OT: Taxes - Verdict Settlement

[DanGarion]

I was hoping someone can give us some advise. We are receiving some money due to a wrongful death / asbestos settlement from my wife's fathers trust. Basically he died last October during the issue being in the courts, they appear to be going to settle out of court. After my father in law passed away it was set that 1/2 went to my mother in law and 12.5% went to each of the 4 children. Now I'm trying to find out what are the tax implications from settlements like this?

My understanding and what I had been told by third party non tax account person was that settlement money is not taxed, even in this type of circumstance. I haven't asked our CPA regarding this yet, but we are looking to just pay off all our bills and use the rest for buying a house, but want to make sure we aren't going to get our ass kicked because of taxes. Anyone know how this stuff works?

[Chief Rum]

Originally Posted by dangarion

I was hoping someone can give us some advise. We are receiving some money due to a wrongful death / asbestos settlement from my wife's fathers trust. Basically he died last October during the issue being in the courts, they appear to be going to settle out of court. After my father in law passed away it was set that 1/2 went to my mother in law and 12.5% went to each of the 4 children. Now I'm trying to find out what are the tax implications from settlements like this?

My understanding and what I had been told by third party non tax account person was that settlement money is not taxed, even in this type of circumstance. I haven't asked our CPA regarding this yet, but we are looking to just pay off all our bills and use the rest for buying a house, but want to make sure we aren't going to get our ass kicked because of taxes. Anyone know how this stuff works?

I thought I heard somewhere that inheritance taxes below $100,000 weren't taxed, but not sure.

I am not a lawyer, so take the following for what it's worth. I sometimes run into these issues as a title examiner, but I'm not trained to look at the finer points of tax law (only how it affects a property owned by the decedent).

For the settlement money not being taxed, well, it's not directly (it would be taxed as income you received during regular tax time). But this doesn't seem to me to be settlement money (at least by the time it gets to your wife).

Remember, the money from the settlement isn't going directly to your father-in-law's successors, but to your father-in-law's estate. Even if he left a will (your post seems to say he did), this will have to go to probate. Once probate carries through and assuming there are no issues with debts to be paid from his estate and what not, then the money (what's left) is passed through to his successors. And that whole sum (all proceeds from his estate, not just the settlement money the estate received) would be subject to inheritance tax, I believe.

But I'm sure a real lawyer or tax accountant will be along soon to give you the precise answer.

Is this in California?

[Swaggs]

Originally Posted by Chief Rum

I thought I heard somewhere that inheritance taxes below $100,000 weren't taxed, but not sure.

I am not a lawyer, so take the following for what it's worth. I sometimes run into these issues as a title examiner, but I'm not trained to look at the finer points of tax law (only how it affects a property owned by the decedent).

For the settlement money not being taxed, well, it's not directly (it would be taxed as income you received during regular tax time). But this doesn't seem to me to be settlement money (at least by the time it gets to your wife).

Remember, the money from the settlement isn't going directly to your father-in-law's successors, but to your father-in-law's estate. Even if he left a will (your post seems to say he did), this will have to go to probate. Once probate carries through and assuming there are no issues with debts to be paid from his estate and what not, then the money (what's left) is passed through to his successors. And that whole sum (all proceeds from his estate, not just the settlement money the estate received) would be subject to inheritance tax, I believe.

But I'm sure a real lawyer or tax accountant will be along soon to give you the precise answer.

Is this in California?

This is not an inheritance, though. It is an insurance and/or civil settlement.

Dan, I have been out of the insurance business since around 2002, but back then, settlements were non-taxable. So, unless California has its own laws or the federal law has changed (which I doubt in both cases), you are entitled to 100% (minus lawyer fees).

If you had/have a lawyer(s), they will probably be able to clarify that for you, as the check will likely be in their and your name(s).

[Vinatieri for Prez]

The whole estate thing throws a big curveball into it. Speak to a CPA. I'm sure they'll have answer for you in about 5 minutes.

The issue here is while it is a settlement that would definitely be considered one in terms of the estate's income tax calculations. Once it get paid to you, that could be considered regular old proceeds from an inheritance. I don't know the answer, but I think it's a little more complicated than if you were the one injured and receiving the settlement.

[Chief Rum]

Originally Posted by Swaggs

This is not an inheritance, though. It is an insurance and/or civil settlement.

Dan, I have been out of the insurance business since around 2002, but back then, settlements were non-taxable. So, unless California has its own laws or the federal law has changed (which I doubt in both cases), you are entitled to 100% (minus lawyer fees).

If you had/have a lawyer(s), they will probably be able to clarify that for you, as the check will likely be in their and your name(s).

Not entirely. This is a two step progression.

Dangarion's wife does not receive anything from the settlement. She did not breathe in asbestos and is not a part of the lawsuit. The lawsuit, I would assume, has her father as the plaintiff (or one of them). Since he has passed on, his estate is entitled to any proceedings from the settlement. His estate is not some transitory real person to real person thing. It's an actual entity which may receive assets in trust.

Probate is the process dissolving the assets and debts of that trust/estate to longer term holders of assets (such as the successors to that estate, including dangarion's wife). The first step--the settlement--puts the awarded money into the estate. The second step--the probate (which is where inheritance comes in)--moves the awarded money from the estate to the court-ruled successors of that estate. That's not a settlement move, but a probate move--and thus potentially subject to inheritance tax.

Nonetheless, regardless of whether inheritance tax comes into play, V4P is correct that all of this will come into play with income taxes at the very least.

[DanGarion]

Originally Posted by Chief Rum

Not entirely. This is a two step progression.

Dangarion's wife does not receive anything from the settlement. She did not breathe in asbestos and is not a part of the lawsuit. The lawsuit, I would assume, has her father as the plaintiff (or one of them). Since he has passed on, his estate is entitled to any proceedings from the settlement. His estate is not some transitory real person to real person thing. It's an actual entity which may receive assets in trust.

Probate is the process dissolving the assets and debts of that trust/estate to longer term holders of assets (such as the successors to that estate, including dangarion's wife). The first step--the settlement--puts the awarded money into the estate. The second step--the probate (which is where inheritance comes in)--moves the awarded money from the estate to the court-ruled successors of that estate. That's not a settlement move, but a probate move--and thus potentially subject to inheritance tax.

Nonetheless, regardless of whether inheritance tax comes into play, V4P is correct that all of this will come into play with income taxes at the very least.

Well none of the money is going into probate, I can tell you that much. I think what happen is because he died during the process the children ended up becoming the party involved in the case. So they are being awarded the settlement instead of it being an inheritance, at least that is how I'm understanding it.

And yes this is in CA.

[Chief Rum]

Originally Posted by dangarion

Well none of the money is going into probate, I can tell you that much. I think what happen is because he died during the process the children ended up becoming the party involved in the case. So they are being awarded the settlement instead of it being an inheritance, at least that is how I'm understanding it.

And yes this is in CA.

Hmm, I will be surprised if that's the case. I don't think lawsuits work that way, unless the law allows some sort of refiling. Pretty sure it has to go to his estate first.

Hopefully a lawyer will come along to fix this? John Galt, where are you?

I just re-read your first post, and I think you're right on probate, if you mean your father-in-law established the trust while alive (and not that it's a trust that was formed as a result of his passing, which would essentially be an estate). Trusts aren't subject to probate unless there is some issue with the successor trustees or the paperwork that formed the trust, I don't think (smart move by your father in law, BTW, if he did move his assets to a trust; saves his relatives a ton of hassle and cost).

[DanGarion]

Originally Posted by Chief Rum

Hmm, I will be surprised if that's the case. I don't think lawsuits work that way, unless the law allows some sort of refiling. Pretty sure it has to go to his estate first.

Hopefully a lawyer will come along to fix this? John Galt, where are you?

I just re-read your first post, and I think you're right on probate, if you mean your father-in-law established the trust while alive (and not that it's a trust that was formed as a result of his passing, which would essentially be an estate). Trusts aren't subject to probate unless there is some issue with the successor trustees or the paperwork that formed the trust, I don't think (smart move by your father in law, BTW, if he did move his assets to a trust; saves his relatives a ton of hassle and cost).

Yeah I think it was something that was done because he was going to be going in to a major surgery, and mesothelioma is basically uncurable, it was the only option in case something happen in/after surgery, which is pretty much what happened.