Auto Insurance payment for death - Taxes?

[cimm34]

What is the name of your state? IL

Posted this under the accident law forum and was told I should try here for an answer.

My mom was killed by a drunk driver and my lawyer told me that we would be receiving money from her auto insurance policy. My questions is do I have to pay taxes on that money? Thanks for any help

[abezon]

Compensatory damages for personal injury (death) are not taxable. Presumably that's what is happening here.

[tranquility]

This is one of the very few times I disagree with Abezon's answer. While his statement (without the parenthesis) is accurate, when the "(death)" is added it creates a whole bunch of problems.

The key is *why* is the money being received? We don't have enough facts for that here. Was it for the potential future wages of the deceased? Was it for the loss of consortium? Was it for pain and suffering? Or, was is just for the direct money damages which resulted from the injury? Each would be treated differently, and only the last would be completely non-taxable.

Since mom was killed and the OP (child) is getting the money, I bet that any money which flows directly to the OP from the insurance company will be taxable. I'd have to check to be sure, but that's my off-the-cuff answer. If it flows through the estate to the OP that is a different story. In either case, we would need to know exactly what the settlement is for in a legal sense. (As opposed to a factual sense as in "mom was killed".)

Error Correction:
My "off-the-cuff" answer was wrong in that it is irrelevant if the person received the money directly from the insurance company or if they recieved it through the estate in regards to the taxability. However, "a taxpayer who is not the injured party in a personal injury lawsuit, who receives a portion of settlement proceeds from the lawsuit as a non-party, is not allowed to exclude the portion received from gross income unless the taxpayer establishes an independent basis for exclusion. It does not follow that because the injured party has a right to exclude settlement proceeds from gross income that a non-party who also receives a portion of the settlement may exclude that portion under Code Section 104(a)(2)." (per Kleinrock's Federal TaxExpert section 18.2)

[abezon]

I'm going to stick to my answer -- since we're talking about auto insurance, this is a PIP personal-injury-protection payout, which makes it a hybrid life/medical insurance policy that was included in the car insurance policy. PIP coverage varies widely from carrier to carrier & state to state, but in general the definition is:

". . . no-fault benefits in states that have enacted mandatory or optional no-fault auto insurance laws. Personal Injury Protection (PIP) usually includes benefits for medical expenses, loss of income from work, essential services, accidental death, funeral expenses, and survivor benefits." [url]www.insweb.com[/url].

As tranq stated, some of those things could give rise to taxable income. However, PIP payouts are rarely itemized. This is good, because the IRS view is that it ain't gonna try to retroactively itemize an insurance payout/settlement between taxable & nontaxable benefits unless it's really, really easy. If some of the payout is for non-taxable compensatory damages, the IRS will view it all as non-taxable. Here, I expect the payout to be for accidental death/funeral expenses/survivor benefits, which makes it essentially life insurance & nontaxable. Unless the paperwork declares that $xxx was for lost wages, it's all going to be non-taxable.

For a more complete discussion, search the board for posts discussing whether a lawsuit settlement is taxable. You'll find lots of posts.

[moburkes]

There is no PIP in Illinois. The only way this money could be paid out in IL is for the at fault party's liability coverage. If mom had her own auto insurance policy in IL, then she MAY have also purchased medical payments coverage.

Hope that helps, you two.

[abezon]

Illinois allows PIP coverage. It is not required by the state's mandatory minimum insurance coverage, but some carriers offer it in Illinois.

[moburkes]

I'm having a hard time finding out where you're getting that information. I'm licensed to sell insurance in that state, I'm looking at all of my reference sources, including the Department of Insurance's website, and I don't see it.

[abezon]

My source is that I was offered PIP coverage when I lived in IL. Maybe the laws have changed since then?

Wouldn't mom's insurance co. also pay out if the other driver was uninsured/underinsured & mom had comprehensive coverage?

[moburkes]

You're mixing up coverages. If mom had UNDERinsured motorist coverage, it COULD pay out. Comprehensive covers theft, vandalism, acts of nature, windshield damage, etc.