Are Personal Injury Payments Included in Your Estate for Tax Purposes Under New Jersey’s Death Tax Laws?

By Fredrick P. Niemann, Esq. of Hanlon Niemann Wright, a Freehold, NJ Estate Administrate and Probate Attorney

In 2011 a decedent died with an estate of $1,000,000 which was closed out and all inheritance and estate taxes paid. The estate has been closed for 4 years, but recently her wrongful death claim case settled after a jury trial. A NJ Inheritance/Estate Tax Auditor informed the family that a certain portion of the settlement is taxable and the other portion is not. So the issue is whether the wrongful death portion of the jury verdict ($250,000) is subject to NJ Inheritance/Estate Tax. One commentator offered the opinion that pain and suffering, expenses of care, nursing, medical and hospital expenses, other charges incident to the injury, and funeral expenses are exempt while any amount recovered in excess of these expenses are included in the Estate Tax.

My take is that any sum recovered under the New Jersey Death Act as compensation for wrongful death of a decedent is not subject to the New Jersey Inheritance Tax except as provided below:

1. Any sum recovered under the New Jersey Death Act representing damages sustained by a decedent between the date of injury and date of death, such as the expenses of care, nursing, medical attendance, hospital and other charges incident to the injury, including loss of earnings and pain and suffering are to be included in the decedent’s estate.
2. Where an action is instituted under the New Jersey Death Act and terminates through the settlement by a compromise payment without designating the amount to be paid under each count, the amount which must be included in the inheritance tax return is an amount, to the extent recovered, which is equal to specific expenses related to the injury. These expenses are similar to those mentioned in sections 1. above and include funeral expenses, hospitalization and medical expenses, and other expenses incident to the injury. Any amount which is recovered in excess of these expenses is considered to be exempt from the taxable damage amount (for the decedent’s pain and suffering). Damages that go to the next of kin for loss of society, consortium or support are not subject to estate tax.

In cases like these interested parties should review the Settlement Agreement to see if the allocation of damages is “in sync” with the damages asked for in the complaint and can be supported. For example, if the damages under the Wrongful Death claim only comprised 25% of the total amount sought, but the Settlement Agreement allocated 75% of the amount to the Wrongful Death claim (to avoid paying death taxes on the Wrongful Death portion), you’re probably going to have a fight with NJ that the allocation was improper.

To discuss your NJ Estate Probate Administration matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.