Typically settlements do not need to be kept confidential and can be discussed with anyone including family, friends and the press. Occasionally, a defendant may seek to include a confidentiality provision in a settlement agreement. While the decision to agree to a confidential settlement should be made on a case-by-case basis by a litigant and their attorney, it is important to know the ramifications of including a confidentiality clause in your settlement and how to protect your interests.
Typically, personal injury settlements for pain and suffering damages are not taxable. Certain other settlement proceeds, such as past and future lost wages are taxable. Money that was paid for the inclusion of a confidentiality clause is subject to taxation. The practical implication of this rule is that if a settlement is reached and the plaintiff agrees to keep the amount of the settlement confidential without any other provisions, the entire amount of the settlement may be taxable.
To protect a plaintiff from burdensome tax obligations, a settlement should be structured in a way that specifically sets forth the consideration being given in exchange for the agreement of confidentiality. Often times, parties will agree to a mutually binding confidentiality provision. This type of agreement restricts each litigant’s ability to release details about the settlement in exchange for the other parties agreeing to do the same. The parties may also agree that confidentiality is being agreed to in exchange for $1.
These arrangements protect a plaintiff from inadvertently allowing the IRS to tax their entire settlement proceeds. At Levinson Axelrod we discourage confidentiality agreements because they do not further the interests of our clients or the general public. In cases where a defendant insists on a confidentiality agreement, however, it is important to have an attorney that knows how to protect the interests of the client.