When calculating your net family property, the Family Law Act sets out a number of different categories of property that are excluded from the calculation. One category of excluded property is damages, or a right to damages, arising from a personal injury.
If you receive an award for damages for personal injuries, nervous shock, mental distress, or loss of guidance, care and companionship, or part of your award is apportioned to those types of damages, you are entitled to exclude those funds from your net family property calculation. This means that you do not need to share them with your spouse or former spouse.
Can I exclude my entire personal injury settlement?
Personal injury settlement awards are generally broken down into different categories, also known as “heads of damages.” These include general damages, loss of income, loss of future income, etc. Family law treats each category differently, depending on what the money is designed to compensate you for. Some may have to be shared, while others may not.
For example, if you receive an award under the category “general damages” you will not have to share any of the award with your spouse. This is because “general damages” are aimed at compensating victims for non-economic damages such as pain and suffering or emotional distress. These damages are purely personal in nature, meaning your spouse or former spouse has no right to share in them.
If part of your settlement compensates you for money you would have received during the marriage, such as “loss of past income” it would likely have to be shared.
Impact of the timing of the injury or award
How family law treats your settlement will depend on when the injury occurred and how the settlement is apportioned into the different “heads of damages” that were discussed earlier.
If the injury happened after the date of separation and you receive a settlement or court awarded damages, you will not have to share any of that money in the property division with your former spouse. This is because the incident happened outside of the relationship/marriage, and as such your spouse has no legal claim to the money. However, the parts of the settlement specifically designed to compensate for lost income could be included when determining income for the purposes of child or spousal support.
If the injury happened prior to separation, things are slightly more complex. In these cases, it is necessary to look at what part of the settlement fell under which “head of damages.” If part of your settlement is related to money you would have received during the marriage (i.e. loss of past income), it will have to shared with your spouse as you would have received that income had you not been injured.
However, if your settlement is to compensate you for loss of future income (i.e. income you would have received after separation) you do not have to include it in the calculation of your net family property as it is compensating you for income you would have received after separation. You will, however, have to include it when determining your income for spousal or child support.
How are “structured settlements” treated?
Structured settlements are a method of having your personal injury settlement paid out over a long period of time, rather than receiving a lump-sum payment, and are treated very differently in family law.
If you receive a lump-sum payment from a personal injury settlement, it may be treated as part of your net family property. As such, parts of that lump-sum payment may have to be shared with your former spouse in the form of an equalization payment.
Structured settlements on the other hand are not treated as forming part of your net family property; instead they are treated as a form of income. Thus, it is only taken into account when determining income for spousal or child support. It is important to note that structured settlement payments are typically tax-free, which means that the amount will have to be grossed up when determining income for support purposes.
Be careful how you use the money
What you do with the funds you receive can impact whether it is shared in a separation. If you receive an award for “general damages” and invest that money in a joint investment or otherwise use it for the benefit of the family, it is likely that you will no longer be able to exclude it from your NFP calculation.