Personal Injury and Medical Expense

[Harvey Lucas]

My client Jim has a son named Billy.

Billy was in a serious car accident on 2-10-09, the day before his 18th birthday.

Billy was a passenger in a car that was hit by another car.

The driver of the other car had no insurance.

Jim had an insurance policy with coverage for uninsured motorist and after a legal fight Jim's insurance company paid out $250,000 for personal injury related to the accident.

Jim's attorney took 1/3 and that left Jim with approx. $165,000.

The $165,000 was received in 2010.

It is unclear at this point if the money was paid to Jim or to Billy, but I am not sure that it matters.

The money was for personal injury to Billy and as such it is not taxable.

It is my understanding that the money can be used for any purpose and there are no restrictions on how it is spent.

However, Jim set up an account for the money and is using it to pay ongoing medical expenses for Billy who is now considered disabled and continues to live at home.

During the year of 2010 Jim paid about $60,000 of medical expenses for Billy and used money from the account to do so.

It seems to me that Jim should be able to deduct the $60,000 as medical expense because Billy is still his dependent, ie, lives at home, is disabled, no job etc.

The insurance settlement money was paid under the label of "personal injury" with no conditions that any of it be paid for medical expense.

Since the money could be spent in any manner in Jim's discretion, it seems logical that we would not have to treat any portion of the $60,000 medical expense as being paid by insurance.

Has anyone had any experience in this sort of scenario?

Opinions?

Thank You,
Harvey Lucas

[Burke]

It is unclear at this point if the money was paid to Jim or to Billy, but I am not sure that it matters.The money was for personal injury to Billy and as such it is not taxable.
However, Jim set up an account for the money and is using it to pay ongoing medical expenses for Billy who is now considered disabled and continues to live at home.

During the year of 2010 Jim paid about $60,000 of medical expenses for Billy and used money from the account to do so.
Since the money could be spent in any manner in Jim's discretion, it seems logical that we would not have to treat any portion of the $60,000 medical expense as being paid by insurance.
Opinions?Thank You,Harvey Lucas

I think the only relevant issue here is whose money was used to pay such expenses. The proceeds of the lawsuit were specifically intended for the injured party. It appears to me that Jim is not paying the expenses, and IMO, would have no medical deduction for them.

[Harvey Lucas]

Thanks Burke

I need more info from Jim regarding who got paid from the insurance company.

You are probably right, money was probably paid to Billy.

Lots of question come into play then.

If it's Billy's money, and the money is used to pay these huge medical expenses, then Billy probably is does not qualify to be a dependent of Jim because of the support issue?

Billy is now 20 years old, (was 19 in year of 2010), and is disabled, lives at home.

Jim set up a trust with the money, Medical bills and other expenses come out of the Trust for Billy.

I need to get a copy of the trust document and also the papers from the insurance settlement to get all the facts straight.

Thanks,
Harvey Lucas