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Do I Need to Pay Tax on a Wrongful Death Settlement?

Losing a loved one is difficult. Many clients are shocked to learn during such a challenging time that inheritance tax is owed to the state of Nebraska.

Although there are many nuances and exceptions, the general rule is that a Decedent’s entire estate is subject to inheritance tax in Nebraska.

Most attorneys will tell you that the proceeds of a personal injury case are tax-free. However, that is not entirely correct! It is true that personal injury proceeds are free from income tax. However, income tax and inheritance tax are not the same, and different rules apply.

When a family member pursues a personal injury claim on behalf of their deceased loved one, the proceeds of the personal injury claim may be subject to tax depending on how the damages are characterized. If the proceeds are a payment to the survivors for their own loss of support, loss of companionship, etc., then those proceeds are free from both income tax and inheritance tax. These proceeds are free from inheritance tax because the claim itself does not belong to the Decedent; it belongs to the survivors. Since the claim belongs to the survivor, the survivor is not inheriting anything.

On the other hand, if the proceeds are a payment to the estate for the Decedent’s own pain and suffering, then those proceeds are free from income tax but are subject to inheritance tax. This is because the claims for pain and suffering belong to the Decedent personally and could have been brought while the Decedent was alive. Because the claims belong to the Decedent personally, the proceeds are treated as an inheritance.

For children and other next of kin, the potential impact of this inheritance tax is often relatively minor. However, most personal injury cases take a long time to resolve. The inheritance tax is due one year from the decedent’s date of death. If the tax is not paid by that date, there are significant penalties and interest which can occur. Our probate attorneys at Carlson & Blakeman, LLP can help mitigate or avoid the penalty and interest entirely in the likely event the personal injury case takes longer than one year to complete.

A skilled personal injury attorney, working in conjunction with a probate attorney, can make sure the settlement your family receives from a wrongful death has as few negative tax consequences as possible. If you would like to speak to one of our attorneys regarding the death of a family member, please give us a call today at (402) 858-0996.

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