Structured Settlements for Minors
~FINANCIAL SECURITY AND INCOME
~FIXED RETURNS
~FLEXIBILITY FOR WHEN "LIFE HAPPENS"
~SECURITY AND PEACE OF MIND
When a family member has been in an accident, the financial burden can be tremendous.
When a minor child is involved in a personal injury settlement, the court is often responsible for determining the fairness of the settlement for the child.
In the court's role of protecting the settlement proceeds until the child reaches the age of majority, sometimes a settlement annuity or trust are the favored options.
Probate Court and Trial Judges generally appreciate the safety, security and competitive returns when compared to alternatives such as stocks, bonds, or court approved savings accounts.
Fortunately, a structured settlement ususally provides a viable alternative with many advatages.
What financial options exist for the settlement of a minor's case?
For most larger settlements, the parents/guardians typically have three options that can be used individually or in combination with each other to preserve the child's settlement.
1. Guardianship Account
· Usually a money market account or something equivalent over which the court maintains some control.
· The money typically earns a modest interest rate and the earnings are taxed on a yearly basis.
· Costs are involved in setting up the guardianship; along with annual fees for accounting and filing.
· The guardian has little control over the money; court approval is required for any spending or change in the account.
· The guardian usually has to provide an annual bond to insure the money is safe.
2. Structured Trust
· Professionally managed usually by a bank trust department, independent trustee, or independent financial advisor.
· Allows for the design of a tax-free, guaranteed, reliable stream of payments tailored to your child's specific needs.
· May earn a competitive rate of return on investment, and according to section 104(a)(2) of the IRS code, the earnings from personal injury cases will not be taxed as income.
3. Structured Settlement Annuity
· Allows for the design of a tax-free, guaranteed, reliable stream of payments tailored to your child's specific needs.
· May earn a competitive rate of return on investment, and according to section 104(a)(2) of the IRS code, the earnings from personal injury cases will not be taxed as income.
· Once the rate of return is determined, it will never decrease. However, payments can be structured to increase with a cost of living adjustment.
· No ongoing maintenance or management fees.
Which option provides the highest level of protection and guarantees?
Structured settlement Trust and A nnuities provide asset protection as they are immune from creditors and judgments.
What are the main advantages of a structured settlement over a trust?
While the child is still a minor, who are the payments made to?
· Duly appointed guardian or Trustee
· 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. In the alternative, if the guaranteed settlement proceeds were scheduled to pay out in pieces over time, the payments will be made as scheduled.
Can a structured settlement provide the child with the necessary funds required for the care he/she will need long after he/she is an adult?
Yes. Payments are tailored to the child's specific needs, can be set up to last throughout the child's lifetime, and can 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 for the child, an annuity or a trust 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?
Does a structured settlement require reporting back to the court?
Although the Trust or annuity must be approved by the court at the time of the settlement, if all of the net proceeds are used to invest in the Trust or annuity there is often 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.
What role does the defendant play in the decision to purchase an annuity for the child?
All structured settlement are a negotiated term or condition of settlement. This option 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 and then uses that money to purchase an annuity, it does not provide the same tax-free benefit.
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 age of majority, the law does allow the child to sell future payments of an annuity if it is a case of extraordinary need. Under law, the court must certify ALL sales-ensuring that the sale is a fair deal and in the child's best interest. Usually these are at deep discount and are a bad idea. An early encroachment is not availale in an annuity but can be included in the planning of a trust.
IRS REQUIRED TAX DISCLOSURE: Information contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any tax penalties. You should seek advice based on your particular circumstances from an independent tax advisor.
