Settlements for wrongful death are obtained through civil court action.  A wrongful death is generally deemed a death caused by the willful or negligent acts of others.  A criminal court action is only concerned with punishment for a wrongful death.  When criminal negligence can or cannot be proved, an action can also be brought in civil court to recover lost money for an heir due to the loss of income generated by the person killed.  It is often very difficult to win a settlement of this type for the death of a child, because the grieving family cannot prove a financial loss other than funeral expense.  Sometimes, a family will seek a civil settlement in an effort to punish the guilty party when a criminal conviction cannot be obtained.  There have been several high profile cases in recent years that demonstrate this principle. 
Wrongful death settlements can run into the millions of dollars and are frequently in the hundreds of thousands.  The tax consequences are of great concern to the recipients.  The short answer is that the proceeds from a settlement for wrongful death are not taxable.  These proceeds are considered to be part of the decedent’s estate and therefore make a definite answer more complicated that a simple yes or no. 
The ultimate answer to the question is based on the size of the deceased’s estate and the current law regarding estate taxes.   The estate tax exemption from 2006 – 2008 was $2 million.  In 2009 in increased to $3.5 million.  This means that if you die you can leave up to $3.5 million to your heirs, federal tax-free.  Any proceeds obtained from a wrongful death lawsuit on your behalf are included in your estate and subject to this deduction.  On the face, this seems like a lot of money.  The problem is that your estate takes into consideration the value of your home, automobiles, boats, snowmobiles, jewelry, art, investments, life insurance proceeds, etc.  The average home value in the United States is currently in excess of $300 thousand and the average automobile value is around $20 thousand.  If we throw in a $2 million dollar wrongful death settlement, it is not difficult to exceed the exemption.  At that point, the government takes 45% of everything over the exempt amount.  That is $.45 of every dollar over $3.5 million. 
Estate tax law changes periodically of the years.  What is true today will not necessarily be true tomorrow.  If you are the recipient of a wrongful death settlement, it is to your advantage to seek the guidance of an experienced estate tax attorney.  Tax hungry government agencies are always looking for new ways to generate income and they often turn to the estates of the deceased.  After all, they are no longer a vote to be concerned with.