How a Personal Injury Settlement Can Affect Your Estate Plan and Investments

You’ve Won Your Case. Now, How Do You Protect Your Award for the Future?

Securing a substantial settlement after a serious injury is a monumental victory. It represents justice and provides the critical financial resources necessary for your lifelong care and your family’s security. However, the legal battle is only the first step. The arrival of a seven-figure settlement is a significant financial event that can have profound and often unexpected consequences for your existing financial world, particularly your estate plan and investment portfolio.

For high-net-worth families, simply depositing the funds into a checking account is not an option. Doing so can expose the award to risks, create significant tax liabilities, and fail to align with your long-term financial goals. A carefully planned strategy is essential to protect these funds and ensure they provide for you and your family for generations to come.

This guide will walk you through the essential considerations for integrating your personal injury settlement into your financial life. We will cover the immediate impact on your estate plan, how to invest the funds wisely, and how to protect the award from future creditors and life events.

The First Priority: Updating Your Estate Plan Immediately

A large influx of cash can instantly render your existing will or trust obsolete. An estate plan drafted when your net worth was substantially lower is likely ill-equipped to manage these new assets efficiently, potentially leading to disastrous consequences for your heirs.

Why Your Current Plan is Suddenly Outdated

• Increased Estate Tax Exposure: A multi-million-dollar settlement can push your estate’s value over the federal or state estate tax exemption limits. Without proper planning, a significant portion of your hard-won settlement could be lost to taxes upon your death.
• Incorrect Asset Distribution: Your will or trust dictates how your assets are distributed. A sudden, massive increase in liquid assets might mean your intended distributions are no longer equitable or wise. For example, a plan to leave a specific cash amount to a child may now represent a much smaller percentage of your total worth than you originally intended.
• Lack of Asset Protection: A standard will does not protect the assets your heirs inherit from their own future creditors, lawsuits, or divorces. The settlement funds, once distributed, could be lost.

Essential Estate Planning Tools to Consider

To address these challenges, you and your attorney should immediately explore creating or updating key legal structures:

• Revocable Living Trust: This is a foundational tool that allows you to control your assets while you are alive and streamlines their distribution after your death, avoiding the costly and public probate process. Your settlement award should be titled in the name of your trust.
• Irrevocable Trusts: For high-net-worth individuals, more advanced strategies are often necessary. An irrevocable trust can be used to move the settlement funds outside of your taxable estate, shielding them from estate taxes. A Special Needs Trust may also be essential if you or a beneficiary will rely on government benefits like Medicaid, as it holds the assets without disqualifying the individual from receiving aid.

Strategic Investing: Shifting from Growth to Preservation

The purpose of a personal injury settlement is not speculative growth; it is to provide a secure source of funds to replace lost income and pay for a lifetime of medical care. Therefore, the investment strategy for these funds should be fundamentally conservative.

Key Principles for Investing Your Settlement

• Capital Preservation is Paramount: The primary goal is to protect the principal amount of the settlement. The investment portfolio should be designed to withstand market volatility and avoid high-risk assets.
• Focus on Income Generation: The portfolio should be structured to generate a steady, predictable stream of income through dividends, interest, and other distributions. This income is what will be used to pay for ongoing expenses.
• Diversification is Crucial: The funds should be spread across a wide range of asset classes, such as high-quality bonds, dividend-paying stocks, and real estate. This diversification minimizes the impact of a downturn in any single asset class.

It is vital to work with a qualified financial advisor who has experience managing large settlement awards. They can help you create a customized investment plan that aligns with your specific needs, risk tolerance, and the projections from your life care plan.

Your financial future depends on making the right decisions today. Call Flanagan Law now at 720-928-9178 for your free, no-obligation consultation.

The Final Takeaway: A Settlement is a Beginning, Not an End

Receiving your settlement is the beginning of a new chapter. It provides the means to rebuild your life and secure your family’s future, but only if it is managed with expertise and foresight. By immediately addressing your estate plan and implementing a disciplined, preservation-focused investment strategy, you can transform your legal victory into a lasting financial legacy.

Sources & Further Reading

1. American Bar Association. (2024). Trusts and Estates.
2. Financial Industry Regulatory Authority (FINRA). Managing a Windfall.

Frequently Asked Questions

1. Are personal injury settlements taxable? Generally, compensation for physical injuries and medical expenses is not considered taxable income by the IRS. However, portions of the settlement allocated to lost wages or punitive damages may be taxable. For more detail, please read our article “Are Auto Accident Insurance Settlements Taxable?.”

2. Should I place my settlement in an annuity? An annuity, which provides a guaranteed stream of payments, can be a component of your financial strategy, but it is rarely wise to place the entire settlement into one. Annuities can be inflexible and may not provide the best long-term returns. It is crucial to evaluate this option with an independent financial advisor, not just the one recommended by the insurance company.

3. How can I protect my settlement from a future divorce? In Colorado, a personal injury settlement is typically considered the separate property of the injured spouse. However, if you deposit those funds into a joint account (co-mingling them), they can become marital property. It is essential to keep the settlement funds in a separate account or trust titled solely in your name to maintain their legal status as separate property.

Don’t leave your family’s future to chance. Contact us online to discuss your case and learn how we can help you.