Minors and Structured Settlements

Children often receive a financial windfall after winning or settling a lawsuit that involves them or their parents. Money gets to minors through a structured settlement that preserves the cash until they turn 18.

When courts decide – or plaintiffs and defendants settle – large cases that involve children, the financial result takes into account the children’s long-term stability. Lawyers and courts take steps to protect minors’ financial future by structuring a financial windfall into periodic payments.

These structured settlements are the result of legal cases that stem from accidents in which a parent perished or was a severely injured; a product-liability claim; or some other serious injury to the child.

Periodic payments help minors by reserving money for essential long-term necessities (food, clothing and shelter) and for any continuing medical care. The settlement pays claimants by scheduling future periodic payments, acting as a kind of financial planning.

The arrangement makes it less likely that a minor – or the minor’s parents – can spend the money too quickly or on the wrong things at a young age.

But there’s a difference between an adult owning a structured settlement and a minor owning one. That difference is control. By law, minors have little to no say in how their periodic payments are set up, and their parents or guardians must spend the money in the exact manner ordered by the court.

The setup prevents the parents of the children in these cases from having unrestricted use of the minor’s settlement funds and potentially spending the money irresponsibly or for purchases unrelated to the court-prescribed purposes.

The goal is to make sure there is money for the child when he or she turns 18.

How Minors Benefit from Structured Settlements

Minors benefit from accepting awards in structured settlements in a variety of ways. For instance:

  • The money is tax-free – including free of income taxes, which normally go along with other annuities
  • The money is protected until it is accessed to meet a child’s specific needs
  • The settlement does not require maintenance fees
  • Payments don’t decrease when the stock market dips
  • The overall rate of return is fixed, assuring the same payment each time. The yield typically ranges between 3 and 10%

Today, structured settlement annuities make up the overwhelming majority of lawsuit awards when it comes to preserving a minor’s financial security. This is because of the favorable financial returns, tax-free status, flexible payout schedules and the protection they offer from pilfering. Insurance commissioners regulate them in all 50 states, and the underlying annuity is protected from creditors and judgments.

Other payment options to minors include a guardianship account (such as a money market account supervised by the court) or a structured trust (supervised by a trustee or financial advisor). Trusts can have tax benefits as well, but sometimes they reduce the settlement amount because fees are often attached.

Structured Settlements vs. 529 Plans

As an alternative to structured settlements, some families may consider putting their financial award into a 529 plan for their minor. Developed in 1996 as section 529 of the Internal Revenue Code, a 529 plan is an educational savings account. Similar to a 401(k) retirement plan, 529s invest a person’s contributions into a mutual fund with the expectation of growth long-term. States and educational institutions administer 529 plans.

Although 529s do offer some advantages to those hoping to save money for a minor’s college education, this type of plan is disadvantageous when compared to a structured settlement for many reasons.

Disadvantages of a 529 plan compared to a structured settlement are:

  • Contributions to the 529 plan are not tax deductible
  • Contributions to the 529 plan are not guaranteed
  • Earnings can sometimes be subject to state tax when withdrawn
  • Funds can only be used for approved educational purposes
  • Funds used for disapproved educational purposes, such as a private tutor or trade school tuition, are subject to penalties
  • The success of a 529 is based on the mutual fund it is invested in. If the market does poorly, the fund could decrease in value

Comparatively, a structured settlement is guaranteed and tax-free. Funds can be used for whatever purpose the recipient chooses, including to spend on educational services not approved for 529s. Continuous payment is guaranteed, regardless of the financial state of the payee. If the minor chooses to, they may also sell their future payments for a lump-sum of cash once they reach the age of majority, which may be useful to pay for tuition or other expenses upfront.

Laws Prevent Adult Misuse

To help minors gain some control over the financial gain from lawsuits awards, federal and state laws now assign to courts – rather than to parents – the responsibility of determining both the fairness of the monetary settlement and how the awarded funds can be spent.

Courts seek to ensure that:

  • The child will receive the money he or she is due
  • The money will grow over time
  • The money is protected from parents who might seek to use it for themselves
  • The child can’t spend the money all at once
  • The money lasts over time

For a child who is under the age of 18, terms of a structured settlement – which must be drafted during the initial negotiations between a plaintiff and a defendant – are permanent and unchangeable for the life of the annuity.

These types of settlements often involve a sum of at least $5,000 and cases that involve a car accident or medical negligence.

Money can get disbursed in any number of ways – periodically over a specific time frame, with a lump-sum payout or a steady stream of payments during a child’s life. The structure can be designed to make sure payments last well into an adult’s lifetime. Attorneys typically negotiate payment schedules well before the conclusion of any court settlement. (This is not true with a verdict.) Attorneys can also structure payments so that they increase over time, rising to account for spikes in the cost of living.

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Designing a Minor’s Structured Settlement

Designing a minor’s structured settlement is a critical part of the settlement process. If done right, the settlement plan will ensure the settlement supports a child throughout their life and will consider major financial needs at certain ages.

First a child’s guardian, attorney and judge should consider award options, including structured settlement plans, court-approved trusts and a registry of the court. Structured settlements offer a unique advantage because the payments are tax-free and guaranteed.

Structured settlements can also be tailored to accommodate a minor’s predicted future needs. The plan can be designed to accommodate:

  • College tuition
  • Down payment or purchase of a car
  • Down payment or purchase of a house
  • Cost of living adjustments

Who Receives Payments?

Depending on the settlement agreement, a child may be receiving structured settlement payments while they are a minor. During this time, there are several agencies that may receive and protect these payments on the minor’s behalf.

All possible recipients are carefully selected to protect the child’s best interest until they reach age 18 and can manage the structured settlement themselves.

Payments may be made to:

  • The Registry of the Court
  • A court-restricted bank account
  • A trust fund
  • An appointed guardian
  • A custodian under the Uniform Transfer to Minors Act

Parents Can Sell on Behalf of Minors, but It’s Rare

If circumstances – financial, health-related or otherwise – change profoundly before a child reaches the age of majority, parents or legal guardians can sell the future payment rights to the structured settlement. However, the burden of proof is high. Parents or guardians must demonstrate conclusively to the court that there is an immediate necessity for a cash buyout and that the child’s needs would be served more by selling the settlement than by waiting on future payments.

These cases are rare – so rare some structured settlement companies don’t attempt them. Other companies can only recall doing it successfully once or twice, and in those cases the process usually drags out for years, frustrating all involved.

The good news for minors, though, is this: eventually, they reach the age of majority. Once they turn 18, they’re considered an adult, and can access their settlement like anyone else can.

This means a new 18-year-old annuitant can decide to sell future payment rights – some of them or all of them – to a buying company for a lump-sum payment just like any other adult with a structured settlement or annuity.

Across the board, all the same rules and laws apply. Any transfer must be considered fair, and in “best interests” of the seller, according to the court and the state’s Structured Settlement Protection Act (SSPA).

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