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 as much of the cash as possible until they turn 18.
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 take the form of 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.
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:
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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 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. Courts seek to ensure:
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. The plan can be designed to provide for:
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. Payments may be made to:
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 long-term growth. 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:
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.