My clients who have been injured by a failed medical device like an artificial hip or knee or a problem drug like Viagra suffer in many ways. There is the physical, emotional and psychological suffering. But there is another form of suffering that is often as traumatic: financial suffering. A failed medical device may cause a client to lose his or her job, and the lost income and extra medical expenses can be devastating. The good news is, often these clients receive a large sum of money from a settlement or jury verdict when a medical device or drug injures them.
Clients occasionally ask my advice on how best to handle the new money that has come into their lives. Frankly, this is a happy conversation. But it’s also extremely important to get the answer right. The worst thing clients can do is spend down the money quickly and have nothing left a few years down the road when they still need money.
Find Good Advisors
The first thing you should do is select a competent tax accountant to help you maneuver through the tax consequences of newly acquired settlement funds. While funds paid as damages for personal injury are not taxable, money damages for lost wages and punitive damages are taxable. You need a smart tax accountant to help you create the best plan to protect your assets. One suggestion your accountant may give you is to make sure you contribute the full amount to your employer’s 401(k) retirement plan in the years following your receipt of personal injury funds. Contributions to an IRA may also be wise. This will allow you to protect more of your income from taxation. You may also need an estate planning lawyer to assist with distributing your assets at the time of your death. You will likely need a will (or to update an existing will), and you may also need to set up a basic trust for protection of the assets for your heirs.
Plan Plan Plan
You will also need to create a financial plan. You should ask yourself all the tough questions: Can I continue working? How long will my spouse continue working? What other sources of income do I have? Other than the injuries from the failed medical device or drug, what other health issues do I have? Does my spouse have health issues? My children? (Every single health “issue” costs money.) What is the state of my health insurance? Is my house paid for? Our cars? Am I on-track to retire at a reasonable age?
Financial advisors urge their clients to create a plan, especially when a substantial amount of “sudden” money arrives. Once you create your financial plan, revisit it after one year. And then every year after that.
Make Only Required Payments at First
Do not rush out and purchase a $60,000 Mercedes. That is really the worst thing you can do. I know that’s not a sexy answer, but it’s the truth. Instead, you should make all required or overdue payments first. If you have medical bills outstanding, you need to pay them. Your attorney must assist you in getting all medical “liens” paid, but you may have other incidental medical bills to pay. If he hasn’t done it for you already, ask your lawyer to help you negotiate lower payments to satisfy existing medical bills.
Further, pay off high interest credit card or other consumer debt. Debt is awful. And high interest debt is the absolute worst. High interest consumer debt can easily deplete settlement or trial funds in a matter of a few years. If you have debt at the time of recovering money in a personal injury case, pay it off in full. You can try to negotiate with your credit card company for a payoff that is less than the full amount, but regardless you have to rid yourself of ruinous consumer debt.
Set Up an Emergency Fund
To start with, everyone should have an emergency fund (if possible). An emergency fund is a savings account set aside for emergencies like home or car repairs, or living expenses if you lose your job. You should strive to build up savings to cover necessary living expenses like your rent or mortgage, car payment, utility bills, and groceries for six months. In fact, an ideal emergency fund will cover your living expenses for a year. You should keep this money somewhere accessible like a savings account or money market account, and you should not invest the emergency funds in pork bellies or oil wells or your nephew’s dog grooming business. Once you have the fund established, leave it alone. You should work hard to ignore it. After all, it’s there for emergencies only.
If you invest your personal injury settlement funds, invest wisely. Above all, diversify. This means don’t put all your money in one investment. I would recommend paying a financial advisor (as opposed to having the advisor actively “manage” your money) to give you sensible advice on investing. A combination of mutual funds, stocks, bonds, and cash on hand is often wisest. If you have the extra money, you may consider using a small portion of your settlement funds to purchase an annuity, which is an insurance product which entitles you to annual payments at a later time, and these payments can reoccur for ten or twenty years or the rest of your life. Annuities work well only in limited situations, and they can certainly be a mistake, so be careful with this option. Annuities are useful only when made part of a larger, comprehensive investment plan.
Have a Little Fun
Again, don’t buy that Mercedes. But once you have a plan for utilizing the money in the best way and for the longest time, then try to set aside a small amount to do something fun. You have been paid because a large corporation was negligent in a way that physically hurt you or a family member. You clearly have suffered needlessly. It’s vital that you put the money to its best and most long-term use, but you also need to pump the brakes and do something that brings you joy. A vacation is a great choice, because after years of surgeries and rehabilitation and litigation, you and your spouse may simply need to sit under a palm tree and relax.
The Takeaway: A Good Problem to Have
Figuring out what to do with money you receive from a settlement or trial verdict is a good problem to have. But you should nevertheless treat it as a problem to be solved. Wasting assets like this can become an injury similar to the original injury. Don’t let this happen. Be smart and careful with settlement funds, so the money can work for you for many years.
Note: I am a product liability lawyer, not an accountant, estate planning lawyer, or financial advisor. You will need to find these professionals to sort through all the questions you will have after you receive personal injury funds.