Monetary Settlements and Special Circumstances

Question 1

Structured Settlements

Answer 1

A structured settlement is a method of compensating injury victims which is voluntarily agreed upon between an injury victim and the defendant. Under a structured settlement, an injury victim receives a stream of payments rather than a lump sum to meet future medical expenses and basic living needs.

Question 2

Advantage of Structured Settlement

Answer 2

One advantage of structured settlements is that the federal government has passed regulations that make the payments tax-free to the victim. If the victim took the lump sum and invested it in an income producing investment vehicle, the earnings from the investment are likely to be taxable as income.

Question 3

Marital Property

Answer 3

Marital property is any property acquired or accumulated by either spouse while they were married. If assets were acquired after the separation date, but purchased through marital property, they can be counted as marital property as well. Also, assets that increased in value due to action of the other spouse during the marriage can be partially deemed as marital property as well.

Question 4

Alimony

Answer 4

Alimony is an amount paid by a person to a spouse or former spouse under a divorce or separation agreement. It is based on the need of one spouse and the ability of the other spouse to pay.

Question 5

Qualified Domestic Relations Order (QDRO)

Answer 5

Qualified Domestic Relations Order (QDRO) is used to divide retirement assets of ex-spouses.

Question 6

An ex-spouse collection of Social Security Benefit

Answer 6

The marriage lasted over 10 years

The ex-spouse who is seeking the benefit is 62 or older

The ex-spouse who is seeking the benefit is unmarried

The ex-spouse who is seeking the benefits is not entitled to benefits or is entitled to lower benefits based on his or her own earnings record.

Question 7

Special Needs Trust

Answer 7

If the disability looks to continue into the child’s adult life, a supplemental or Special Needs Trust can be created for the child.

Question 8

Items a Special Needs Trust Can Pay for:

Answer 8

medical/dental expenses

annual checkups

transportation and vehicle purchase

equipment

training programs

education

insurance

rehabilitation

vacations

home health aide.

Question 9

What types of cases are more likely to result in structured settlements?

Answer 9

Temporary or permanent disability
Guardianship for minors or incompetents
Workers’ compensation
Wrongful death where the surviving family members need monthly or annual income
Severe injuries resulting in need for long-term medical care, living expenses, and support of family

Question 10

There are SIX things to consider regarding lottery winnings

Answer 10

Ownership of the ticket

Acceptance of the prize

Income tax liabilities

Gift tax liabilities

Estate tax liabilities

Selling the settlement

Question 11

Ownership of the ticket

Answer 11

It is important to distinguish who purchased the ticket and the intended owner of the ticket. If an office pooled money to purchase a large amount of tickets, it would mean that each person is part owner of the jackpot.

Question 12

Acceptance of the prize

Answer 12

If an individual won the lottery, it may make sense to transfer the ownership of the ticket into an irrevocable trust before accepting the prize. This would keep the prize money in the trust in case the person dies rather than going to an estate and be subject to heavy taxes. If a group won the lottery together, it may make sense to create a partnership to accept the prize. Otherwise, if one person accepts the prize, he or she could be responsible for all the taxes associated with the winnings.

Question 13

Income tax liabilities

Answer 13

Lottery winnings are taxed up to 37%, and 24% will automatically be withheld for federal tax purposes. In addition, state taxes will likely be withheld prior to distribution.

Question 14

Gift tax liabilities

Answer 14

Of course, you want to be generous with your money. The most you can give away is $15,000 or $30,000 per year for a married couple to an unlimited number of people without incurring a gift tax. This annual gift tax exclusion amount will help when time comes to pay estate taxes on the winner’s assets.

Question 15

Estate tax liabilities

Answer 15

Estate tax liabilities: If there is a choice to elect lump sum versus annuity payments, in the interest of estate planning, it may be more prudent to take the lump sum, so that the taxes are paid off, and a financial planner can help the winner to allocate the funds in a manner most suitable for estate tax planning. Otherwise, if the winner passes away while there are still payments outstanding, the estate may be the subject of a hefty estate tax bill before realizing any of the benefits.
Selling the settlement: Again, some states now allow the winner to sell the payments to obtain a lump sum. So, if a person began receiving the payments and decided to take a lump sum for the rest of the winnings or a portion of the remaining winnings, they can find a structured settlement broker to facilitate that transaction. In the case where the heir would be paying more in estate taxes than the annual payout amounts, the heir should consider this as an option to pay off the estate taxes owed all at once.

Question 16

Lump sum retirement distributions

Answer 16

Lump sum retirement distributions are payouts from qualified retirement plans that represent the entire account balance of the plan participant. To be considered a lump sum distribution, the distribution must be for a qualified reason such as the attainment of age 59 ½, death, disability, or for separation of service.

Lump sum distributions are generally taxed to the payee as ordinary income though the taxation can be further deferred by rolling the balance into an IRA or another qualified retirement plan.

Question 17

Insurance Proceeds

Answer 17

When insurance proceeds are received, there are generally a two options on how the proceeds can be paid to the beneficiary. One option is a lump sum. Life insurance proceeds paid via a lump sum are income tax free.

The proceeds can also be paid via an annuity where each payment would be partially taxable. Each payment would have an income portion (taxed at ordinary income tax rates) and a tax-free return of basis component.

Question 18

One of your clients has won the state lottery. She can either have $5,000,000 in a lump sum or receive payments of $400,000 per year for the next 25 years. Your client has expressed an interest in receiving the payments over the next 25 years and giving half of each payment to her children. Which of the following are issues you should discuss with your client associated with taking equal payments over 25 years and giving half to her children?

A. Advise your client that if she passes away while there are still payments outstanding, her heirs may have to pay estate taxes before receiving the money.

B. Advise your client that $400,000 per year will yield more than the lump sum of $5,000,000.

C. Advise your client that gifting half of the yearly payment will result in gift tax.

D. Advise your client that $5,000,000 will yield more than 25 yearly payments of $400,000.

Answer 18

Correct Answer: A. and C.

Explanation: If an individual is receiving an annual payout and passes away, her heirs may be subject to estate tax on funds that have yet to be received. Also, gifting half of $400,000 per year to your children will result in a gift tax because it exceeds the $13,000 annual limit. Finally, there is not enough information to know whether the lump sum or the annual payments are a better option for this client.

Question 19

Please select the true statements related to structured settlements listed below.

A. They are a remedy that defendants owe to plaintiffs by court order or agreement.

B. They are a method of compensating injured victims voluntarily agreed upon between an injury victim and the defendant.

C. They are tax-free to the recipient.

D. They are taxable to the recipient.

Answer 19

Correct Answers: B. and C.

Explanation: A structured settlement is a method of compensating injury victims voluntarily agreed upon between an injury victim and the defendant. One advantage of structured settlements is that the federal government has passed regulations that make the payments tax-free to the victim.

Question 20

Division of Assets in a Divorce

Answer 20

The present tax impact and the client’s current cash flow needs are important considerations when deciding which assets to keep and which to give up. For example, some assets generate income, while others may not. If a client does not know how to manage certain assets, professional help may be needed.

The first step in dividing assets is to identify the type of property law that the state enforces. Idaho, Washington, Wisconsin, California, Nevada, Arizona, New Mexico, Texas and Louisiana have community property laws, while the remaining states have equitable distribution laws.

Question 21

Community property laws

Answer 21

Community property laws proclaim that all property owned by the couple is marital property and will give the spouses half of all the property owned

Question 22

Equitable division law

Answer 22

Equitable division law declares certain properties (such as gifts, inheritances, and property owned prior to marriage) are owned by spouses separately and are therefore not subject to division.

Question 23

Factors used to determine equitable distribution

Answer 23

Duration of marriage

Mental and physical well being of spouses

Income or property each party brought to the marriage

Standard of living during marriage

Existence of prenuptial agreements

Income and earning capacity of each party

Contribution made by each party to the earning power of the other spouse

Value of marital property

Tax consequences of settlement

Custody of child and need for residency

Outstanding debts

Need to secure foreseeable medical, education costs for spouse or child

Other special circumstances

Question 24

Marital Property

Answer 24

All marital assets and liabilities are available for an equitable distribution. Marital property is any property acquired or accumulated by either spouse while they were married. If assets were acquired after the separation date, but purchased through marital property, they can be counted as marital property as well. Also, assets that increased in value due to action of the other spouse during the marriage can be partially deemed as marital property as well. Separate assets are items such as, inheritance, premarital acquisitions, and gifts to one spouse from third-party.

Question 25

Qualified Domestic Relations Order (QDRO)

Answer 25

A Qualified Domestic Relations Order (QDRO) is used to divide retirement assets of ex-spouses. Pension plans and qualified plan assets can be split using QDROs. The recipient spouse is called the “alternate payee.” The person whose interest is being transferred is called the “participant.”

Question 26

Social Security Benefits

Answer 26

An ex-spouse can collect Social Security retirement benefits even if the other ex-spouse remarried and is still working if:

The marriage lasted over 10 years

The ex-spouse who is seeking the benefit is 62 or older
The ex-spouse who is seeking the benefit is unmarried

The ex-spouse who is seeking the benefits is not entitled to benefits or is entitled to lower benefits based on his or her own earnings record.

If the spouse is 65 years old, he or she will receive 50% of the worker spouse’s benefit (known as the “primary insurance amount”). However at the age of 62, he or she would only be entitled to receive 37 ½% of the working spouse’s benefit. The benefits are not terminated if the spouse marries a person who is entitled to widower, parent monthly benefits, or childhood disability benefits.

Question 27

Disability under Social Security Administration

Answer 27

Disabled persons may qualify for social security benefits earlier than retirement. Disability under Social Security is based on the person’s inability to work. Applicants are considered disabled under Social Security rules if they cannot do work that they did before and the Social Security Administration decides that they cannot adjust to other work because of their medical condition(s). The disability must also last or be expected to last for at least one year or to result in death. Social Security provides two avenues of aid for the disabled: Social Security Disability Insurance and Social Security Supplemental Security Income. They both have strict guidelines for qualification. For more details on social security options available, visit SSA.gov.

Question 28

How is Medicaid used as a fundinng source for funding a disabled person’s medical expenses.

Answer 28

Medicaid is also another source for funding a disabled person’s medical expenses. However, the best way to avoid losing the Medicaid benefits because of assets owned is to create a Supplemental Needs Trust to hold his or her assets. A person such as a family member may establish a Supplemental Needs Trust for a disabled individual without jeopardizing the beneficiary’s eligibility for Medicaid and other government benefits. Recent changes in federal and state law allow disabled persons to establish the trust with the disabled person’s own funds.

Question 29

List of Important documents for special needs children

Answer 29

Guardianship Appointment

Will

Letter of Intent

Question 30

Guardianship Appointment

Answer 30

Guardianship Appointment: It is important to appoint a guardian who will be a committed advocate for the child. Also, the best guardian may not be the best trustee, as the role of the trustee will be to manage and administer the trust. Sometimes the best caregiver is not the best person to manage or make decisions about money.

Question 31

Will

Answer 31

Will: Allows parent(s) to name a guardian/successor guardian for the child/children. If a will is not drawn at the time of death, there will be no guardian appointment. The appointment will be left to a judge to make.

Question 32

Letter of Intent

Answer 32

Letter of Intent: This is not a legally binding document, but it can provide insight as to a parent’s vision regarding their child’s future care and quality of life. The content may include names of doctors, known allergies, medicines, therapies, hobbies, likes/dislikes, and a parent’s desires for the child when he or she is no longer living.

Since money and assets should not be left directly to a special needs child, it is important to be sure that the child is not named as a beneficiary of a life insurance policy, annuity, or retirement plan.

Question 33

Characteristics of a Special Needs Trust

Answer 33

A special needs trust is irrevocable and must be set up by parents or a third party. The trustee has discretion to use assets for the benefit of the disabled person and must handle all distributions from the trust. When the disabled person dies, unused assets can go to other siblings or family members. If parents feel their child might be able to handle their own finances as an adult, they can allow the trustee to evaluate competency. The assets can then be transferred to the child.

Funds of the trust may come from a structured settlement. It can also come from life insurance. A survivorship, or second-to-die policy covers both parents and pays out on the death of the second. The special needs trust can be named as the beneficiary.

Question 34

Options available to a participant who is changing their jobs are:

Answer 34

Roll the funds into the future employer’s qualified retirement plans: Request for a direct rollover, where the check is made out to the plan administrator of the new company.

Keep the funds in the old plan: In the event the new employer does not sponsor a retirement plan, and the participant’s account is larger than $5,000, then it may make sense to leave the plan where it is.

Roll the money over to an IRA account: Open an IRA at a financial institution. Keeping the funds separate from other IRA moneys will allow it to be transferred to another employer-sponsored plan later on.

Question 35

Jason has worked at ABC, Inc. for 15 years but has recently resigned and started working for Acme, Inc. Jason has accumulated $48,000 in his retirement account. Which of the following actions can Jason take and not be taxed IMMEDIATELY?

A. Directly roll the funds into the Acme, Inc. qualified retirement plan.

B. Keep the funds in the ABC, Inc. plan.

C. Rollover the money to an IRA account.

D. Wait and withdraw the funds when he turns 59 ½.

Answer 35

Correct Answers: A., B., C. and D.

Explanation: Jason could take any of the actions listed above and not be subject to tax.

Question 36

David and Joanne have been married for 4 years and live in Texas. Due to irreconcilable differences they have decided to divorce. David had $30,000 in assets when they got married and Joanne had $10,000 in assets when they got married. They decided to commingle their assets together after marriage. Over the 4 years of marriage they accumulated another $50,000 worth of assets. What is the dollar value of assets that David will receive?

A. $35,000

B. $40,000

C. $45,000

D. $55,000

E. $80,000

Answer 36

Correct Answer: C. $45,000

Explanation: Because David and Joanne live in a community property state, all assets, including their assets obtained before marriage that were commingled after marriage, will be divided equally between the couple.

Question 37

Christopher, your long-time client, was recently injured at his job. He hasn’t been able to go back to work since being injured. Which of the following criteria would allow Christopher to receive disability benefits from SSA?

A. Christopher’s doctor said he cannot function and be gainfully employed.

B. It is determined he cannot adjust to other work because of his advanced age, education, adverse vocational profile and his medical condition.

C. Christopher’s disability is expected to last for at least one continuous year or result in death.

Answer 37

Correct Answers: B. and C.

Explanation: Applicants are considered disabled if if their medical condition is expected to last for at least one year or result in death. They can also receive SS disability benefits if they cannot adjust to other work because of their medical condition and they have an adverse vocational profile, which includes factors such as their age, education and former work history. A doctor’s opinion that a patient cannot function or be gainfully employed is not a basis for finding disability. Disability criteria is based on medical signs, symptoms and laboratory findings that are evaluated by SSA’s staff of physicians.