What Should You Do With Funds Received From A Medical Malpractice Lawsuit?

30 December 2014
 Categories: Law, Blog


If you've recently been awarded a court judgment or reached a settlement with your medical provider, you may be wondering about your next steps. Unfortunately, many such settlements are quickly spent, leaving the plaintiff with little to show for his or her harrowing experience. However, there are several steps you can take to help preserve or even grow your settlement. Read on for some recommendations on handling this type of financial windfall.

1. Pay your medical bills.

This may seem like a no-brainer -- however, many settlement recipients may spend their funds catching up on other unpaid bills while outstanding medical bills skulk in the background. Be sure that your first payment from settlement funds is used to eliminate any medical bills that have resulted from the initial injury or malpractice.

2. Talk to an accountant.

Although any portion of a medical malpractice settlement or judgment that is designed to compensate you for actual losses (including lost wages, medical bills, or pain and suffering) is not taxable, punitive damages are often treated as income, and therefore subject to federal, state, and local taxes. Punitive damages are costs assessed to the defendant that are not based on the actual costs of injury, but are designed to prevent the defendant from engaging in future negligence. 

Although your court order or settlement agreement will often specifically lay out which portion of your judgment is meant to compensate you for actual losses and which portion consists of punitive damages, this language can often be vague or unclear. Visit an accountant -- and talk to your attorney, like Attorney Carole A Gardiner -- so that you are sure of how much of your settlement you'll need to set aside to pay this year's taxes.

Visit a certified financial planner

A fee-only certified financial planner (CFP) can help you take a holistic look at your financial picture and how this medical settlement can assist you going forward.

For example, if the issue that led you to sue the defendant is an ongoing health concern that may necessitate future care, your CFP will likely recommend that you set aside a certain amount of the settlement funds to help pay for this care. Depending upon the frequency of this care, the CFP may recommend that you keep these funds in a low-risk stable investment, or -- if you may not need these funds for years -- in a higher-risk, higher-return stock or mutual fund.

If your retirement funds took a hit while you were going through your medical issue, these settlement monies may also be used to help beef up your current accounts.