Structured Settlements For Children and Minors

STRUCTURED SETTLEMENTS FOR MINORS

Settlement Planning and Sudden Money Financial Transition Planning for Minors and Young Adults

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STRUCTURED SETTLEMENTS FOR MINORS

Structured Settlements for Minors
Wrongful Death of a Parent
settlement planning for minors
structured settlements for young adults

Structured settlements help to secure a brighter future for minors who have suffered a serious personal physical injury,  dealing with the wrongful death and loss of a parent, or an emotional trauma with or without physical injury.


What You Need to Know about Structured Settlements for Minors


Court approval is generally required when structured settlements are proposed for, or on behalf of minors and children. While the Court of jurisdiction may vary by the type of legal case, court oversight is necessary regardless of whether your child’s lawsuit involves medical malpractice, personal injury, or the wrongful death of a parent or sibling in an auto accident, construction accident, aviation accident or due to a defective product.


Financial Transition Expertise Matters


We have extensive experience working on all aspects of minors' settlements, with attorneys, parents and guardians, guardians ad litem and all parties to settlements for minors. Many structured settlement annuitants, whether we have written them or not, contact us when they make the transition to young adulthood  (or experience other life events), to ask questions. We provide education, context and an orientation about their structured settlements and a resource for other financial matters.  This has also been helpful in addressing the root causes of unwarranted sales of structured settlement payments.


Why is Court Approval Required in Settlements Involving Minors?


The judge’s role, in most jurisdictions, is to assist in the determination of the settlement’s fairness and to assure that funds are safeguarded until your child or minor ward is an adult. If cash is paid in a lump sum, most judges require that the funds be placed in a "protected" or "blocked" account until the age of majority (age varies by state law). The money in a blocked account is taxed yearly on interest in excess of a modest exempt amount. The rate of return on the protected or blocked account is usually quite low, typically equivalent to a savings account. With such protected or blocked accounts, your child or minor ward assumes complete control of the money, in a lump sum distribution, at the age of majority.  This may have implications on ability to get student loans.


Be Mindful of Wasteful Dissipation


Many parents and guardians are, and should be (and a young adult child should be) concerned with the potential for wasteful dissipation of settlement proceeds. The responsibility of managing all of the settlement money is immense at an age when the child or minor may not be financially savvy or mature. The stories of dissipation are unfortunately plentiful . A early study, published in a California practice guide, showed that most cash settlements are spent within five years. Even a financially responsible child can make mistakes. Take a moment to think about what you and your child or minor ward went through to reach the point of settlement.


Consider the loss and the time from your lives taken by the lawsuit. A liability situation (car accident), future medicals that would have qualified under Medicaid, impulsive spending, or failed marriage, or a gullible mistake, could wipe out the funds. Structured settlements are a great settlement option for minors that helps solve many of these problems. A structured settlement guarantees specific dollar amounts that can be spread over key years in your child’s or minor ward’s life for a finite period of time or even for entire life of your child, if desired. 


A structured settlement can be paired with other strategies such as a trust or investment account to provide a bespoke solution for the client.

More Benefits of Structured Settlements for Minors and Young Adults

 

  • Structured settlements provide income tax-free payments to your child, where there are claims of physical injury or physical sickness or your child is a wrongful death survivor.  Tax deferred payments are possible in other types of cases (or components of cases) where damages do not qualify for the IRC 104 exclusion.
  • The impact of the structured settlement tax benefit will increase as your child enters the work force. There is no income tax on the cost of the structured settlement or earnings from structured settlements involving damages for physical injury or physical sickness, or if the structured settlement is established as compensation to the child for the wrongful death of a parent, that arose out of a physical injury or physical sickness. By contrast, interest on a lump sum settlement invested in bank CDs or otherwise, generates taxable unearned income or capital gains and the so-called " Kiddie Tax applies. Unearned taxable income that exceeds certain thresholds for dependents under age 19, and dependents who are full-time students under age 24. The SECURE Act, effective January 1, 2020, re-established that the the parents’ marginal tax rate applies instead of trust tax rates that were in effect under the Tax Cuts and Jobs Act. 
  • In some cases, a structured settlement can be used to shelter settlement money from student financial aid formulas. But ultimately the timing of the payments will determine how structured settlements impact financial aid applications.  See Mark Kantrowitz "How Structured Settlement Impact Financial Aid" The College Investor December 10, 2022.  Money sitting in a bank account or trust on behalf of the minor can seriously impact financial aid. A child's assets are counted at 20% towards the Expected Family Contributions under the FAFSA form and 25% under the CSS Profile used by around 300 private schools for institution-based aid. There is no accrual under FAFSA making structured settlements an ideal planning tool for help with college funding.

 

  • Generally, structured settlements are not subject to the claims of creditors or considered common property in later marriages.
  • Structured settlements offer a highly competitive after-tax return with low risk in today’s interest rate climate, typically better over the long haul than savings accounts, current yields on a number of types of bonds, or the Registry of the Court. 
  • Interest rate linked structured settlements (American General), index linked structured settlements (such as Pacific Life ILAPA, Prudential Income Advantage, Independent Life  (IStructure) and market based structured settlements, or blended solutions (Assura Trust) are available and may be incorporated as part of an allocation in a longer-term settlement plan, if appropriate and if the Court approves.
  • Structured settlements relieve the burden, expense and risk of money management, avoiding what can be agonizing investment decisions, unpredictable investment results and ongoing management fees that have the potential to eat away at earnings on your child's or minor ward's settlement. 
  • Structured settlements for minors can provide payments timed to coincide with college semesters, other significant milestones, payments into adulthood and, if desired, all the way through retirement. If desired, other "in-combination" or "stand alone" spendthrift options are available to assure that money intended for college, or other vital expenses, is not wasted on frivolous items or "hangers on" to your child or minor ward through a   Settlement Preservation Trust   mechanism.
  • A Structured settlement can provide a core amount of stable income in the post college years to permit your child to explore better training programs that offer good long-term potential but may not pay as much, while remaining independent, and avoid the distraction of having to work multiple jobs or share living quarters with multiple people in order to make ends meet.
  • While it cannot be used as collateral, the stable income from a structured settlement demonstrates a resource and an ability to pay bills to potential lenders or landlords.
  • Create an annual scholarship in the name of your child at their former school or university, or a fellowship in the medical specialty that treats the condition that your child is/was afflicted with. Fund the annual scholarship or fellowship with a structured settlement annuity and/or life insurance, which can be funded with a structure.
  • Fund an annual payment to help pay for holiday gifts, so that resources are there through thick and thin, for a fixed period of time, and/or for life.

 

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Last updated November 20, 2023

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