Taxability of Settlement

Individual is to receive a settlement after their relative, who has since passed away, was "mistreated" while under the care of a nursing home. I've always understood bodily injury and/or wrongful death settlements to be non-taxable. However, how do you determine whether the settlement is punitive?

You need to know more.

First of all, why is the individual receiving the settlement, not the person's estate? Second, what does the settlement agreement say? Third, what does the attorney say?

I'm sure others will chime in, but that is a beginning.

The individual is the adult child of the deceased. No settlement payments have been received yet. No mention of an attorney in the initial conversation with the adult child.

In these kinds of cases are settlements typically paid to the deceased person's estate? Also, do settlement agreements explicitly say that the award is punitive?

I doubt that there are any settlement agreements which include an amount for punitive damages. What's the point?

I doubt that there are any settlement agreements which include an amount for punitive damages. What's the point?

You’re probably right that the settlement agreement doesn't include an amount for punitive damages. But in the absence of an allocation of the settlement in the written settlement agreement, the courts have held that we must look to the claims made in the original complaint or those during the trial if there was one. So, it’s possible that through that analysis, a portion of the settlement could be allocated to punitive damages.

Well, if this was a wrongful death settlement in a state that, as described in 104(c)(2), only allows punitive damages to be awarded in such settlements, it's excludible. However, I'm not sure there are any such states anymore.

You're overthinking this. We're talking about a return position.

Well, if this was a wrongful death settlement in a state that, as described in 104(c)(2), only allows punitive damages to be awarded in such settlements, it's excludible.

That's not what 104(a)(2) says. It specifically says that the exclusion doesn't apply to punitive damages.

But 104(c)(2) limits that in specific circumstances.

Okay, now I see. This exception only applies in the situation where a state statute provides ONLY for punitive damages in wrongful death claims.

This sounds like a potential elder abuse case.
Which state?
Even states which might not allow punitive damages in wrongful death actions may allow punitive damages in elder abuse cases. That said, punitive damages are awarded by juries, not by defendants in settlements.

It makes no sense that a state would only allow punitive damages to be awarded. Mere negligence can be the basis for a wrongful death action. Wrongful death is a tort in which the plaintiff seeks compensatory damages. The term "punitive damages" is a misnomer. Punitive damages are awarded on top of the plaintiff's damages. The amount of punitive damages is determined with reference to morality and ability to pay, not the plaintiff's damages.

It makes no sense that a state would only allow punitive damages to be awarded.

Alabama’s Wrongful Death Act (sec. 6-5-410 of the Alabama Code) only allows punitive damages and not compensatory damages.

The statute does not say at all that but the Alabama Supreme Court says "We also recognize that Alabama is the only state in which a wrongful death statute has been judicially interpreted to authorize the recovery of only punitive damages. See, Comment, Alabama's Wrongful Death Statute, 4 Ala.L.Rev. 75 (1951)." Black Belt Wood Co. v. Sessions, 514 So. 2d 1249, 1262 (Ala. 1986)).

An interesting oddity, for sure, but for tax purposes would you not argue that the damages are actually compensatory?

Wow! That's a strange one.

BTW, I don't think the cite is correct.
2006 Alabama Code - Section 6-5-410 — Wrongful act, omission, or negligence causing death.
(a) A personal representative may commence an action and recover such damages as the jury may assess in a court of competent jurisdiction within the State of Alabama, and not elsewhere, for the wrongful act, omission, or negligence of any person, persons, or corporation, his or their servants or agents, whereby the death of his testator or intestate was caused, provided the testator or intestate could have commenced an action for such wrongful act, omission, or negligence if it had not caused death.

(b) Such action shall not abate by the death of the defendant, but may be revived against his personal representative and may be maintained though there has not been prosecution, conviction or acquittal of the defendant for the wrongful act, omission, or negligence.

(c) The damages recovered are not subject to the payment of the debts or liabilities of the testator or intestate, but must be distributed according to the statute of distributions.

(d) Such action must be commenced within two years from and after the death of the testator or intestate.

I was relying on this court opinion:

https://scholar.google.com/scholar_case?case=12163838842936015849&hl=en&as_sdt=6&as_vis=1&oi=scholarr

This is a 1980 ruling on a 1975 Alabama law, and admittedly, the law might have been amended since 1975.

Not to belabor the point, but NoCalCPA85 is correct according to this Alabama lawyer. https://andywins.com/blog/wrongful-deat ... e-a-claim/

Also, the IRS says the same in this 2011 Guide. https://www.google.com/url?sa=t&rct=j&q ... qTyYb-nFXR

It is not clear that this is even a wrongful death settlement. Many states have created causes of action for Elder Abuse separate from wrongful death. Although a jury might award punitive damages in some states, settlement of an Elder Abuse claim typically encompasses compensatory damages for the mistreatment of the elder patient, not for the wrongful death.