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  • James Robinson CFP

Wrongful Death-Structured Settlements

Updated: Jan 3, 2019


It Begins with Wrongful Lawsuits

A wrongful death lawsuit is a claim for money damages from someone whose negligence caused another’s death.


Wrongful death claims are allowed by the estate of the deceased to cover the financial loss from their loved one’s death. The suit can be filed by a personal representative of the estate or family members.


Wrongful death lawsuits can be brought against anyone who negligently caused a death, including medical professionals, negligent drivers, and manufacturers. This also includes institutions e.g. hospitals and prisons.


Calculating the amount of damages in a wrongful death lawsuit is difficult and often requires the expertise of financial professionals and economists.


Two Types

The states generally recognize two separate and distinct types of wrongful death claims.


First: Claim that establishes the full value of the life of the deceased. These are economic damages and quantifiable expenses, such as the amount of income the loved one would have earned for the remainder of their working years, and the amount they would have contributed toward the household. This claim is brought by or on behalf of the surviving family members of the deceased person. It includes monetary damages related to both the financial and intangible value of the deceased person's life, such as:

  1. lost wages and benefits, including what the deceased person might reasonably have earned if he or she had lived.

  2. loss of care, companionship, and other intangible benefits the deceased provided to loved ones.

Second: Claim meant to remedy the financial losses related to the deceased person's death. This claim is brought by or on behalf of the deceased person's estate, and it seeks to establish and recover the losses the estate suffered in relation to the untimely death. These are Noneconomic Damages. Losses that have no tangible value such as loss of consortium and companionship. Damages that may be recovered in this claim include:

  1. medical expenses related to the deceased person's last illness or injury

  2. funeral and burial expenses, and

  3. conscious pain and suffering endured by the deceased just before death.

Good News - Many Never Make It To Court

When wrongful death cases are resolved by a settlement, each case varies in the amount ultimately settled upon. Many wrongful death cases settle before reaching a trial. Defendants may choose to negotiate terms outside of court to avoid negative publicity and media coverage, or the claimants may want to avoid unnecessary emotional strain from an ongoing trial.


The damages amount must not be merely a ballpark estimate but must be supported by objective evidence. Economists and other expert witnesses are often called in to review the deceased person circumstances to determine an appropriate and suitable amount.


Wrongful death settlements are often paid out by insurance providers who provide liability coverage for the person or entity for whom the death is being blamed. Insurance policies typically have a policy limit amount, above which the insurance company will not pay, and the person is individually liable. If the responsible party does not have enough insurance coverage, they will be personally responsible for any judgment or settlement amount and possibly the legal fees accrued in the process.


Once a lawsuit is won, payments are distributed. However, the way the payments distribute depend on the circumstances of the lawsuit, the amount, and the defendant’s ability to pay.


How Wrongful Death Settlements are Distributed

Distribution is difficult in wrongful death settlements because compensation may go toward different parties – not always family members or beneficiaries of the estate. Some considerations that the court will make when deciding how to distribute the assets include:

  • Age of the Beneficiaries: Children under the age of 18 years cannot legally inherit or receive compensation for their wrongful death case. Therefore, the courts will need their financial well-being considered. They may do this by appointing a guardian to oversee the compensation, set up a trust, and manage that trust until the child reaches an age where they can legally receive the compensation.

  • When beneficiaries are all adults, then the parties’ attorneys would determine what a fair value is per party.

  • The Legal Capacity of the Beneficiaries: Some beneficiaries may be legal adults but suffer conditions like Alzheimer’s, permanent mental or physical disabilities. In this case, their compensation would be handled like a child under the age of 18.


Lump Sum Settlement

When settling outside of court, it is common for the plaintiff to receive a lump-sum payment. With a lump sum, the victim’s family receives a full payout for emotional and financial losses. A full payout allows families to pay larger medical bills and legal fees up front, in addition to eliminating financial debt. This option guarantees full freedom and flexibility with the payment received.


Structured Settlements

A structured settlement may be the ideal instrument for income streams. Here ‘s why:


If A Recipient Dies: Structured settlement payments can be deferred to a beneficiary.


Flexible Plan Design: Structured settlements can be designed to fit the needs of the claimant, whether that means monthly payments to supplement income, payments that decrease over time while the claimant gets back on their feet, future lump sums to pay for college or a home purchase.

  • Guaranteed Source of Long-Term Income: Periodic payments provide a stable, long-term source of income. In some cases, this strategy protects financially irresponsible beneficiaries from their destructive spending habits and from predatory family members.

  • Tax-Free Interest Growth: While the lump sum proceeds from these types of settlements are tax-free if the proceeds are placed in a traditional investment vehicle, any interest earned on the investment is taxable. Interest earned on a structured settlement annuity is tax-free.

  • Guaranteed rate of return: Unlike investments in the open market, the rate of return for a structured settlement is guaranteed for the life of the annuity.

  • Claimants can also opt to take some cash up front to pay for immediate needs, then place the rest in a structured settlement to preserve it for a longer period.

  • Structured settlement payments can replace lost income streams, providing more reliable financial support over time than lump-sum payments.

The Relationship: A spouse of a decedent will receive more than surviving children in a wrongful death case. For example, in full value of life claim, the compensation can be split equally, but the spouse cannot receive less than one-third per the statute.


Special note: If there are liens against the estate for outstanding costs, such as medical expenses and hospital bills from the decedent’s injuries, then these liens must be satisfied before the remaining compensation can be distributed.


Is Wrongful Death Settlements Taxable?

According to the Internal Revenue Service (IRS), most wrongful death settlement payments are non-taxable, provided the payments are compensatory. This means that the compensation is meant to account for the pain and suffering experienced by the case. If the damages are considered punitive or meant to punish the person responsible for the death, then the IRS may tax the punitive damages.


It is important that any award of damages clearly sets forth whether the damages are compensatory or punitive in nature. This will help resolve any confusion when it comes to reporting to the IRS.


SEEK PROFESSIONAL ADVICE

Consult with an attorney, accountant and advisor to review the tax repercussions of any settlement proposal before it is accepted.