Converting a Personal Injury Settlement to a Tax-Free Investment Account
Anyone reading this newsletter probably knows someone who has filed a personal injury complaint, as over 400,000 claims are filed each year. But if you’ve never been a plaintiff and you’re relatively removed from the legal industry, you probably haven’t given much thought to what it really means to receive a settlement in an injury case.
A catastrophic injury comes with lifelong medical care and possibly equipment, therapy, home nursing and other needs as well. On top of these unforeseen costs, it is likely that the injured person will be unable to work – at least in the same capacity as before the injury – which means less income and more bills. A personal injury settlement or jury verdict helps rectify the financial burden on the victim.
But it is often very difficult to extend a personal injury settlement over the lifetime of a plaintiff, even if it is a very large settlement. Most people have never received such a large lump sum, so naturally they don’t know how to properly plan for it. Companies like Milestone help implement strategies for complainants that are tailored to their financial needs and goals, and once those plans are in place, they set them up and forget about them. The claimant has the peace of mind that the settlement money will last for years and cover all of their needs, so they can move forward in life.
A distinct advantage that all personal injury claimants automatically have is that they receive their settlements as tax free income. In other words, anyone who receives monetary compensation in a personal injury case does not have to pay tax 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 isn’t a higher tax bracket impending or the need to set aside some of the proceeds to pay next season IRS tax.
This rule also opens the door to incredible investment growth when an applicant uses what my company calls tax-free settlement design. Using an innovative planning process, these tax laws can be used to create an individual settlement account. Here’s how it works: A claimant invests any part of a personal injury settlement and is granted a 100% tax exemption of the investment income on that account. They receive regular, long-term payments and enjoy the tax-free growth that accompanies their settlement investment. It is that simple.
While there is no express part of the tax code for the design of the tax-free establishment as there is for a 401 (k) and other qualified pension plans, there is extensive tax guidelines regarding appropriate investment and income tax exemption for periodic payment obligations. – which is what tax free settlement design is basically.
If you want to learn more about how these accounts work, whether for yourself or a client, send me a DM on LinkedIn or call my office at 716-883-1833.