GeriLaw | Robert Fleming, Tucson elder law attorney, and colleagues

COMMUTATION OF A STRUCTURED SETTLEMENT By Thomas D. Begley, Jr.

                Unfortunately, claimants receiving the periodic payments under a structured settlement often face unforeseen events, such as unexpected medical bills, housing needs, school tuition, etc.  One solution would be to have the plaintiff commute the structured settlement.  A structured settlement can be commuted in whole or in part.  When the structure is commuted, the payee receives a discounted lump sum.  Typically, the payee receives the currently discounted value of the remaining periodic payments, commonly known as the present value.  The obligation of the insurance company to make future payments is thereby terminated. 

                                •              Commutation and I.R.C. §130.  There may be an issue as to whether a non-automatic commutation of a structured settlement violates the “no acceleration” provisions of §130.  If the transaction is viewed from the perspective of the qualified assignee, the assignee is the legal owner of the annuity and has the right and power to change its terms.  From that perspective, a non-automatic commutation is arguably an acceleration.[1]

                                •              Automatic Commutation Provisions.  Many structured settlements are written with a commutation rider that provides that the contract may be commuted at the payee’s option upon certain events outside the payee’s control and outside the control of the annuity issuer.  For example, a structured settlement may permit a partial commutation of the contract upon the death of the injured person so that monies are available to pay death taxes, or the structure may provide that the contract can be commuted in its entirety and that the remaining payments be made in a lump sum to named beneficiaries.  It is not likely that the I.R.S. would view these types of commutations as violating the provisions of I.R.C. §130 prohibiting acceleration of payments.

                                                If the payee of a structured settlement dies before the end of the guarantee period, the present value of the unpaid payments as of the date of death are includable in the estate of the decedent.[2] The gross estate includes the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death.[3] In cases involving large structured settlements, estate taxes must be considered unless the annuity is payable to a trust having sufficient cash to pay the anticipated tax, a commutation rider should be considered at the time the structure is established.

Thomas D. Begley, Jr., CELA

Begley & Bookbinder, PC

ATTORNEYS AT LAW

COMMITTED TO EXCELLENCE

Specializing in Elder & Disability Law

    

www.begleylawyer.com

(800) 533-7227

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[1] I.R.C. §2033.

[2] Structured Settlements: Factor vs. Commute?, Robert W. Wood, Tax Notes, Dec. 25, 2006.

[3] I.R.C. §2039(a).

Assisted Living Facility Costs as Tax Deductions

A recent NAELA News article by Robert Anderson discusses the process for deducting assisted living facility (ALF) costs on federal individual income tax returns.  Internal Revenue Code (IRC) § 7702B provides rules for deducting certain qualified long-term care costs as medical expenses.  Normally, the costs of nursing home care should be deductible, but the status of ALF costs has not been as clear.

For ALF residents, qualified long-term care costs are “necessary rehabilitative services, maintenance or personal care services that are (1) required by a chronically ill individual, and (2) provided pursuant to a plan of care by a licensed health care practitioner.”  The ALF resident must first qualify as a chronically ill individual.  The resident can meet this definition if within the previous 12 months, a licensed healthcare practitioner certifies that the resident meets one of two descriptions pursuant to IRC § 7702B(c)(2):

1. The resident is unable to perform at least two activities of daily living (ADLs) without substantial assistance from another individual for at least 90 days due to a loss of functional capacity.  ADLs are eating, toileting, transferring, bathing, dressing, and continence.

2. The resident requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Maintenance or personal care services provide assistance for a chronically ill individual with his or her disabilities; therefore, if an ALF resident needs help with two ADLs, then the assistance provided by the ALF qualifies as personal care services.  Likewise, if the ALF protects the individual from safety and health threats due to severe cognitive impairments, then the assistance provided by the ALF qualifies as personal care services.  The certification of the chronic illness requirement must be done within the preceding 12 months.  The certifying licensed care practitioner can be any physician, registered professional nurse, or licensed social worker, and this practitioner does not have to be an employee of the ALF, although this practitioner could be.  The licensed care practitioner must personally examine the resident and provide a written opinion.  The opinion should be obtained prior to admission to the ALF.

The plan of care is not defined within the Internal Revenue Code.  Federal statutes require that nursing facilities have a written plan of care for each resident.  Although written care plans for ALFs are not required by federal statutes, most ALFs prepare them.  The plan of care must be prepared by a licensed care practitioner, and it should be prepared at or as soon after admission to the ALF as possible.

If these requirements are satisfied, then 100% of the costs of the ALF (including room and board) are deductible on the resident’s 1040, Schedule A, to the extent that the costs are not reimbursed by government benefits or insurance.  Under IRC § 213 (a), the resident can claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceed 7.5% of adjusted gross income.  These expenses include the qualified long-term care expenses, as well as insurance premiums and other eligible medical expenses. 

If the resident does not meet the requirements of IRC § 7702B, then the resident can still deduct the percentage of the ALF costs attributed to nursing services, pursuant to IRC § 213.  The room and board and personal services costs would not be deductible.  The ALF should provide an estimate of the deductible portion of its costs, and the taxpayer can attach the statement to the Schedule A.  Typically 30% to 40% of the ALF costs are for nursing services.

Andrew H. Hook
Oast & Hook
www.oasthook.com