Settlements received on account of personal physical injuries or physical sickness are generally non-taxable (Interest earned on a settlement after it is received, however, is generally taxable.). Nonetheless, there can be tax consequences depending upon the type of settlement you receive. We therefore recommend that you consult with your personal tax advisor before entering into a settlement for a significant amount of money.
As a general rule, a spouse’s compensation for their injury sustained during marriage is the separate property of that spouse. For example, recovery for physical pain, impairment, disfigurement, and mental anguish is separate property. On the other hand, recovery for loss of earning capacity and medical expenses incurred during the marriage as well as other expenses for which the community estate was liable, is considered community property.
When a spouse receives a settlement in a personal injury action, the presumption of community property applies. When a settlement is received, some of which could be community property and some which could be separate property, the burden is on the injured spouse in a divorce to show which portion of the settlement is his or her separate property. If the injured spouse cannot meet this burden, the entire settlement is deemed community property.
Unless specifically requested by you, we do not attempt to classify your settlement as either separate or community property because of possible tax consequences or conflicts of interest. If you are contemplating a divorce, please notify us and advise us as to how you want your settlement classified before you authorize us to settle your case.
If you file for bankruptcy after an accident, your claim as well as your settlement will probably belong to the bankruptcy court. Please notify us immediately if you have or are contemplating filing for bankruptcy.
If your settlement is worth hiring a lawyer, it is also worth having a Will to ensure that your settlement is distributed according to your wishes in the event of your death. If you do not have a Will, we will be happy to refer you to an attorney who can draft the proper Will for you.
You can structure all or a portion of your settlement in many types of cases. A structured settlement essentially involves the purchase of a special type of annuity that provides for a guaranteed series of tax-free payments in the future. Structured settlements are often used to guarantee that money will be available for future needs as well as to earn tax-free interest on a settlement.
You usually cannot set up a structured settlement once you have settled your case. If you are interested in a structured settlement, please notify us before authorizing us to settle your case.
A financial settlement can effect your right to government benefits. For example, if you are receiving government benefits based upon your financial need for those benefits, a settlement may eliminate your financial need along with your right to those government benefits. If you are receiving any such benefits and want to try to preserve your right to continue receiving such benefits, please consult with us about this before authorizing us to settle your case.
WORKERS’ COMPENSATION BENEFITS
If you receive a settlement for an injury or death for which you are receiving workers’ compensation benefits, payment of the workers’ compensation benefits (including health care benefits as well as disability payments) is usually suspended or terminated. Moreover, the law generally requires that the workers’ compensation insurance company be repaid out of your settlement for providing these benefits. If you are concerned about losing these benefits, please consult with us before authorizing us to proceed further with your case.