The general rule is that damages for a decedent’s pain and suffering (the survival action) are an asset of the decedent’s estate and subject to federal estate tax and PA inheritance tax. The wrongful death award that goes to next of kin for loss of society, consortium and support are not estate assets and are not subject to estate or inheritance tax.
Trusts & Estates carried an article by John T. Brooks and Samantha Weissbltuh, entitled Estate Tax on Wrongful Death Claims? which discusses an Illinois case where the appellate court held that the wrongful death damages went to the estate. The case, Bender v. Eiring, 2008 WL 351126 (Ill. App. 1st Dist. Feb. 7, 2008) established, in the words of the authors. “a potentially dangerous precedent.”
Brooks and Weissbluth say: “We not only think the appellate court made a mistake, but also worry that the decision could have an unfortunate ripple effect. Will wrongful death proceeds now be subject to estate tax? Spousal elections? Creditors’ claims?”