How Should I Add My Personal Injury Settlement To My Estate?
When you try to talk to the average working American about estate planning, they usually dismiss it as something reserved for people with significant financial means. But if you have a family and you want to take care of that family after you have gone and you want to make sure that your assets are distributed in a certain way, then estate planning is a smart idea.
In many cases, distributing wealth after you have passed on is easy because your life insurance policies and other investments have beneficiaries. However, what would you do if you suddenly received a large personal injury settlement? Having a sudden windfall can change your estate planning ideas, and it is important to know how to incorporate that settlement into your estate.
What Is An Estate?
Estate planning involves putting together the paperwork necessary to help distribute your assets after you have passed on, and to make sure that your family maintains as much control as possible over decisions regarding your life.
The most common tools used to create an estate include a will, a health proxy, and a power of
attorney. It is best to put an estate together when you are younger and update it every year to make sure all of these important documents are in place if something should happen to you.
Personal Injury Settlements And Taxes
In New York State, most of the proceeds paid out in a personal injury settlement are not subject to income tax. Most personal injury settlements are designed to pay for property damages and medical bills related to an incident, and that is why they are not taxable. However, punitive damages (pain and suffering) could be subject to income tax.
The hoops you would need to jump through to try and protect your settlement from taxation are not guaranteed to be effective, so it is best to consult with a financial expert to determine how much income tax you would owe on your settlement. Paying any taxes associated with your settlement can also help to speed up the probate process after you have passed on.
How Should I Incorporate My Settlement Into My Estate?
There are a few effective ways to make sure that your settlement is safely maintained for you and your family while you are alive, and after you have passed on. One option is to open a savings or checking account specifically for the settlement money and then make your spouse or other beneficiary part owner of the account. Remember that your part owner will have the same access to the account that you will, so be sure you make the right choice. While this is not guaranteed to pass through probate, it definitely shows the probate court who you want to have the funds.
The simplest way to incorporate a personal injury settlement into your estate is to update your will to specifically handle the distribution of settlement funds after you have passed away. Every will has to go through probate, but your settlement is much more likely to be distributed how you want it to be distributed if you take care of it in your will.
What Is Probate And How Can It Affect My Settlement?
The probate court system is the system in your state that looks over an estate and determines how assets are to be distributed. If the estate is part of a trust, then the rules of the trust kick in and the probate courts will not get involved. If there is a will, then the probate courts will normally follow the directions of the will after the will has been verified. If there is no will, then the probate court often awards assets to the closest relatives with a spouse being first, and then blood relatives to follow.
If you are awarded a significant personal injury settlement, then it can change your entire life. To protect your family and your estate when you have a new settlement award, it is a good idea to update your estate documents to indicate how you want the settlement handled after you have passed on. If you do not have an estate plan in effect when you get a settlement, then that would be a good time to start putting an estate together.