What Happens After a Wrongful Death Settlement Is Reached

TL;DR

Once a wrongful death settlement is agreed upon, the process shifts to legal and financial administration. The agreement is formalized in a written contract, which often requires court approval, particularly if minor beneficiaries are involved. The defendant’s insurer sends the settlement funds to the plaintiff’s attorney’s trust account. From there, the attorney pays off all outstanding liens, such as medical bills and government reimbursements, as well as legal fees and case costs. The remaining net funds are then distributed to the legal beneficiaries according to state law, a procedure that may be overseen by a probate court and can have specific tax considerations.

Key Highlights

Formal Agreement: The settlement is documented in a legally binding “Settlement and Release Agreement.”
Court Approval: A judge may need to approve the settlement to ensure it is fair, especially for minors.
Funds Transfer: The settlement check is deposited into a secure attorney trust account, not directly to the family.
Lien Resolution: All legal claims against the settlement (liens) from hospitals, insurers, or government agencies are paid first.
Fee and Cost Deduction: Attorney fees and all case-related expenses are deducted from the settlement total.
Beneficiary Distribution: The final net amount is distributed to the lawful heirs, either as a lump sum or through a structured plan.

Wrongful death claims represent a critical function of the civil justice system, providing a path for financial recourse when a person’s death is caused by the negligence or misconduct of another. In the United States, thousands of such claims are filed annually, stemming from events like traffic collisions, medical errors, and workplace incidents. The Centers for Disease Control and Prevention (CDC) reports that unintentional injuries are a leading cause of death, highlighting the frequency of situations that could give rise to these legal actions. The primary goal of a wrongful death lawsuit is not to assign criminal blame but to secure compensation for the surviving family members who have lost financial support, companionship, and services.

The legal basis for these claims is established by state statutes. For example, the California Code of Civil Procedure 377.60 specifies who can file a claim—typically a surviving spouse, domestic partner, children, or other dependent heirs. These laws define the types of damages that can be recovered, which often include economic losses like lost future income and non-economic losses such as the loss of love and guidance. Reaching a settlement agreement with the at-fault party’s insurance company is a significant achievement in this process, often concluding months or even years of investigation and negotiation.

However, the moment an agreement is reached is not the end of the journey. It marks the beginning of a highly structured administrative phase governed by legal, financial, and ethical rules. The procedures that follow are designed to ensure that all financial obligations tied to the deceased and the case are properly settled before funds are released to the family. Understanding this post-settlement process is essential for beneficiaries to manage expectations and see that the compensation intended for their future is handled correctly and transparently.

Finalizing the Settlement: From Agreement to Court Approval

A verbal agreement on a settlement amount is a pivotal moment, but it lacks legal force until it is properly documented and, in many cases, approved by the judicial system. This stage transforms a handshake deal into an enforceable legal resolution, protecting all parties involved and setting the stage for the transfer of funds.

Drafting and Signing the Settlement and Release Agreement

The first concrete step is the creation of a “Settlement and Release Agreement.” This is a comprehensive legal contract drafted by the defendant’s attorney. It outlines every term of the deal in precise detail. Your attorney’s job is to scrutinize this document to ensure it accurately reflects the agreement and protects your interests.

Key clauses within this agreement typically include:

The Settlement Amount: The total sum the defendant or their insurer agrees to pay.
Release of All Claims: This is a critical provision. In exchange for the settlement funds, the plaintiffs (the beneficiaries) agree to release the defendant(s) from any and all future liability related to the death. This means you cannot sue the same party again for the same incident.
Confidentiality Clause: Many defendants insist on a confidentiality or non-disclosure agreement (NDA). This clause prevents the plaintiffs from discussing the settlement amount or the terms of the agreement publicly.
No Admission of Liability: The agreement will almost always state that the defendant does not admit any fault or wrongdoing by paying the settlement.

Once your attorney confirms the document is accurate and fair, all eligible beneficiaries, or the representative of the estate, will sign it. The signed document is then returned to the defense, creating a binding contract.

The Role of the Court in Approving the Settlement

In many wrongful death cases, the settlement agreement must be submitted to a judge for formal approval. This is not just a rubber-stamp procedure; the court has a duty to review the terms. Court approval is almost always mandatory in two specific situations:

When a Beneficiary is a Minor: If a child is set to receive a portion of the settlement, the court must ensure the amount is fair and that the child’s funds will be protected. The judge will often require the money to be placed in a protected account or a structured settlement annuity that the child cannot access until they turn 18. A “guardian ad litem,” an attorney appointed by the court, may be involved to represent the child’s best interests.
When the Case is in Probate: If the wrongful death claim is tied to the deceased’s estate, the settlement distribution plan must be approved by the probate court. The judge verifies that the funds will be allocated according to the state’s wrongful death and inheritance laws.

The judge’s review provides an essential layer of oversight, safeguarding the interests of vulnerable beneficiaries and ensuring the final resolution is equitable.

What Happens if a Party Backs Out?

Once the Settlement and Release Agreement is signed, it is extremely difficult for either party to back out. A signed settlement is a contract. If the defendant or their insurance company refuses to pay after signing, your attorney can file a “motion to enforce the settlement” with the court. The judge can then issue an order compelling the defendant to honor the agreement. Likewise, if a plaintiff changes their mind after signing, the defendant can enforce the agreement against them, preventing them from proceeding to trial.

The Journey of the Settlement Funds: From Insurer to Beneficiary

After the settlement agreement is finalized and approved, the next phase involves the physical transfer of money. This process is highly regulated to protect the funds and ensure all financial obligations are met before the beneficiaries receive their share. The money does not go directly from the insurance company to the family.

The IOLTA or Attorney Trust Account

As required by state bar associations and ethical rules, the settlement check from the defendant’s insurance company is made payable to both you and your attorney. This check is then deposited into a special bank account called an “Interest on Lawyers’ Trust Account” (IOLTA) or a client trust account.

This is a crucial step for several reasons:

Protection of Funds: The money in a trust account does not belong to the law firm. It is held “in trust” for the client. This protects the funds from the law firm’s creditors or any operational expenses.
Transparency and Accountability: The use of a trust account creates a clear paper trail, showing exactly when the money was received and how it was disbursed.
Facilitating Payments: It provides a central account from which your attorney can legally and ethically pay all the required third parties, such as lienholders and case-related vendors.

The funds must remain in this account until all checks have cleared and all payments have been calculated and approved by you.

The Timeline for Receiving the Settlement Check

Beneficiaries are often anxious to know when the money will arrive. It is important to have realistic expectations about the timeline. After the settlement agreement is fully executed, it can take anywhere from a few weeks to a couple of months for the insurance company to process the payment and mail the check.

Factors that can influence this timeline include:

Insurance Company Procedures: Large insurers have internal administrative processes that can take time.
Court Approval Delays: If the settlement requires a judge’s signature, scheduling a court hearing can add weeks to the process.
Complexity of the Case: Cases with multiple defendants or complex terms may take longer to process.

Your attorney will typically follow up with the defense counsel to ensure the payment is processed in a timely manner as stipulated in the settlement agreement.

Verification and Holding Period

Once the settlement check is deposited into the attorney’s trust account, the bank will place a hold on the funds. For a large sum of money, this is a standard security measure to ensure the check is legitimate and does not bounce. This holding period can last from a few business days to over a week. No funds can be disbursed from the trust account until the bank confirms the check has officially cleared. This brief delay is a necessary part of the secure financial transaction process.

Satisfying Liens and Obligations Before Distribution

Before any money can be paid to the beneficiaries, all outstanding debts and legal claims against the settlement must be resolved. These claims are known as “liens.” A lien is a legal right held by a third-party creditor to a portion of the settlement proceeds as reimbursement for services or benefits provided. Identifying and satisfying these liens is one of the most critical responsibilities of your wrongful death attorney.

What is a Lien in a Wrongful Death Case?

Imagine a hospital provided $100,000 in emergency medical care to your loved one before they passed away. If the bill was not paid, the hospital has a legal right to be reimbursed from the settlement that compensates for those very injuries. This right is the lien. Failing to pay a valid lien can have serious legal consequences for both the attorney and the beneficiary, as the lienholder could sue to recover their money.

Common Types of Liens to Be Paid

The types of liens in a wrongful death case can vary, but several are common. Your attorney will conduct a thorough investigation to identify all potential lienholders.

Medical Liens: These are claims from healthcare providers for the cost of the deceased’s final medical treatment. This includes hospitals, surgeons, ambulance services, and other doctors who rendered care related to the fatal injury.
Health Insurance Subrogation: If a private health insurance company (like Blue Cross Blue Shield or Aetna) or an ERISA plan paid for the deceased’s medical bills, they have a “right of subrogation.” This means they can seek reimbursement from the settlement for the money they paid out.
Government Liens: These are often the most complex and non-negotiable liens. If Medicare or Medicaid paid for any of the deceased’s medical care, federal law gives them an absolute right to be reimbursed. These agencies must be notified of the settlement, and their claims must be paid in full.
Workers’ Compensation Liens: If the wrongful death occurred in a workplace context and the family received workers’ compensation benefits (like funeral expenses or death benefits), the workers’ compensation insurance carrier will have a lien on the settlement to recover the benefits it paid.

The Attorney’s Role in Negotiating Liens

A significant part of an arizona wrongful death lawyer’s job during this phase is to negotiate with lienholders. While government liens are often difficult to reduce, liens from hospitals and private insurers can frequently be negotiated down.

For example, if there is a hospital lien for $80,000, your attorney might argue that the settlement had to be compromised for various legal reasons or that the hospital’s billed rates are excessive. Through negotiation, they may be able to get the hospital to accept $50,000 as payment in full. Every dollar saved in lien negotiations is a dollar that goes directly to the beneficiaries. This service adds immense value and maximizes the family’s net recovery.

Calculating and Paying Legal Fees and Case Expenses

Once all liens have been identified and the negotiation process is complete, the next step is to calculate and deduct the attorney’s fees and the costs associated with litigating the case. This is all done transparently, based on the agreement you signed with your lawyer at the beginning of the legal process.

Understanding the Contingency Fee Agreement

Most wrongful death attorneys work on a “contingency fee” basis. This means the lawyer’s fee is a pre-agreed-upon percentage of the total settlement amount. A typical contingency fee ranges from 33.3% to 40%. The primary benefit of this arrangement is that the family does not have to pay any legal fees upfront. The attorney only gets paid if they successfully recover money for you.

For instance, on a $1,000,000 settlement with a 35% contingency fee, the attorney’s fee would be $350,000. This fee compensates the law firm for their time, expertise, and the financial risk they took on by funding the case.

What Are Case Costs and Expenses?

Separate from the attorney’s fee are the case costs and expenses. These are the out-of-pocket expenses the law firm paid to build, investigate, and pursue your case. These costs are reimbursed to the law firm from the settlement funds.

Common case expenses include:

Filing Fees: The cost to file the lawsuit with the court.
Expert Witness Fees: Fees paid to experts like accident reconstructionists, medical doctors, or economists who provide testimony. This is often the largest expense.
Deposition Costs: The cost of court reporters and videographers to record sworn testimony from witnesses.
Medical Record Retrieval: Fees charged by hospitals and clinics to provide copies of the deceased’s medical records.
Investigation Costs: The cost of hiring investigators to locate witnesses, serve legal documents, or gather evidence.
Travel Expenses: Costs for travel related to depositions, hearings, or site inspections.

These costs can range from a few thousand dollars in a straightforward case to tens or even hundreds of thousands of dollars in a complex medical malpractice or product liability case.

The Final Settlement Statement (Closing Statement)

Before you receive any money, your attorney will provide you with a “settlement statement” or “closing statement.” This is a detailed accounting document that breaks down the entire financial transaction. It will clearly list:

The gross settlement amount.
The attorney’s contingency fee amount.
A detailed, itemized list of all case costs and expenses.
A list of all liens paid and the final amount paid to each lienholder.
The final net amount to be distributed to the beneficiaries.

You will be required to review this document carefully and sign it to confirm your approval. This ensures complete transparency and serves as a final record of how every dollar of the settlement was allocated.

The Distribution of Net Settlement Proceeds to Beneficiaries

After all liens, fees, and costs have been paid, the remaining funds are the net settlement proceeds ready for distribution to the family. How this money is divided and paid out is determined by state law and, in many cases, overseen by the probate court to ensure fairness and legal compliance.

Who Are the Legal Beneficiaries?

The individuals entitled to receive settlement funds are known as “beneficiaries” or “heirs.” Who qualifies is not determined by the deceased’s will, but by the state’s wrongful death statute. While laws vary, the order of priority is generally:

Surviving Spouse and Children: They are almost always the primary beneficiaries.
Surviving Parents: If there is no spouse or child, the deceased’s parents may be next in line.
Other Heirs: In some situations, siblings or other next of kin who were financially dependent on the deceased may be eligible.

The court will approve a distribution plan that allocates the settlement among the eligible beneficiaries. This allocation is based on the financial and emotional loss each person suffered. For example, a young child who lost a parent will have a greater claim for lost financial support and guidance than an adult child who is financially independent.

The Role of the Probate Court

In many jurisdictions, the net settlement funds are paid to the deceased’s estate and the distribution is managed through the probate court. A personal representative or administrator is appointed for the estate, and they are responsible for formally distributing the funds according to the court-approved plan. This judicial oversight ensures that the money goes to the correct legal heirs and that the process is handled according to statute. While it adds a layer of administration and time, it provides a final, legally sound resolution.

Methods of Distribution

The beneficiaries do not always receive their share as a single check. There are several methods for distributing the funds, chosen based on the beneficiaries’ best interests.

Lump-Sum Payment: Each adult beneficiary receives their entire share in a single payment. This provides immediate access to the funds for paying off debts, buying a home, or investing.
Structured Settlement: This is a common and often required method for minor beneficiaries. Instead of a lump sum, the money is used to purchase an annuity from a life insurance company. The annuity then provides a stream of guaranteed, tax-free payments to the beneficiary over a set period—for example, monthly payments for life or lump sums at ages 18, 21, and 25 to pay for college and other life expenses. This protects the money from being spent too quickly.
Special Needs Trust: If a beneficiary is disabled and receives government benefits like Supplemental Security Income (SSI) or Medicaid, receiving a large lump-sum settlement could disqualify them from these essential programs. To prevent this, the settlement funds can be placed in a “special needs trust.” The trust’s assets can then be used to pay for supplemental needs not covered by government benefits, preserving the beneficiary’s eligibility.

Understanding the Tax Implications of a Wrongful Death Settlement

A common question from beneficiaries is whether they will have to pay taxes on the settlement money. The tax treatment of wrongful death proceeds is governed by federal and state tax law, and the answer is generally favorable for the recipients.

Are Wrongful Death Settlements Taxable?

For the most part, wrongful death settlements are not considered taxable income. Section 104(a)(2) of the U.S. Internal Revenue Code specifies that compensation received on account of “personal physical injuries or physical sickness” is excluded from gross income. The IRS has long interpreted this to include damages recovered in a wrongful death action, as the claim originates from the physical injury that caused the death.

This tax-free treatment applies to compensation for damages such as:

Medical expenses
Funeral and burial costs
Lost wages and financial support
Loss of companionship, comfort, and guidance (non-economic damages)

Exceptions to the Tax-Free Rule

While the bulk of a settlement is typically non-taxable, certain portions can be subject to taxes. It is crucial to understand these exceptions.

Punitive Damages: In rare cases where the defendant’s conduct was particularly reckless or malicious, a court may award punitive damages. These damages are intended to punish the wrongdoer, not to compensate the family for a loss. The IRS considers punitive damages to be a windfall, and they are fully taxable as income.
Interest on the Settlement: If there is a delay in payment and the settlement award accrues interest, that interest is taxable income.
Confidentiality Agreements: In some instances, if a portion of the settlement is specifically allocated as payment for signing a confidentiality agreement, the IRS may view that portion as taxable income.
Allocations to the Estate: If part of the settlement is for claims belonging to the estate, such as pain and suffering the deceased experienced before death (a “survival action”), there could be estate tax implications, though this is rare for all but the largest estates.

The Importance of Consulting a Tax Professional

Your wrongful death attorney can structure the settlement agreement to maximize its tax-free status. However, they are not tax advisors. Once the settlement is finalized, it is highly recommended that you consult with a certified public accountant (CPA) or a tax attorney. They can provide personalized advice on your specific tax situation, help you with financial planning, and ensure you comply with all IRS reporting requirements, especially if any portion of your settlement is taxable.

Conclusion

Reaching a settlement in a wrongful death case is a monumental step toward securing a measure of financial justice for a grieving family. Yet, it is the beginning of a detailed and legally mandated administrative process. The journey from the settlement agreement to the final distribution of funds involves several non-negotiable stages: the formalization of legal documents, potential court oversight, the transfer of funds into a secure trust account, and the meticulous satisfaction of all liens and case-related expenses. Each step is designed to ensure fairness, transparency, and legal compliance.

The calculation of legal fees and the creation of a final closing statement provide a clear picture of how the settlement is allocated. Finally, the distribution of the net proceeds to the rightful beneficiaries, whether through a lump sum, a structured settlement for a minor, or a special needs trust, is managed according to state law to protect the family’s long-term interests. Understanding the generally tax-free nature of the compensation, along with its few exceptions, is also a key part of the financial picture.

This post-settlement phase requires patience and the guidance of an experienced legal team. An attorney’s role extends far beyond negotiating the settlement amount; they act as a fiduciary, managing the complex financial transactions and lien negotiations to maximize the net recovery for the family. If you are facing this difficult situation, securing legal counsel who can expertly handle every one of these steps is essential. Taking this action ensures your family’s rights are protected and the financial stability your loved one intended for you is properly secured. Contact us for free consultation today.

What Happens After a Wrongful Death Settlement is Reached