Ask the tax adviser
Death-settlement tax implications
Dear Tax Talk:
I have a lawsuit related to the death of my husband. I should receive
a large settlement. Will it be taxable? How much of it can I give
to the children without paying tax? I know that at least 60 percent
of the money is said to be for pain and suffering, but I'm not sure
of the rest. Please answer as soon as you can as I have already
started receiving some of the money.
Generally, a recovery in a lawsuit for pain and suffering for the
death of an individual is tax-free. You don't indicate what the
remaining portion of the settlement relates to, so I can only tell
you that if the amount is for punitive damages, it would be taxable.
If the amount relates to lost wages it would be tax-free. Your attorney
should be able to provide you better guidance on the tax implications.
If your children are not a party to the wrongful death
action, then you would basically be making a gift to them. You can
make a gift to each one of your children of up to $11,000 annually
without gift tax implications. If you have three children, you can
give $33,000 in 2002 and $33,000 in 2003.
If you want to give more you most likely can without
tax implications, but you'll be required to complete Internal
Revenue Service Form 709, United States Gift Tax Return.
Since the implications of making larger gifts is complex, you should
consult with a CPA who can advise you on such matters in relation
to your overall financial needs, objectives and tax situation.
-- Posted: Sept. 12, 2002