Wrongful death settlements can be paid out either as a lump sum or in a structured settlement. Lump sum settlements are paid out all at once. Structured settlements provide regular payments to the deceased’s loved ones over time. The parties to the lawsuit have to agree on how the settlement is paid. With exceptions, the settlement is not taxable.
How are wrongful death settlements paid?
A wrongful death settlement can be paid in 2 ways:
- in a lump sum, or
- in a structured settlement.
It is up to the parties in the case to decide how it will be paid. However, the circumstances of the defendant will generally dictate how the settlement ends up getting disbursed.
If the defendant is being held personally liable for a substantial portion of the verdict, it will usually come in a structured settlement. Most defendants are financially unable to pay more than a few thousand dollars in a lump sum. If they are contributing tens of thousands of dollars to the settlement amount, then it will usually have to come in the form of a structured settlement. This lets the defendant make the payments over a long period of time.
If the settlement will be covered entirely by the defendant’s insurer, on the other hand, the chances of a lump sum payment increase. Insurance companies are far more likely to have enough money on hand to make the payment all at once.
The decision about how to pay the settlement is made when the case is settled. It is usually decided when the parties agree on a settlement amount. In some cases, the form of the payments will even slightly influence the final settlement agreement.
Plaintiffs who want one form of payout but get the other still have options to get what they want.
How do lump sum payments work?
If the wrongful death settlement is paid in a lump sum, the defendant or his or her insurer will pay the full amount all at once. They may even cut the plaintiffs or their personal representative a check once the case is settled.
Plaintiffs who receive a lump sum payment but who would have preferred a structured settlement can put the settlement in a trust fund. By arranging the fund so it makes regular payments over a longer time period, these plaintiffs can mimic a structured settlement.
There are benefits and drawbacks to receiving the settlement in a lump sum.
The biggest benefit of a lump sum settlement payment is that plaintiffs can pay down the debt they have accrued while the lawsuit was pending. This can be quite substantial. It includes:
- medical bills and debt, especially if the victim was in a hospital for a long period of time,
- funeral costs, and
- legal fees for personal injury attorneys.
If the decedent was also the plaintiff’s primary source of financial support, there will likely be other consumer debts that accrued as the plaintiff struggled to make up the financial losses.
By getting all of the settlement up front, plaintiffs can pay down the debt before it begins to accrue too much interest.
Getting the settlement up front also eliminates any problems of nonpayment that can come up with a structured settlement.
There are some drawbacks to receiving the settlement in a single payment, though.
Managing such a large amount of money all at once is difficult. Some plaintiffs use the settlement money unwisely. They then find themselves still facing the debt that accrued while the wrongful death claim was pending, and without the means to pay it.
What is a structured settlement in a wrongful death case?
A structured settlement is an arrangement that lets the defendant pay in smaller installments over a period of time. These installments are typically made every month, though the parties can make another agreement that fits their needs. Once these arrangements are made, they are very difficult to change.
Plaintiffs who receive a structured settlement can sell some or all of their rights to future payments in an annuity. This can effectively turn a structured settlement into a lump sum payment. Doing so may require court approval. However, it can help plaintiffs who have had unexpected costs spring up and who need to tap into their settlement before they have a right to receive it.
There are also benefits and drawbacks to structured settlements.
The chief benefit to a structured settlement is that it provides long-term financial stability to the victim’s loved ones. This is especially important when the deceased person was the primary source of income for the plaintiffs. In these cases, the structured settlement will act as a reliable revenue stream for long enough that the plaintiffs can make ends meet in other ways.
The major drawback to a structured settlement is that it keeps the plaintiffs from paying down any debt right away. While they will still be able to cover their debt with the funds from the settlement, they will have to do it slowly and in smaller payments. This allows interest to build on the debt’s principal. More of the settlement will be eaten away with these interest payments.
The inflexibility of the terms of a structured settlement are also a drawback. Once these terms are agreed to when the wrongful death claim settles, they are almost impossible to change. If those terms no longer work for a plaintiff, he or she is usually stuck with them.
Because structured settlements are paid out over the course of many years, there also exists the potential for nonpayment. A personal injury lawyer can mitigate this risk by insisting that certain protections be included in the settlement agreement.
Does the money from a successful wrongful death claim come from an insurance company?
The source of the funding for a wrongful death suit will depend on the specific case and defendant.
In most cases, the defendant’s act of fatal negligence will be covered by one of his or her insurance policies. When this happens, the defendant’s insurer will provide legal representation and the source of compensation for the victim’s loved ones. When the wrongful death claim resolves, the insurance company pays for the costs of the settlement. The defendant may end up not contributing anything to the settlement amount out of their own pocket, though their insurance premiums may increase in the future.
However, even if the defendant has insurance, he or she may still be held personally liable if the settlement amount ends up exceeding the limits on their insurance policy. In these cases, the insurer will contribute up to the policy’s maximum. The defendant will then have to contribute what remains.
For example: Clark causes a fatal car accident. His insurance company agrees to settle the subsequent wrongful death case with the victim’s family members for $300,000. Clark’s auto insurance, however, has a $250,000 policy limit. Clark will have to contribute $50,000 to the settlement fund.
When the defendant is uninsured, he or she will be entirely responsible for the settlement amount. These cases frequently leave the plaintiffs undercompensated for their losses. If it appears that a defendant is uninsured, it is especially important to establish an attorney-client relationship with a wrongful death lawyer. They can look for other sources of financial compensation to cover the wrongful death damages.
Is the settlement from a wrongful death lawsuit taxable?
Generally, wrongful death settlements are not taxed.1 This is because the Internal Revenue Service (IRS) views these settlements as a form of compensatory damages. These damages are meant to compensate someone for a loss that they have suffered. As a result, the IRS does not see them as “income.” In wrongful death claims, the compensatory damages covered by the settlement are:
- loss of consortium, care, and loss of companionship,
- loss of the deceased’s income and future earnings,
- burial expenses,
- loss of inheritance, and
- mental anguish and emotional suffering.
However, compensation for these damages may be taxed if the plaintiff deducted them on their taxes, before.
For example: Jen’s husband is in a car accident and suffers a traumatic brain injury. He is in a coma for a month before passing away. On her tax return, Jen deducts the costs of these medical bills. Jen then settles the wrongful death action against the at-fault party and receives a fair settlement amount as the surviving spouse. The portion of the settlement that compensates her for medical expenses will be taxable because she deducted them, up front.
The IRS also taxes settlements that include non-compensatory damages. While they are very rare in a personal injury settlement involving someone’s negligent actions, exemplary or punitive damage awards may be taxed.2
The details of a wrongful death settlement can have significant tax implications. An experienced wrongful death attorney from a reputable law firm can provide the legal advice that plaintiffs need to protect their payout.
- 26 USC 104(a)(2).