Ensuring Money for a Child’s Future
When courts decide or plaintiffs and defendants settle large cases that involve children, the financial result takes into account the child’s long-term stability. Lawyers and courts take steps to protect minors’ financial future by structuring the financial windfall into periodic payments.
These insurance settlements for minors are the result of legal cases that stem from a product-liability claim, a workplace accident in which a parent perished or was severely injured, car accident, or some other serious injury to the child. Periodic payments are beneficial for minors because they reserve money for essential long-term necessities (food, clothing and shelter), future academic expenses, and any continuing medical care.
Structured settlements for minors are usually paid through an annuity from a life insurance company, just as for adults.
The key difference between an adult owning a structured settlement and a minor owning one 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 the court orders.
This setup prevents the minor and their parents or guardians from having unrestricted use of the settlement funds and potentially spending the money irresponsibly or for purchases unrelated to the court-prescribed purposes. The goal of a structured settlement for a minor is to provide for the child’s needs and make sure there is money for the child leftover when he or she turns 18.
How Minors Benefit from Structured Settlements
Today, structured settlement annuities make up the overwhelming majority of lawsuit awards when the financial security of minors are at stake, due to the many advantages of accepting an award in this way.
- The settlement income comes tax-free, even when the annuity earns interest.
- The settlement does not require maintenance fees.
- The overall rate of return is fixed, ensuring payments don’t decrease when the stock market dips. The yield typically ranges between 3 – 10 percent.
- Insurance commissioners regulate structured settlements in all 50 states, and the underlying annuity is protected from creditors and judgments.
- Until the child is 18, the money is protected and can only be accessed to meet the child’s specific needs.
Other payment options for 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 attached.
Designing Structured Settlements for Minors
Designing structured settlements for minors is a critical part of the settlement process. Federal and state laws assign courts the responsibility of determining both the fairness of the monetary settlement and how the awarded funds can be spent.
- The child will receive the money he or she is due
- The money will grow over time
- The money is protected from parents or guardians who might seek to use it for themselves
- The child can’t spend the money all at once
- The money lasts over time
If done right, the settlement plan will ensure the annuity income supports the child throughout their life by anticipating major financial needs at different ages.
- College tuition
- Down payment or purchase of a car
- Down payment or purchase of a house
- Regular cost-of-living adjustments
There are several agencies that may receive and protect the settlement payments on the minor’s behalf. When designing the structured settlement, the court carefully evaluates every possible recipient to select the one that will protect the child’s best interest until they reach age 18 and can manage the structured settlement on their own.
- 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
Structured Settlements Versus 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 state-approved mutual fund that meets the time horizon and investment objective of the child’s situation. For example, if the minor is 16 years old and starting college within 10 years, the state would select a more conservative fund.
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.
- Depending on the source of the funds, contributions to the 529 plan may not be tax deductible, nor are they 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 the state chooses to invest in. If the market does poorly, the fund could decrease in value.
- The individual has no control over the investments and is limited to the options the state approves.
- The plan can affect the child’s eligibility for federal financial aid.
Comparatively, a structured settlement is guaranteed and tax-free. Funds can be used for expenses other than educational services, and 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, to pay for tuition or other expenses upfront.
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- National Structured Settlements Trade Association. (n.d.). Structured Settlements for Minors. Retrieved from https://www.nssta.com/sites/default/files/library/2019/2019-08/NSSTA_Structures_For_Minors_08292019.pdf
- U.S. Securities and Exchange Commission. (2018, May 29). An Introduction to 529 Plans. Retrieved from https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.html