A tax exemption is applicable to damages on account of  personal physical injury or physical sickness, wrongful death or workers compensation

IRC 104 (a) states that "In general Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—

(1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;

(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;"

Alabama’s wrongful death statute is unique

Alabama's wrongful death statute,  Alabama Code §6-5-41,.only allows punitive damages to punish the wrongdoer and does not allow for recovery of compensatory damages. Any damages recovered under Alabama’s wrongful death statute passes outside of the estate and are not subject to the payment of debts or liabilities of the decedent.  There is a $1.500,000 cap.

What is IRC 104(c)?

IRC 104 (c) Application of prior law in certain cases. The phrase “(other than punitive damages)” shall not apply to punitive damages awarded in a civil action—

(1)which is a wrongful death action, and
(2) with respect to which applicable State law (as in effect on September 13, 1995 and without regard to any modification after such date) provides, or has been construed to provide by a court of competent jurisdiction pursuant to a decision issued on or before September 13, 1995, that only punitive damages may be awarded in such an action.

This subsection shall cease to apply to any civil action filed on or after the first date on which the applicable State law ceases to provide (or is no longer construed to provide) the treatment described in paragraph (2).

The "shall not apply to punitive damages..." in IRC 104(c) means that settlement of wrongful death claims in Alabama can be structured under IRC 130.