Are proceeds from a wrongful death lawsuit includible in a decedent’s gross estate for estate tax purposes?
Answer: The IRS’ position is that amounts received pursuant to a wrongful death claim are not includible in a decedent’s gross estate, unless “such proceeds represent damages to which the decedent had become entitled to during his lifetime (such as for pain and suffering and medical expenses)."  Thus, when the proceeds are payable to survivors and compensate survivors for their own losses, such proceeds are not included in the decedent’s gross estate.  The IRS follows a line of cases that hold “because the wrongful death action cannot exist until the decedent has died…the decedent possessed neither a property interest [in the proceeds] …nor a power of appointment [over the proceeds] at the time of his death…" and therefore the proceeds cannot be considered “property owned by the decedent at the time of his death." 
(See IRS Revenue Ruling 75-127, 1975-1 C.B. 297 below)
REV. RUL. 75-127, 1975-1 C.B. 297
Wrongful death proceeds. The Service will no longer take the position under the law of Connecticut, Iowa, or of any State having a “survival" type wrongful death statute that the value of wrongful death proceeds, which include nothing for the pain, suffering, or other expenses of decedent during his lifetime, is includible in decedent's gross estate.
26 CFR 20.2033-1: Property in which the decedent had an interest.
(Also Section 2041; 20.2041-1.)
Advice has been requested whether the values of proceeds received in settlement of claims under wrongful death statutes in the two situations described below, are includible in the gross estates of the decedents under section 2033 or, alternatively, under section 2041 of the Internal Revenue Code of 1954.
Situation 1. A Connecticut decedent died as a result of a collision between the automobile in which he was a passenger and a train. The accident occurred in Connecticut. A settlement was reached by the executor of the decedent's estate and the negligent railroad company in satisfaction of claims for damages arising by reason of the wrongful act that caused the decedent's death. The amount paid in settlement consisted solely of the settlement proceeds for the decedent's wrongful death. Nothing was included for the pain and suffering or medical expenses of the decedent. Under the terms of his will, the decedent bequeathed his entire estate to his surviving wife and two children.
Situation 2. Same facts as above, only the decedent was a resident of the State of Iowa and the accident occurred in Iowa.
At common law, no recovery was available for damages resulting from a wrongful act after the death of the injured party. Any cause of action for personal injury abated at the death of the injured party. To abrogate this rule, the various states have enacted what are commonly called “wrongful death acts." Generally, these acts take one of two forms: “death acts" or “survival acts." “Death acts" include the type discussed in Rev. Rul. 54-19, 1954-1 C.B. 179, (involving New Jersey law) where the statute creates a new cause of action, after the death of the injured party, for the benefit of certain beneficiaries. Under a “survival act," the cause of action for personal injury resulting in death survives the victim's death and passes to his personal representative to be pursued as an asset of the probate estate.
The States of Connecticut and Iowa have enacted “survival acts." Conn. Gen. Stat. Ann. section 52-555 (Supp. 1974) and Iowa Code Ann. section 611.20 (1950) both provide that a cause of action for injuries resulting in death survives the victim's death and may be brought by his representative. Additionally, under Conn. Gen. Stat. Ann. section 45-280 (Supp. 1974) and Iowa Code Ann. section 633.336 (Supp. 1974) any recovered proceeds are subject to debts of the decedent's estate and are disposed of as personal property belonging to the estate.
The similarity between the survival statutes in Connecticut and Iowa was recognized by the Iowa Supreme Court in Fitzgerald v. Hale, 78 N.W. 2d 509 (1956). See also Lang v. United States and Morgan v. United States, 356 F. Supp. 546 (S.D. Iowa 1973).
Section 2033 of the Code provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death. Section 2041 requires that the value of all property with respect to which the decedent had a general power of appointment at the time of his death be included in the gross estate. For purposes of section 2041, the term “general power of appointment" is defined as a power that is exercisable “in favor of the decedent, his estate, his creditors, or the creditors of his estate."
In several recent cases the Government unsuccessfully argued that the value of the proceeds of settlement or recovery under Connecticut's and Iowa's “survival" type wrongful death statutes was includible in the decedent's gross estate, for Federal estate tax purposes, pursuant to section 2033 of the Code (as property owned by the decedent at the time of his death) or section 2041 (as property with respect to which the decedent had at the time of his death a general power of appointment). See Connecticut Bank and Trust Company v. United States, 465 F. 2d 760 (2nd Cir. 1972); Lang and Morgan, above; and Vanek v. United States, 360 F. Supp. 116 (S.D. Iowa 1973). These cases hold that the wrongful death proceeds are not includible in the decedent's gross estate under either section 2033 or section 2041 because the wrongful death action cannot exist until the decedent has died. Thus, the decedent possessed neither a property interest in such cause of action nor a power of appointment over such cause of action at the time of his death.
The Internal Revenue Service will follow this line of cases. See Rev. Rul. 75-126, page 296, this Bulletin, with respect to Arizona law.
Accordingly, the Internal Revenue Service will no longer take the position under Connecticut, Iowa, or Arizona law, or under the law of any State having a wrongful death statute similar to the law of one of these states, that the value of wrongful death proceeds is includible in the decedent's gross estate. However, where it can be established that such proceeds represent damages to which the decedent had become entitled during his lifetime (such as for pain and suffering and medical expenses) rather than damages for his premature death, the value of these amounts will be includible in the decedent's gross estate.
Thus, since the death proceeds recovered by the executors in Situation 1 and Situation 2 included nothing for the pain, suffering, or expenses of the decedents during their lifetimes, the values of such proceeds are not includible in the gross estates of the decedents under section 2033 or section 2041 of the Code.
 IRS Revenue Ruling 75-127, 1975-1 C.B. 297. See also, Rev. Rulings 69-8, 54-19, 75-126, and 83-44.
Shannon G. Becker
The Law Office of Shannon G. Becker, LLC
P.O. Box 3663
Mansfield, Ohio 44907
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