Including A Personal Injury Award In Your Estate Plan

After a personal injury settlement, most people concentrate on immediate concerns like covering medical expenses, supporting recovery, and stabilizing their finances. But once the settlement is in hand, longer-term planning becomes just as important. One area that often gets overlooked is how that award fits into an estate plan. Personal injury compensation can be substantial, and without careful planning, it can raise issues down the line for heirs or fiduciaries. Attorneys with experience in this area of practice can attest to how important it is to think ahead in these situations.

Why Personal Injury Awards Require Special Planning

Unlike regular wages or savings, personal injury compensation is often treated differently under the law. These funds may be subject to specific protections or conditions, depending on how they were awarded. For instance, settlements for pain and suffering are typically not taxed, but punitive damages or lost wages may be. The mix of taxable and non-taxable elements can create confusion during estate administration if not addressed in advance.

Some settlements are structured, meaning payments are spread out over time. Others are received as a lump sum. If structured payments continue after death, they may pass to a beneficiary or become part of the estate. Either way, it’s important to specify who receives those funds and under what conditions. Without direction, courts or heirs may disagree about what was intended.

Using Trusts To Protect The Award

One effective option for managing a personal injury award is to place the funds in a trust. A revocable living trust can help the injured person manage the money during their lifetime and direct how it is handled after death. In cases involving minors or individuals with disabilities, a special needs trust may be more appropriate. These tools do more than offer control; they add a layer of protection that a basic will does not provide.

Trusts can also help reduce probate exposure. Assets in a properly funded trust typically avoid the delays and public nature of probate court. This can be especially helpful for families who want to maintain privacy or expedite the transfer of assets after a loved one dies. It also minimizes the risk that a large award becomes tied up in legal disputes between potential beneficiaries.

Addressing Tax And Benefit Implications

An experienced estate planning lawyer can help address how the award might affect future tax filings or government benefit eligibility. In some situations, a sudden influx of money can disqualify someone from income-based programs like Medicaid. Planning around this issue ahead of time can preserve both the award and access to necessary services.

Another issue that sometimes arises is whether a personal injury settlement needs to be reported to the IRS as part of the estate. The answer often depends on how the funds were awarded and how they are being held. For larger estates, especially those that exceed the federal exemption amount, tax exposure can become a real concern. Including the injury award in a well-structured estate plan helps clarify how those funds will be handled both during life and after death.

When The Injury Claim Is Still Pending

Sometimes, a personal injury claim is unresolved at the time an estate plan is created. This doesn’t mean the issue should be ignored. The estate plan can include language covering proceeds that might be received later. It can also designate who has authority to continue pursuing the claim if the injured person passes away before resolution. Appointing a representative and specifying how potential funds should be distributed keeps the process clear and avoids unnecessary delays.

Why Timing And Clarity Matter

Adding a personal injury award to an estate plan isn’t only about managing money—it’s also about giving clear direction to those who come after. Whether the funds are being used for long-term care, structured to support family members, or directed toward specific goals, having a written plan in place allows those wishes to be honored.

Heirs and fiduciaries will appreciate a well-drafted document that clearly explains how the funds should be handled. Without it, there’s a greater chance of confusion or legal conflict. In some situations, family members may not even know about the award unless it’s disclosed as part of the estate.

Planning ahead can reduce unnecessary burden, provide clarity to beneficiaries, and preserve the value of the compensation received. It reflects the same care and intention that went into pursuing the claim in the first place. Including these considerations as part of a broader estate plan is a step attorneys like those at Pioletti Pioletti & Nichols often encourage.