The Settlement Alliance

Preserving a Minor's Settlement: Part II

Preserving a Minor's Settlement: Part II

Oct 9, 2014

In Part I of this post, we discussed the three main options for preserving a minor’s settlement: a guardianship account, a trust, and a structured settlement annuity. As mentioned in the previous post, these options can be used exclusively, or in combination with each other.
When deciding on a course of action, there are a number of factors to consider and families often have many questions. Some of the most frequently asked questions are:

Which option provides the highest level of protection and guarantees?
Structured settlement annuities provide outstanding asset protection, as they are immune from creditors and judgments. Unlike many traditional investments, structured settlement annuities also have a guaranteed rate of return.

What are the main advantages of a structured settlement over a trust?
In personal injury and wrongful death cases, any earnings on top of the initial settlement proceeds are tax-free when a structured settlement is utilized properly. On the other hand, trusts and court-established bank accounts can’t typically promise tax-free earnings or distributions. In addition, a structured settlement requires no ongoing maintenance or management fees. There are fees associated with drafting and administering a trust.

While the child is still a minor, who are the payments made to?
Depending on the individual situation, the payments could be made to:

  • Duly appointed guardian
  • Registry of the Court
  • Bank account restricted by the Court
  • Trust fund
  • Custodian under the Uniform Transfer to Minors Act

What happens to the settlement money once the child reaches age of majority?
It depends on how the settlement funds were originally positioned at the time of settlement. If the plan was to pay everything out immediately at the age of majority, the guaranteed payments would be made at that time. However, if the guaranteed settlement proceeds were scheduled to pay out over time, the payments will be made as scheduled.

Can a structured settlement provide the child with the necessary funds required for the care s/he will need long after s/he is an adult?
One major benefit of structured annuities is their flexibility—payments can be made monthly, annually, in future lump sums, or in almost any combination that meets the plaintiff’s needs. They can even be structured to increase with a cost of living adjustment.

Can a structured settlement pay for the child’s college tuition?
Depending on the size of the settlement, an annuity can be used to fund a college plan, provide for a home, or even provide a lifetime of steady income.

What role does the court play in purchasing a structured settlement annuity?
Although the annuity must be approved by the court at the time of the settlement, if all of the net proceeds are used to purchase an annuity, there is generally no need for a guardian of the property to be appointed and no need to file any future accountings or reports to the court about the status of the money. (Note: Regardless of whether a structured settlement annuity is purchased, it is extremely important to involve a settlement expert when making these decisions, as the laws and regulations surrounding minor’s settlements can vary from state to state).

What role does the defendant play in the decision to purchase an annuity for the child?
All structured settlement annuities are a negotiated term or condition of settlement and must be agreed upon by both plaintiff and defendant. In order for the annuity payments to be tax-free, the defendant must purchase the annuity on behalf of the child. If the plaintiff receives the settlement money (i.e. has constructive receipt of the funds) and then uses that money to purchase an annuity, the tax-free benefit is off the table.

What if the child’s financial needs suddenly change several years after the settlement?
Federal law recognizes that financial needs sometimes change. Once the child reaches the age of majority, the law does allow the child to sell future payments if it is a case of extraordinary need. To ensure that the minor’s best interests are protected, though, the court is legally obligated to certify all sales.

Of the three options—a guardianship account, a trust, and a structured settlement annuity—the structured settlement annuity is often most attractive. However, an experienced settlement planner will take the time to walk through all of the options, and based upon the minor’s individual situation, recommend the best course of action for preserving the settlement.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential