Key Takeaways
- Structured settlements offer several benefits, including tax-free income, no maintenance fees and protection from creditors.
- Parents or guardians must only spend the money as strictly outlined by the courts.
- Minors have limited control over how their periodic annuity payments are set up or disbursed.
When courts adjudicate or plaintiffs and defendants settle substantial cases involving minors, the financial outcome considers the child’s long-term stability. Attorneys and courts safeguard minors’ financial futures by structuring the financial windfall into periodic payments, often referred to as structured settlements for minors.
These insurance settlements for minors typically arise from legal cases that stem from a product-liability claim, a workplace accident where a parent was severely injured or perished, a car accident or other serious injuries to the child. Periodic payments benefit minors as they reserve money for essential long-term necessities such as food, clothing and shelter, future academic expenses and ongoing medical care.
Structured settlements for minors are generally paid through an annuity from a life insurance company. The primary distinction between an adult owning a structured settlement and a minor owning one is control. By law, minors have limited control over how their periodic payments are set up, and their parents or guardians must spend the money precisely as the court orders.
This arrangement prevents the minor and their parents or guardians from having unrestricted use of the settlement funds, potentially averting irresponsible spending or purchases unrelated to the court-prescribed purposes. The objective of a structured settlement for a minor is to cater to the child’s needs and ensure there is money remaining for the child when he or she turns 18.
Structured settlements for minors are setup to help the minor(s) when they turn 18 years old. However, there are many factors to consider in such settlements. A finance professional may help you understand the options available in a structured settlement.
Timothy Li, MBABusiness Finance ManagerTimothy Li, MBA, has dedicated his career to increasing profitability for his clients, including Fortune 500 companies. Timothy currently serves as a business finance manager where he researches ways to increase profitability within the supply chain, logistics and sales departments.
How Minors Benefit from Structured Settlements
Today, structured settlement annuities constitute the vast majority of lawsuit awards when the financial security of minors is at stake, due to the numerous benefits of accepting an award in this manner.
Advantages of accepting settlements include:
- The settlement income is 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% to 10%.
- 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 safeguarded and can only be accessed to meet the child’s specific needs.
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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 due to attached fees.
Read More: How Does a Structured Settlement Work?
Designing Structured Settlements for Minors
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 aim 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 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 correctly, 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:
- 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 the age of 18 and can manage the structured settlement on their own.
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.
Structured Settlements Versus 529 Plans
As an alternative to structured settlements, some families may consider investing 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 aligns with the time horizon and investment objective of the child’s situation. For example, if the minor is 16 years old and starting college within the next 10 years, the state would likely 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 not advantageous when compared to a structured settlement for many reasons.
Disadvantages of 529 Plans
- Depending on the source of the funds, contributions to the 529 plan may not be tax-deductible or 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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Frequently Asked Questions About Structured Settlements for Minors
Structured settlements work much the same for minors as they do for adults. Minors typically receive structured settlement payments through an annuity provided by a life insurance company. They receive a series of periodic payments over a specific time covering the amount of the judgment or settlement in the court case they won or settled.
A court can decide to put the money from a minor’s judgment or settlement into a guardian account with the court, a CD, or a blocked savings account rather than a structured settlement.
To sell, a parent or guardian has to demonstrate that the child would be better served by selling the structured settlement payments than by receiving future payments. They must provide conclusive proof that there is an immediate need for cash.
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