W-9 Requested for Settlement Payment

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GeraniumLover
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W-9 Requested for Settlement Payment

Post by GeraniumLover »

My FIL passed away last year. He was a member of a plaintiff class in a class action suit that has since settled involving amounts charged by his assisted living company. The settlement administrator is requesting a W-9 because they will be issuing a 1099 for the settlement payment (over $600). They state that they will withhold and pay to the IRS 24% if we do not supply the requested W-9. This raises a few issues that I am hoping fellow members may be able to help with:

(1) My understanding was that legal settlements are not taxable, so we initially didn't understand their request. I took a look at the settlement agreement and it appears there are two components -- a partial refund and a payment of interest. My guess is that the latter amount will be taxable, but I would appreciate confirmation on this.

(2) It is unclear to me in whose name the W-9 should be completed, and what to use as an SSN/TID. My FIL's estate has closed and there are no tax returns to be filed using his SSN for years after 2021. His assets were split between my MIL and a tax shelter trust. The letter requesting the information was addressed to my FIL c/o my BIL (his executor and trustee of his credit shelter trust). Whose tax ID should go on the W-9?
Investing Lawyer
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Re: W-9 Requested for Settlement Payment

Post by Investing Lawyer »

You're understanding about (1) is incorrect. Settlements are generally included as taxable income unless an exception applies (personal injury comes to mind).
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galawdawg
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Re: W-9 Requested for Settlement Payment

Post by galawdawg »

GeraniumLover wrote: Thu Jan 13, 2022 4:11 pm My FIL passed away last year. He was a member of a plaintiff class in a class action suit that has since settled involving amounts charged by his assisted living company. The settlement administrator is requesting a W-9 because they will be issuing a 1099 for the settlement payment (over $600). They state that they will withhold and pay to the IRS 24% if we do not supply the requested W-9. This raises a few issues that I am hoping fellow members may be able to help with:

...
(2) It is unclear to me in whose name the W-9 should be completed, and what to use as an SSN/TID. My FIL's estate has closed and there are no tax returns to be filed using his SSN for years after 2021. His assets were split between my MIL and a tax shelter trust. The letter requesting the information was addressed to my FIL c/o my BIL (his executor and trustee of his credit shelter trust). Whose tax ID should go on the W-9?
Who received the settlement payment, your FIL or the estate?

Why isn't your BIL (the executor) handling this?
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GeraniumLover
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Re: W-9 Requested for Settlement Payment

Post by GeraniumLover »

Investing Lawyer wrote: Thu Jan 13, 2022 7:34 pm You're understanding about (1) is incorrect. Settlements are generally included as taxable income unless an exception applies (personal injury comes to mind).
Thanks
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GeraniumLover
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Re: W-9 Requested for Settlement Payment

Post by GeraniumLover »

galawdawg wrote: Thu Jan 13, 2022 7:55 pm Who received the settlement payment, your FIL or the estate?
They have not yet sent a check so we don't know.
galawdawg wrote: Thu Jan 13, 2022 7:55 pm Why isn't your BIL (the executor) handling this?
It is not his forte.
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Plano
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Re: W-9 Requested for Settlement Payment

Post by Plano »

It is entirely appropriate for your BIL to write a letter to the plaintiff lawyers asking whether the settlement is taxable and to what extent. Ask for a breakdown the amounts for "partial refund" and for interest.

You are correct that the interest is most likely taxable (see, e.g., https://www.irs.gov/pub/irs-pdf/p4345.pdf). The big question is whether the "partial refund" is really just a refund of amounts your FIL paid. If it's a true refund, what matters is how the original bill was paid (best case scenario would be if it was out of pocket with after-tax dollars). Or is this characterized as damages for breach of contract? Those are generally taxable (see, IRS Pub 525 https://www.irs.gov/publications/p525#e ... 1000229507) unless an exception applies, such as for certain insurance contracts. The lawyers will know.

Also ask they lawyers whose name goes on the W-9. They probably get this question a lot, given the nature of the class. The name on the W-9 is the one the settlement admin will use for the check, so be sure you can deposit the check as written. Trying to get a class settlement check reissued is a nightmare.

Bottom line, these questions are for the plaintiff lawyers (your FIL's paid legal representatives in this action). They will write the usual disclaimer re: they are not giving tax advice, but they will respond. They probably have a canned memo for it -- I know I would.
HoneyBee
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Re: W-9 Requested for Settlement Payment

Post by HoneyBee »

Plano is correct. Ask the lawyers who represented the class (plaintiffs). Sometimes, taxability depends upon how the settlement document categorized the resolution or how the document allocated the settlement funds.

See IRS Publication 4345.
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galawdawg
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Re: W-9 Requested for Settlement Payment

Post by galawdawg »

GeraniumLover wrote: Thu Jan 13, 2022 8:41 pm
galawdawg wrote: Thu Jan 13, 2022 7:55 pm Who received the settlement payment, your FIL or the estate?
They have not yet sent a check so we don't know.
galawdawg wrote: Thu Jan 13, 2022 7:55 pm Why isn't your BIL (the executor) handling this?
It is not his forte.
Without knowing the specific laws of the state where the decedent lived, it may be necessary to reopen the estate so that the estate can receive these funds, account for them, handle any necessary tax reporting and payment and disburse what remains to the beneficiaries as provided in the will. If an attorney previously handled the legal matters for the estate or the amount of the funds to be received are substantial, then legal advice would be wise.

Don't be surprised if the attorneys' representing the class are unwilling to speak with the heir(s) or executor of a now-deceased class member to provide tax or other legal advice. The tax implications may be complex, depending on whether some or all of the settlement proceeds are categorized as a refund of amounts paid by the decedent and those previously paid amounts were deducted on the decedent's previous tax return(s).

There are a number of other attorney Bogleheads and one or more may weigh in with better/different feedback. While I am fairly well-versed in some areas of estate and taxation law, this particular issue is a little outside of my wheelhouse. Good luck.
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