After you receive a personal injury settlement, you should take a second look at your estate plan. While being injured in an accident is often painful and life-disrupting, you may receive money in settlement of your legal claims against the people who caused the accident. This money can help you pay for medical bills and other losses, but you may have some money left over. If you plan to leave the money to your family, review your current estate plan or make one now.
How a Settlement Can Lead to Increased Taxes
The IRS rules say that personal injury settlements are tax-free. However, you may have to pay taxes if you give settlement money away as a gift or if the money is part of your estate. Most people are exempt from gift and estate taxes up to a certain amount ($11.18 million in 2018). If your estate is worth more than $11.18 million at your death, then your family’s inheritance will get reduced. The estate will have to pay taxes on the excess estate value.
You can create an estate plan that helps reduce the possible taxes your estate may owe in the future. For example, you can place some of the money in a trust. As long as the trust is set up properly, it will not be included in your taxable estate. Alternatively, you could make charitable donations, purchase life insurance, or fund retirement accounts with the money. While not all of these options exclude the money from your taxable estate, you will receive other benefits such as increased value and interest.
Paying Off Debt
Your debts do not disappear when you die – they become part of your estate. Your family or executor must pay the debts off with estate assets. This decreases the inheritances your family members could receive. If you have a substantial personal injury settlement, pay off debts first. You may have medical debt from the injury, past due bills from when you were off work, and more.
Estate Planning Structures and Investing
For any money left over, consider your estate planning and investment options. You may want to set up a trust so that the money will benefit your family for years after you pass away. Or you may want to set up some new retirement or education accounts, such as an IRA or a 529 plan. Alternatively, you may have concerns about your health in the future. An estate planning attorney can help you set up everything from a trust to a medical directive. These estate planning structures give you peace of mind and protect your personal injury settlement money.
Do you need help planning after receiving a significant personal injury settlement? Angela Klenk, Esq. and the team at Beach Cities Estate Law couple personalized attention to your estate plan with big law firm experience for a winning combination to give you peace of mind. To schedule a case evaluation, visit Beach Cities Estate Law online or call Angela’s office at (424) 400-2125.