How Will my Personal Injury Settlement Affect my Family Law Separation or Divorce?

Written by and on December 06, 2017.

When a personal injury matter settles, there are two primary ways the settlement can be paid out for an adult claimant: a lump sum cash payment, or a structured settlement.

A structured settlement is created when some or all of a personal injury settlement is deposited with a life insurance company in exchange for guaranteed tax-free payments for a specific number of years or for the recipient’s lifetime. While it is common to structure the payments on a monthly basis, the structure can also include periodic lump sums, which are also received tax-free.

In some cases, a personal injury settlement is specifically broken down between the different “heads of damage”. Heads of damage may include general damages (pain and suffering), past economic losses, future income loss, future care costs, out of pocket expenses, and costs. In other cases, a lump sum settlement is reached without specific reference to heads of damage.

A personal injury settlement can have an impact upon a family law situation. When settling a personal injury action, it may be a good idea to receive advice from a family law lawyer so that you properly understand how your award may affect you in the event of a separation. The way you use or invest your settlement funds may also have an impact within your separation or divorce.

A personal injury settlement will impact family law in two primary areas: (1) Equalization of net family property, and (2) Support.

Equalization of Net Family Property

When two spouses have separated with no reasonable prospect of reconciliation, the spouse who has less “net family property” than the other is entitled to a payment of one-half the difference between the net family properties. This is referred to as an “equalization payment”.  When calculating “net family property”, any property owned by a spouse on the date of marriage is deducted from that spouse’s net family property calculation, since it is only the property accumulated during the marriage that is meant to be shared.

Section 4(2) of the Family Law Act allows certain property to be excluded from a spouse’s net family property.  One of the permitted exclusions is “damages or a right to damages for personal injuries, or the part of a settlement that represents those damages”.

There is still some uncertainty in Ontario as to how the various heads of damages should be treated when calculating net family property. Any portion of an award or settlement that represents general damages (i.e. damages for pain and suffering), and any special damages that can be attributed directly to the personal injury (i.e. out-of-pocket expenses) will almost certainly be excluded. When it comes to future income loss, thanks to the recent Court of Appeal decision, Hunks v. Hunks, 2017 ONCA 247, we can be reasonably certain that a structured settlement meant to replace the recipient’s future lost income will be treated as “income” and will not be included in the calculation of that person’s net family property.

If the settlement is received as a non-structured lump sum, the situation is not as clear. There are some recent decisions in which the Court has excluded settlements for lost future income from the calculation of net family property (for example, Lukovnjak v. Weir, 2016 ONSC 6893 and Bonnick v. Bonnick, 2016 ONSC 657), however there is as of yet no Court of Appeal decision specifically dealing with non-structured settlements. Recent case law also suggests that damages for future care costs will likely be excluded from the calculation of net family property, either by falling outside of the definition of “property”, through the exclusion in section 4(2) of the Family Law Act, or through an unequal division of the net family property pursuant to section 5(6) of the Family Law Act, but again there is no Court of Appeal ruling determining this issue with certainty.

If part or all of your award is paid out to you as a lump sum, what you do with that money is just as important as how the settlement was allocated among the various heads of damage. For example, if you are awarded only general damages (pain and suffering), which would generally be excluded from your net family property, but you use that money to purchase a matrimonial home (or pay off your mortgage), you will lose the ability to exclude that award from the equalization calculation because you are not permitted to exclude a matrimonial home. If you put your money into a joint bank account or investment, you will lose the ability to deduct your spouse’s portion of that joint asset. And finally, if you spend the settlement money on things like day to day expenses, vacations, or paying off debt, you will get no exclusion for that money because the money will no longer exist on the date of separation.

Support

When a relationship breaks down, if there are any dependent children, the parent with whom the children are not living (the “access” parent) will have an obligation to pay child support to the custodial parent. Similarly, if one spouse suffers from an economic disadvantage as a result of the marriage and/or the breakdown of the marriage and is in need of support, that spouse may be entitled to spousal support from the other. The amount of support payable will depend on the annual income of the support payor (and support recipient, in the case of spousal support). This is where a personal injury settlement may become relevant, as some or all of that settlement may be considered part of a person’s “income” for support purposes.

The Court has discretion to impute income to a support payor or recipient as it considers appropriate in the circumstances, even if the income is non-taxable. This can include some or all of structured settlement payments, as well as draws from capital if some or all of a personal injury award was paid out as a lump sum and invested.

In several cases, judges have determined that only the portion of the settlement funds paid for lost wages will be treated as income for support purposes. However, the Court is not bound to follow this approach and may take other factors into consideration, such as what the person’s annual income was before the injury, whether the person is spending money on expenses required because of the injury or for treatment of the injury, or whether the funds are simply being used as income to pay for the ordinary expenses that would be incurred by any person, and whether part of the money is being spent on expenditures that are not “necessary”.

Conclusion

As you can see, these issues are complicated. If you are injured, it is important to seek out legal advice from a personal injury lawyer and when settling, a family law lawyer, who have expertise in these issues, and who will have a view to protecting those interests in the event of a separation or divorce.

If you have any questions, or would like more information on this topic, please contact personal injury lawyer Rasha El-Tawil at 519.660.7713 or family law lawyer Nadine Russell at 519.660.7838.

Posted in Family, Personal Injury & Motor Vehicle Claims