wrongful death and taxes

General Rule

Not all amounts recovered in a wrongful death action are exempt from the New Jersey Inheritance Tax.  Generally, wrongful death settlements recovered under N.J.S. 2A:31-1 are not subject to the New Jersey Inheritance Tax IF the amount is incident to the decedent’s death itself.  For example, take a settlement that pays $1,000,000.  Let’s say the settlement stipulates that $250,000 is to compensate for pain and suffering.  In that case, $750,000 would be exempt from tax and the rest would be subject to the inheritance tax.

Property includible in estate of decedent
(a) Moneys recovered under New Jersey Death Act ( N.J.S.A. 2A:31-1 et seq.). Any sum recovered under the New Jersey Death Act representing damages sustained by a decedent between the date of injury and date of decedent’s death (such as the expenses of care, nursing, medical attendance, hospital, and other charges incident to the injury), including loss of earnings and pain and suffering are to be included in the decedent’s estate.
1. Where an action is instituted under the New Jersey Death Act and terminates through settlement by a compromise payment without designating the amount to be paid under each count, the amount so recovered is first applied toward the payment of funeral expenses, the expenses of care, nursing, medical attendance, hospital, and other proper charges incident to the injury and is fully includible in the estate of the decedent.

NJAC § 18:26-5.3

Estate Tax of Wrongful Death Settlements

For estate tax purposes, when New Jersey still had an effective estate tax, the law was similar.  Under federal law, which underpinned the New Jersey estate tax regime, wrongful death proceeds that did not contain a pain and suffering component were (and are) excludible from a decedent’s taxable estate.  The IRS had argued (and lost) that such proceeds should be includible.

In Revenue Ruling 75-127 (1975-1 CB 297), the IRS acquiesced and held such proceeds to not be includible under either 2033 or 2041 because “the wrongful death action cannot exist until the decedent has died. Thus, the decedent possessed neither a property interest in such cause of action nor a power of appointment over such cause of action at the time of his death”.

“Accordingly, the Internal Revenue Service will no longer take the position under Connecticut, Iowa, or Arizona law, or under the law of any State having a wrongful death statute similar to the law of one of these states, that the value of wrongful death proceeds is includible in the decedent’s gross estate. However, where it can be established that such proceeds represent damages to which the decedent had become entitled during his lifetime (such as for pain and suffering and medical expenses) rather than damages for his premature death, the value of these amounts will be includible in the decedent’s gross estate.”

Revenue Ruling 75-127 (1975-1 CB 297)

For help in structuring wrongful death settlements, contact an experienced attorney early in the process.