When a child suffers a severe injury or loses a parent due to someone else’s negligence, the resulting legal settlement can provide much-needed financial support. However, managing these funds and ensuring they last well into the future can be difficult.
That’s where structured settlements come in. These financial arrangements offer guaranteed, tax-free payments over an extended period, providing a stable source of income for the child’s long-term needs, such as medical care, education, and housing.
Families work with attorneys and financial advisors to create a customized structured settlement agreement after carefully observing the case and their child’s specific needs.
Hey, this is James, and I work as a financial advisor assisting families in situations involving financial settlements resulting from a personal injury or medical malpractice case on behalf of children.
In this article, I will guide you on structured settlements for minors and how they protect an injured child’s financial future.
Common Situations Leading to Structured Settlements for Minors
According to various authentic reports, over 30,000 structured settlements are arranged each year, with a significant portion involving minors.
Minors may be awarded structured settlements in various situations, including:
Personal Injury Case
When a child suffers a severe injury due to another party’s negligence, such as in a car accident or premises liability incident, a structured settlement in a personal injury claim can provide ongoing financial support for their medical expenses and future needs. The settlement amount is determined through settlement negotiations and considers factors such as the extent of the injuries, long-term care needs, and any punitive damages awarded.
Medical Malpractice
If a child is harmed due to a healthcare provider’s negligence, such as in cases of surgical errors or misdiagnosis, a structured settlement can help cover the costs of ongoing medical treatment and therapy. In these cases, the attorney fee is often a percentage of the total settlement award.
Birth Injuries
When a child sustains an injury during birth, such as cerebral palsy or Erb’s palsy, due to medical negligence, a structured settlement can provide a steady stream of income to support their lifelong care needs. These settlements often involve special needs trusts to ensure that the child’s eligibility for government benefits is preserved.
Wrongful Death of a Parent or Guardian
In cases where a parent or guardian dies due to another party’s negligence, a structured settlement can ensure that the child receives financial support to replace the income and support they would have received from the deceased. The settlement amount may include a combination of a lump sum payment and ongoing monthly payments.
In a structured settlement for a minor, the at-fault party typically pays the settlement amount to a life insurance company (Annuity issuer) to purchase an annuity contract. The life insurance company then makes periodic payments to the minor per the agreement.
The structured settlement agreement is negotiated between both parties involved in the case and must be approved by a court to ensure that it is fair and in the best interests of the child. These settlements are protected under the Structured Settlement Protection Act, which helps ensure that the injured party receives their settlement award in a way that best meets their long-term needs.
Benefits of Structured Settlements for Minors
Structured settlements offer several advantages for minors, including:
Structured settlements provide a series of guaranteed, tax-free payments over a specified period, ensuring a stable source of income for the child’s future needs.
By distributing the settlement funds over time, structured settlements protect against the mismanagement or rapid depletion of the money, which may occur if a lump sum is awarded to a minor or their family.
Structured settlements can be tailored to meet the child’s anticipated future needs, such as education expenses, housing costs, or ongoing medical care, by scheduling payments to coincide with key milestones.
Structured settlements often offer higher returns than traditional savings accounts or conservative investments, as highly-rated life insurance companies back them.
In some cases, structured settlements can be designed to preserve a child’s eligibility for government benefits, such as Medicaid or Supplemental Security Income (SSI), by limiting the amount of assets they receive at any given time.
Structured Settlement Options for Minors
There are several options for structuring a minor’s settlement, including:
Blocked Accounts
A blocked account is a court-controlled bank account that holds the settlement funds until the child reaches the age of majority (typically 18 or 21, depending on the state). The funds in a blocked account earn interest, but the interest is subject to taxation.
Trusts
A trust is a legal arrangement in which a trustee manages the settlement funds on behalf of the minor. Trusts can offer flexibility in distributing the funds and may provide tax benefits, but they also involve ongoing management fees and potential taxation of investment income.
Structured Settlement Annuities
Structured settlement annuities are the most common option for minors. An annuity is purchased from a life insurance company, which then makes the guaranteed, tax-free payments to the minor according to the agreed-upon schedule.
Combining Settlement Options
Sometimes, a combination of settlement options may be the best approach for a minor’s financial future. For example, a portion of the settlement funds could be used to purchase a structured settlement annuity, while another portion is placed in a trust or blocked account for additional flexibility and control.
A financial advisor or settlement planning professional can help determine the most appropriate combination of options based on the minor’s unique needs and circumstances.
Customizing Structured Payment Schedules
Given concerns over minors’ ability to manage sudden wealth, structured settlements for injured minors properly are designed to distribute funds gradually over time rather than conveying a lump sum to the recipient as a legal adult. Settlement experts assist with mapping out anticipated financial milestones and expenses. This allows for periodic payments to be scheduled accordingly.
Types of Payment Arrangements In A Minors Settlement Include:
The overall objective of these customized payment arrangements is coordinating access to funds when they will be most beneficial while limiting risks from conveying total settlement amounts prematurely. Built-in flexibility also allows for payment schedules to be adjusted if an injured minor’s financial needs change significantly due to new medical issues or health improvements.
Selling Structured Settlement Payments Of Minors
In some cases, the beneficiary of a structured settlement may wish to sell their future payment for a lump sum. However, when minors are involved, strict regulations apply:
Strict Regulations for Selling Minor’s Payments
Federal and state laws heavily regulate the sale of a minor’s settlement payments to protect their interests.
Court Approval Process
To sell a minor’s structured settlement payment, a petition must be filed with the same court that approved the original settlement. The court will appoint a guardian ad litem to review the proposed sale and ensure it is in the child’s best interests.
Demonstrating Financial Necessity
The petitioner must provide evidence demonstrating that the sale of the structured settlement payments is necessary to meet the minor’s financial needs and that the funds will be used for their direct benefit.
The Role of Parents and Guardians
As a parent or guardian, you play an important role in safeguarding your child’s settlement funds and ensuring their financial well-being. This includes:
Structured Settlements Vs. 529 Plans
When planning for a minor’s future financial needs, particularly their education, parents and guardians may consider structured settlements and 529 plans. While both can provide funds for a child’s future, there are notable differences between the two.
What is a 529 Plan?
A 529 plan, named after section 529 of the Internal Revenue Code, is an educational savings account designed to help families save for a child’s future education expenses. Similar to a 401(k) retirement plan, contributions to a 529 plan are invested in state-approved mutual funds that align with the time horizon and investment objective of the child’s situation. For example, if the minor is 16 years old and planning to start college within the next 10 years, the state would likely select a more conservative fund to minimize risk.
Disadvantages of 529 Plans Compared to Structured Settlements
Benefits of Structured Settlements
When deciding between a structured settlement and a 529 plan, consider the child’s and their family’s specific needs and circumstances.
Conclusion
Structured settlements play a vital role in protecting the financial futures of minors who have been injured or have lost a parent or guardian due to another party’s negligence. By providing guaranteed, tax-free payments tailored to the child’s specific needs, structured settlements offer a secure and flexible way to ensure that the child receives the necessary support and resources throughout their life.
When considering a structured settlement for a minor, it is essential to work with experienced professionals, including attorneys and financial advisors, who can guide you through the process and help design a plan that best serves the child’s interests. Families can make informed decisions that protect and nurture the child’s future well-being by understanding the benefits, options, and regulations surrounding structured settlements.
