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  1. #1
    Join Date
    Nov 2011
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    1

    Default Is a Lump Sum Settlement for a Death Benefit Taxable

    I am a widow who has been receiving monthly death benefit payments for about 20 years. The company handling the claim recently called me and wants to know if I'm interested in receiving a lump sum settlement. They want me to ask for an amount (!). I guess my first concern is if it's taxable. I've been finding conflicting information and the IRS information makes my eyes bleed. I would be grateful for any information or links where I could get information. I'm disabled and it's hard for me to spend a lot time at the computer.

  2. #2
    Join Date
    Oct 1971
    Posts
    5,193

    Default Re: Is a Lump Sum Settlement for a Death Benefit Taxable

    My advice would be if you're under 60, don't do it.
    Consult a lawyer before you do anything, settlements are not in your interest.

    Tony
    Moderator Responses are based on my personal bias, experience and research - They do not represent the views of the admin nor may be accepted in the legal community, always consult an attorney.

  3. #3
    Join Date
    Feb 2007
    Location
    Calif
    Posts
    17,938

    Default Re: Is a Lump Sum Settlement for a Death Benefit Taxable

    Tony is right ... while the cash lump sum may be attractive.. you cannot self invest and earn interest that will replace the weekly benefits you are currently receiving.
    The ONLY benefit to a cash payment... there creates an estate value... goes to your heirs...doesn't do you any good at all.

    Benefits to the IW, even cash lump sum are never taxable...but to a suvivor... you need a competant tax advisor, or atty. At best...you would know the potential value of the remaining benefits. This would not be based on your life expectance... as it was the IW.

  4. #4
    Join Date
    Mar 2007
    Location
    Georgia
    Posts
    1,923

    Default Re: Is a Lump Sum Settlement for a Death Benefit Taxable

    AKBFARR, Tony makes a very good point. Seldom to NEVER does a lump sum buy out serve a better monetary purpose than a weekly or monthly benefit for the recipient. IF however you have other income that takes care of your month to month needs and you want a lump sum of money to put into your name then that "might" be a good enough reason to at least consider it.

    So long as you are being paid partial payments if you were to die today how is that death benefit structured? Does the remaining unpaid benefits then pass on to your heirs or does the claim stop upon your death? Something else to consider IF there is no one else that could continue to collect those benefits and as Tony pointed out, depending on your own age, only you can determine IF it is something you want to do.

    Rather than to provide you a link to information, that may or may not end up being relevant to your situation, I would highly suggest you talk to a tax attorney in your area. Or at least one in Arizona as s/he would be knowledgeable concerning the tax issue you posed as well as most likely have some knowledge about AZ WC law or could refer you to someone that does.

    Given that you have a hard time spending a lot of time at the computer I would think this would be your best bet. Also you never really know 100% for sure if a web site is providing accurate information or not. Unless of course it is the web site for the IRS and as you say that "makes you eyes bleed", (I had to chuckle at that statement as I have heard/read many ways of folks expressing their displeasure with attempting to make heads or tails out of much of the information on the IRS's web site. That really was a straight up yet comical way of putting it. I can't say that I disagree with you about the IRS's web site BTW .....) or you may want to try the Arizona work comp web site but that may also cause a hemorrhage or two

    Getting legal and tax advise from a reputable firm in your area seems to me to be the most logical answer. Good Luck with it. And by all means IF you have other questions or issues come on back and hopefully someone will be able to give you a hand with it. Have a great night.
    "He who is his own lawyer has a fool for a client"
    Abraham Lincoln


    Take Care and Be Well.

  5. #5
    Join Date
    Aug 2011
    Location
    Georgia
    Posts
    790

    Default Re: Is a Lump Sum Settlement for a Death Benefit Taxable

    FROM THE IRS, PUBLICATION 525 (2010) -

    ">>>Workers' Compensation

    Amounts you receive as workers' compensation for an occupational sickness or injury are fully exempt from tax if they are paid under a workers' compensation act or a statute in the nature of a workers' compensation act. The exemption also applies to your survivors. The exemption, however, does not apply to retirement plan benefits you receive based on your age, length of service, or prior contributions to the plan, even if you retired because of an occupational sickness or injury.

    If part of your workers' compensation reduces your social security or equivalent railroad retirement benefits received, that part is considered social security (or equivalent railroad retirement) benefits and may be taxable. For a discussion of the taxability of these benefits, see Other Income under Miscellaneous Income, later.<<<"

    In other words, that portion of the death benefit that reduces your SS benefit (whether retirement or disability) would be taxable as SS income. Not all SS income is taxable, so that amount would also enjoin the SS benefit for consideration, based on your tax liability level.

    The general rule under the IRS Code is that the "income" (receipts) would be treated the same way as if the decedent was still living and receiving those monies from the same source. Since WC benefits are not taxable, then it stands to reason that the WC death benefits (a virtual replacement of the "living" benefits) would also be tax exempt, with the exception noted above regarding SS benefits. This is what the IRS considers the "character of the income".

    Again, it is best to rely upon the advice of a tax professional.

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