Anyone reading this newsletter likely knows someone who has filed a personal injury lawsuit, as more than 400,000 claims are filed each year. But if you’ve never been a plaintiff and you are relatively far removed from the legal industry, you probably haven’t thought much about what it actually means to receive a settlement in an injury case.
A catastrophic injury comes with lifelong medical care and maybe also equipment, therapies, home nursing care, and other needs. On top of those unexpected costs, chances are the injured person is unable to work – at least in the same capacity as they were pre-injury – which means less income and more bills. A personal injury settlement or jury verdict helps rectify the financial burden for the victim.
But there’s often a lot of difficulty in stretching a personal injury settlement over a plaintiff’s lifetime, even when it’s a really big settlement. Most people have never received a lump sum that large, so they naturally do not know how to appropriately plan for it. Companies like Milestone help implement strategies for plaintiffs that are customized to their needs and financial goals, and once those plans are in place, it’s set it and forget it. The plaintiff has the peace of mind that the settlement money will last for years and cover all their needs, so they can move forward with life.
One distinct advantage that all personal injury plaintiffs automatically have is that they receive their settlements as tax-free income. In other words, anyone who receives a monetary award from a personal injury case does not have to pay taxes on that money. That’s a really big deal if you think about it – whether we’re talking about a $40,000 case or a $10 million case, there is no impending higher tax bracket or the need to set aside a portion of the proceeds to pay the IRS next tax season.
This rule also opens the door for amazing investment growth when a plaintiff uses what my company calls tax-free settlement design. Using an innovative planning process, these tax laws can be utilized to create an individual settlement account. Here’s how it works: A plaintiff invests any portion of a personal injury settlement and gets 100 percent tax-exemption of the investment earnings on that account. They receive pre-arranged periodic payments over the long term and enjoy the tax-free growth that comes with investing their settlement. It’s that simple.
Although there is not an express portion of the tax code for tax-free settlement design like there is for a 401(k) and other qualified retirement plans, there is extensive tax guidance around the proper investment and tax exemption on earnings for periodic payment obligations – which is what tax-free settlement design is essentially.
If you want to hear more about how these accounts work, whether for yourself or a client, DM me on LinkedIn or call my office at 716-883-1833.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).