Workers Compensation is one more area where death and taxes must be considered.
Death of an injured worker who has not previously entered into a Compromise & Release for the indemnity part of the claim stops all benefits. Per California Labor Code 4700, “Neither temporary nor permanent disability payments shall be made for any period of time subsequent to the death of the employee.” Life expectancy is uncertain. An injured worker who is concerned about the injured worker’s family’s future welfare may want to get the value of those benefits now. The way to do this is by entering a Compromise and Release settlement.
An injured worker can create a potential estate for the injured worker’s family by cashing out the value of future indemnity benefits. The question then becomes how to value those benefits. Rather than a dollar-for-dollar payment, it may be appropriate to apply a discount for present value. In other words, a dollar in hand today is worth more than the promise of one to be paid years in the future. The reason is that today’s dollar can grow with proper investment. Parties may differ on the proper discount rate to use for this purpose. In cases where payments are due for the lifetime of the injured worker, disagreements can arise about the injured worker’s life expectancy.
All payments made pursuant to a Workers Compensation claim, both medical and indemnity, are being paid due to a physical injury. Therefore, these payments are excluded from gross income for income tax purposes under Internal Revenue code section 104. Settling the claim for a lump sum does not change the tax-free character of the payment. Beware, however, that once that money is invested, the income generated from that principal is treated like any other income without regard to the source. The injured worker can choose to invest some of the settlement in a structured settlement which pays return of principal and tax-free investment income according to a schedule the injured worker chooses at time of settlement.