Centara Connection

Settling a Personal Injury Claim May Affect Estate Planning

Brittany Oates, Estate Planning Attorney

If you or someone you know is suing for personal injuries, it’s important to remember the way the case is settled could affect your estate plan. For example, a couple in Michigan sued a doctor and a hospital for severe injuries to their daughter during childbirth. The daughter required special care for the rest of her life. The doctor and the hospital settled the case. Pursuant to the settlement, the parents received a lump sum to compensate them for their own suffering and expenses and the daughter received two annuities that would pay her $5,000 per month for life (with the payments increasing 5% per year). The annuities were guaranteed to last for 30 years, and if the daughter died before then, the money would be paid to her estate. The girl died when she was 12 years old.

The IRS ruled the present value of the annuities was part of the girl’s estate, and demanded $500,000 in estate taxes. The parents went to court, but the Tax Court ruled in favor of the IRS. The court suggested if the settlement had been set up differently, the estate tax problem might have been avoided. For example, if the annuities had been transferred at the girl’s death to her parents or someone else, then the tax outcome may have been less onerous.

If you or someone you know has a personal injury claim, it may be possible to eliminate tax problems by properly structuring the settlement. Further, a large personal injury settlement could in itself require a change in estate planning, since the additional money could alter the assumptions on which a previous plan was based.

Centara Legal Group, APC
8880 Rio San Diego Drive, Suite 450
San Diego, CA 92108
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