a structured settlement, which provides periodic payments over time.
Key Highlights
- Payment Source: The settlement is typically funded by the defendant’s liability insurance policy.
- Recipient: The check is made payable to the deceased’s estate and managed by a personal representative or executor.
- Initial Deductions: Legal fees, case expenses, and estate debts (including medical liens and funeral costs) are paid first.
- Distribution: The net settlement is divided among statutory beneficiaries as determined by state law and court approval.
- Payout Options: Beneficiaries can choose between a one-time lump-sum payment or a series of guaranteed payments known as a structured settlement.
- Court Oversight: The probate court often must approve both the settlement amount and the final distribution plan to ensure it is fair and lawful.
Losing a family member is a deeply personal and difficult experience. When that loss is caused by another party’s negligence or wrongful act, it introduces a layer of legal complexity. According to the Centers for Disease Control and Prevention (CDC), preventable injuries are a leading cause of death in the United States, with millions of incidents annually resulting from motor vehicle collisions, medical errors, and workplace incidents. In these situations, families may pursue a wrongful death claim to hold the responsible party accountable and secure financial stability.
A wrongful death lawsuit is a civil action, distinct from any criminal charges. It is governed by state statutes that define who is eligible to file a claim—usually a personal representative on behalf of the deceased person’s estate—and who qualifies as a beneficiary to receive compensation. These laws are designed to compensate surviving family members for their losses, which can include the loss of financial support, emotional companionship, and guidance. The goal is to provide a measure of justice and financial relief for the surviving dependents and close relatives.
Understanding how a settlement is paid out is just as important as reaching one. The process is not as simple as a check being mailed directly to the family. It involves the legal framework of the estate, the oversight of the probate court, and critical financial decisions that will impact the beneficiaries for years to come. From the initial payment from an insurance carrier to the final distribution of funds, each step is methodical and regulated to ensure all legal and financial obligations are met before the family receives compensation.
Who Actually Receives the Settlement Check? The Role of the Estate
When a wrongful death case settles, a common misconception is that the surviving family members, such as a spouse or children, will receive a check directly from the defendant or their insurance company. In reality, the process is more formal and is centered around the deceased person’s estate.
Why the Estate Is the Central Hub
Legally, a wrongful death claim is brought on behalf of the deceased person’s estate and its beneficiaries. Therefore, the settlement funds are considered an asset of the estate. The settlement check is made payable to “The Estate of [Deceased’s Name]” and is sent to the attorney representing the estate. This legal structure ensures that all the deceased’s final obligations are handled properly before the remaining assets are distributed to the rightful heirs. This prevents a situation where beneficiaries receive money while significant debts, like final hospital bills, go unpaid.
The Personal Representative or Executor
Because an estate is a legal entity and not a person, it cannot manage its own affairs. The probate court appoints an individual to act on its behalf. This person is called a personal representative or executor (if named in a will). The personal representative has a fiduciary duty to act in the best interests of the estate and its beneficiaries.
Their responsibilities concerning the settlement include:
- Formally accepting the settlement funds on behalf of the estate.
- Depositing the funds into a dedicated bank account for the estate.
- Paying all legitimate debts and expenses of the estate.
- Working with the attorney to create a distribution plan for the beneficiaries.
- Distributing the net settlement funds according to the court-approved plan.
The Probate Court’s Involvement
The probate court plays a critical supervisory role in the settlement process. Its involvement is designed to protect both creditors and beneficiaries. The court typically must approve the wrongful death settlement, especially if a minor child is a beneficiary. The judge will review the settlement amount to ensure it is fair and reasonable.
Furthermore, the court must approve the final plan for distributing the funds. The personal representative submits an accounting of all the money that came into the estate (the settlement) and all the money that went out (fees, debts, expenses). The court reviews this accounting and the proposed distribution to ensure it complies with state law before giving the final order to pay the beneficiaries.
The First Deductions: Where the Money Goes Before It Reaches Beneficiaries
Before any money reaches the surviving family members, several major deductions are made from the gross settlement amount. The personal representative is legally obligated to settle these accounts first. Understanding this sequence is key to managing expectations about the final net amount the family will receive.
Attorney’s Fees and Legal Costs
Most wrongful death lawyers work on a contingency fee basis. This means they do not charge any upfront fees. Instead, their payment is a percentage of the total settlement or verdict they obtain. This percentage is agreed upon at the beginning of the case and is typically between 33% and 40%.
In addition to the fee, the law firm also fronts the costs of pursuing the case. These are known as legal costs or case expenses. These are reimbursed to the firm from the settlement. Common costs include:
- Court filing fees
- Fees for expert witnesses (e.g., medical experts, accident reconstructionists)
- Deposition and transcript costs
- Investigation expenses
- Costs for obtaining medical records and other evidence
Example Breakdown:
- Gross Settlement Amount: $1,000,000
- Attorney’s Contingency Fee (33.3%): -$333,333
- Case Expenses: -$50,000
- Amount Remaining for the Estate: $616,667
Paying Back the Estate’s Creditors
After legal fees and costs are paid, the next step is to satisfy any outstanding debts of the deceased person and their estate. These creditors have a legal right to be paid before any beneficiaries receive their inheritance.
Common debts and liens paid from settlement funds include:
- Final Medical Bills: Medical bills for emergency services, hospital stays, surgeries, and other treatments related to the fatal injury can be substantial.
- Health Insurance Liens (Subrogation): If a health insurance company (including Medicare or Medicaid) paid for medical treatment, it has a legal right to be reimbursed from the settlement. This is called a subrogation lien. The attorney will often negotiate with the lienholder to reduce the amount owed, maximizing the funds left for the family.
- Funeral and Burial Expenses: Reasonable costs for the funeral and burial are considered a debt of the estate and are paid from the settlement.
- Other Personal Debts: Any other outstanding debts of the deceased, such as credit card balances or personal loans, must also be settled.
Only after all these fees, costs, and debts have been fully paid is the remaining amount—the net settlement—available for distribution to the beneficiaries.
Lump Sum vs. Structured Settlement: Choosing the Right Payout Method
Once the net settlement amount is determined, the beneficiaries face a critical decision: how to receive the money. The two primary options are a single lump-sum payment or a structured settlement. The choice depends on the family’s financial situation, long-term needs, and financial discipline.
The Lump-Sum Payout: Immediate Access to Funds
A lump-sum payout is exactly what it sounds like: the beneficiary receives their entire share of the settlement in one single payment.
- Pros:
- Full Control: The beneficiary has immediate access to the full amount and can use it as they see fit.
- Financial Flexibility: Funds can be used to pay off major debts like a mortgage, make large purchases, or be invested in a diversified portfolio.
- Simplicity: It is a straightforward, one-time transaction without ongoing administration.
- Cons:
- Risk of Mismanagement: Receiving a large sum of money can be difficult to manage, especially for someone without financial experience. Studies have shown that many people who receive large windfalls deplete them within a few years.
- Potential for Poor Investments: Beneficiaries may be tempted by high-risk investments or fall prey to financial scams.
- Tax on Growth: While the settlement itself is generally tax-free, any interest, dividends, or capital gains earned from investing the lump sum are considered taxable income.
The Structured Settlement: Guaranteed Long-Term Income
A structured settlement is an alternative where the settlement funds are used to purchase an annuity from a highly-rated life insurance company. This annuity then provides a stream of guaranteed, periodic payments to the beneficiary over a set period or for their entire life.
- Pros:
- Financial Security: It provides a stable, predictable source of income, protecting beneficiaries from the risk of spending the money too quickly. This is especially valuable for minor children or dependents who need long-term support.
- Tax-Free Growth: Under Section 104(a)(2) of the Internal Revenue Code, the entire stream of payments from a structured settlement, including the growth (interest), is received completely free of income tax.
- Customization: The payment schedule can be tailored to meet specific needs, such as larger payments during college years or cost-of-living adjustments (COLAs) to counteract inflation.
- Cons:
- Inflexibility: Once the structure is in place, it is very difficult and costly to change. The beneficiary cannot access the underlying funds for an emergency.
- Lower Initial Capital: The beneficiary does not have a large sum of money upfront to pay off a mortgage or make other significant investments.
- Inflation Risk: If the annuity is not designed with a COLA, the fixed payments may lose purchasing power over time due to inflation.
The decision between a lump sum and a structured settlement should be made with guidance from a wrongful death attorney and a qualified financial advisor who can analyze the family’s unique circumstances.
How the Net Settlement is Divided Among Beneficiaries
After all deductions are made and the payout method is chosen, the final step is to divide the net settlement among the legal beneficiaries. This is not always an equal split. The distribution is determined by state law and the specific losses each beneficiary has suffered.
State Intestacy Laws
Each state has laws that define who is eligible to recover damages in a wrongful death case. These laws typically establish a hierarchy of beneficiaries. For example, the order might be:
- Surviving spouse and children
- Surviving parents (if there is no spouse or child)
- Siblings or other next of kin
If the deceased had a will, it dictates how their personal property is distributed, but it does not control the distribution of a wrongful death settlement. The wrongful death statute is what governs who receives the funds.
The Court-Approved Distribution Plan
The personal representative, with the help of their attorney, will propose a distribution plan to the probate court. This plan allocates the settlement based on the individual damages sustained by each beneficiary. The court will review this plan for fairness before approving it. The allocation considers different types of damages:
- Economic Damages: This is compensation for measurable financial losses. It includes:
- Loss of Financial Support: The amount of money the deceased would have provided to each dependent over their lifetime. This is calculated based on the deceased’s income, earning potential, and work-life expectancy.
- Loss of Services: The value of services the deceased provided, such as childcare, home maintenance, and financial management.
- Loss of Inheritance: The amount the beneficiaries could have reasonably expected to inherit had the deceased lived a full life.
- Non-Economic Damages: This is compensation for intangible, personal losses. It includes:
- Loss of Companionship, Society, and Consortium: For a surviving spouse.
- Loss of Guidance, Nurture, and Instruction: For surviving children.
- Mental Anguish and Sorrow: The emotional pain suffered by the beneficiaries due to the death.
Because these losses vary for each person (a young child’s loss of a parent is different from an adult child’s), the distribution is often proportional rather than equal.
Special Considerations for Minor Beneficiaries
When a beneficiary is a minor (under 18), they cannot legally receive and manage a large sum of money. The court will take steps to protect their inheritance. The funds are typically placed in a court-supervised guardianship account, a trust, or a structured settlement. The money is managed by a guardian or trustee until the child reaches the age of majority (18 or sometimes 21), ensuring the funds are preserved for their future needs like education and living expenses.
The Tax Implications of a Wrongful Death Settlement
A major concern for families is whether the settlement money will be taxed. The good news is that, in most cases, the core compensation from a wrongful death settlement is not considered taxable income by the IRS.
Are Wrongful Death Settlements Taxable?
According to Section 104(a)(2) of the U.S. Internal Revenue Code, any damages received on account of “personal physical injuries or physical sickness” are excluded from gross income. The IRS has consistently interpreted this to include damages from wrongful death claims. This means the portion of the settlement intended to compensate for losses like loss of support, pain and suffering, and loss of companionship is received tax-free.
What Parts of a Settlement Could Be Taxable?
While the main portion is non-taxable, certain elements of a settlement or award can be subject to taxes.
- Punitive Damages: In some cases, a court may award punitive damages. These are not meant to compensate the family for a loss but to punish the defendant for extreme or malicious conduct. Punitive damages are almost always considered taxable income.
- Interest: If there is a delay between when the settlement is agreed upon and when it is paid, any interest that accrues on the settlement amount during that time may be taxable.
- Compensation for Lost Wages (Survival Action): Some states allow for a “survival action” to be filed alongside a wrongful death lawsuit. This allows the estate to recover damages the deceased could have claimed if they had survived, such as their own pain and suffering and lost wages between the time of injury and death. The portion allocated to the deceased’s lost wages may be taxable to the estate.
- Investment Earnings: If a beneficiary receives a lump-sum payment and invests it, any earnings from those investments (dividends, interest, capital gains) are taxable. This is a key reason why the tax-free growth of a structured settlement is so attractive.
The Importance of Consulting a Tax Professional
Tax laws are complex and can change. It is essential for beneficiaries to consult with a qualified tax advisor or financial planner after a settlement. These professionals can help structure the payout to be as tax-efficient as possible and provide guidance on managing the funds to ensure long-term financial health.
The Timeline: From Agreement to Payout
Securing a settlement agreement is a major milestone, but it is not the end of the process. Several administrative and legal steps must be completed before the money is in the beneficiaries’ hands. Understanding this timeline can help manage expectations.
- Settlement Agreement and Release: Once a settlement amount is agreed upon, the estate’s representative signs a formal settlement agreement and release. This document legally releases the defendant from all future liability related to the death.
- Insurance Company Issues the Check: After the signed release is received, the defendant’s insurance company typically has 30 to 60 days to issue the settlement check. The check is sent to the estate’s attorney.
- Deposit into Attorney’s Trust Account: The attorney deposits the check into a special IOLTA (Interest on Lawyers’ Trust Accounts) or other client trust account. The funds must remain there until the check clears, which can take several days.
- Payment of Liens and Expenses: The attorney then uses the cleared funds to pay all outstanding liens (e.g., from Medicare or hospitals), reimburse the firm for case expenses, and deduct their agreed-upon contingency fee.
- Transfer to the Estate Account: The net settlement funds are then transferred from the attorney’s trust account to the estate’s official bank account, which is managed by the personal representative.
- Probate Court Approval: The personal representative submits a final accounting and a proposed distribution plan to the probate court for approval. This can take several weeks or months, depending on the court’s calendar and the complexity of the estate.
- Final Distribution to Beneficiaries: Once the judge issues an order approving the plan, the personal representative can finally write checks to the beneficiaries or use the funds to purchase a structured settlement annuity.
From the day of the settlement agreement to the final payout, the entire process can take anywhere from a few weeks to several months.
Get clarity on your wrongful death case, contact Life Justice Law Group today.
Conclusion
The journey from a wrongful death settlement agreement to the final distribution of funds is a structured, multi-step process designed to protect all parties involved. The money flows not to individuals, but to the deceased’s estate, where it is used to satisfy legal fees, case costs, and outstanding debts under the supervision of a personal representative and the probate court. Only then is the net settlement divided among the legal beneficiaries based on their specific losses.
Making an informed choice between a lump-sum payment and a structured settlement is one of the most significant financial decisions a family will make. Each path offers different benefits and drawbacks related to flexibility, long-term security, and tax implications. Understanding these options is vital for ensuring the settlement provides the financial stability it was intended to create.
Because this process involves complex legal, financial, and tax considerations, seeking professional guidance is not just recommended—it is essential. An experienced wrongful death attorney can manage the legal procedures, while a financial advisor and tax professional can help the family make sound decisions that will protect their financial future. If your family is facing this difficult situation, taking the step to consult with qualified legal counsel is the most effective way to safeguard your rights and secure the support your family needs. Contact our qualified wrongful death attorney to protect your rights, ensure your story is told accurately and fight for the justice your family deserves.