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| Minors and Structured Settlements |
When courts decide – or plaintiffs and defendants settle – large
cases that involve children, the financial result takes into account the
children’s long-term stability. Lawyers and courts take steps to
protect minors’ financial future by structuring a financial windfall
into periodic payments.
These structured settlements are the
result of legal cases that stem from accidents in which a parent
perished or was a severely injured; a product-liability claim; or some
other serious injury to the child.
Periodic payments help minors
by reserving money for essential long-term necessities (food, clothing
and shelter) and for any continuing medical care. The settlement pays
claimants by scheduling future periodic payments, acting as a kind of
financial planning.
The arrangement makes it less likely that a
minor – or the minor’s parents – can spend the money too quickly or on
the wrong things at a young age.
But there’s a difference between an adult owning a structured settlement
and a minor owning one. That difference is control. By law, minors have
little to no say in how their periodic payments are set up, and their
parents or guardians must spend the money in the exact manner ordered by
the court.
The setup prevents the parents of the children in
these cases from having unrestricted use of the minor’s settlement funds
and potentially spending the money irresponsibly or for purchases
unrelated to the court-prescribed purposes.
The goal is to make sure there is money for the child when he or she turns 18.
How Minors Benefit from Structured Settlements
Minors benefit from accepting awards in structured settlements in a variety of ways. For instance:
- The money is tax-free – including free of income taxes, which normally go along with other annuities
- Money is protected until it is accessed to meet a child’s specific needs
- The settlement does not require maintenance fees
- Payments don’t decrease when the stock market dips
- The overall rate of return is fixed, assuring the same payment each time. The yield typically ranges between 3 and 10 percent
Today,
structured settlement annuities make up the overwhelming majority of
lawsuit awards when it comes to preserving a minor’s financial security.
This is because of their favorable financial returns, their tax-free
status, their flexible payout schedules and the protection they offer
from pilfering. Insurance commissioners regulate them in all 50 states,
and the underlying annuity is protected from creditors and judgments.
Other
payment options to 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
because they often have fees attached.
Laws Put Restrictions on Adults
To
help minors gain some control over the financial gain from lawsuits
awards, federal and state laws now assign to courts – rather than to
parents – the responsibility of determining both the fairness of the
monetary settlement and how the awarded funds can be spent.
Courts seek 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 who might seek to use it for themselves
- The child can’t spend the money all at once
- The money lasts over time
For
a child who is under the age of 18, terms of a structured settlement –
which must be drafted during the initial negotiations between a
plaintiff and a defendant – are permanent and unchangeable for the life of the annuity.
These types of settlements often involve a sum of at least $5,000 and cases that involve a car accident or medical negligence.
Money
can get disbursed in any number of ways – periodically over a specific
time frame, with a lump-sum payout or a steady stream of payments during
a child’s life. The structure can be designed to make sure payments
last well into an adult’s lifetime. Attorneys typically negotiate
payment schedules well before the conclusion of any court settlement.
(This is not true with a verdict.) Attorneys can also structure payments
so that they increase over time, rising to account for spikes in the
cost of living.
Parents Can Sell on Behalf of Minors, but It’s Rare
If
circumstances – financial, health-related or otherwise – change
profoundly before a child reaches the age of majority, parents or legal
guardians can sell the future payment rights
to the structured settlement. However, the burden of proof is high.
Parents or guardians must demonstrate conclusively to the court that
there is an immediate necessity for a cash buyout and that the child’s needs would be served more by selling the settlement than by waiting on future payments.
These cases are rare – so rare some structured settlement companies
don’t attempt them. Other companies can only recall doing it
successfully once or twice, and in those cases the process usually drags
out for years, frustrating all involved.
The good news for
minors, though, is this: eventually, they reach the age of majority.
Once they turn 18, they’re considered an adult, and they own their
annuity. As an owner, they no longer have to follow regulations set up
for minors.
This means a new 18-year-old annuitant can decide to
sell future payment rights – some of them or all of them – to a buying
company for a lump-sum payment just like any other adult with a
structured settlement or annuity.
Across the board, all the same
rules and laws apply. Any transfer must be considered fair, and in “best
interests” of the seller, according to the court and the state’s
Structured Settlement Protection Act (SSPA).