Settlement Planning for Minors

Clear guidance for protecting minors’ settlement funds

Minors’ Settlements

Financial decisions made now can have a long-term impact on a minor’s financial future and quality of care. Investment recommendations are heavily dependent on three main factors: the age of the claimant, the amount of the award, and any future health considerations. Each individual case should be carefully evaluated to determine the best solution.

Considerations

There are a number of questions that must be answered when determining the best investment vehicle(s) for a minor, including:

Does the minor have any day-to-day financial or medical needs?
Are there transportation, adaptive equipment, home modification, or housing needs to better accommodate the minor?
Will the minor need money to supplement or replace future earnings?
Does the minor intend to go to college or purchase a home in the future?
Is it likely that the minor will be able to appropriately manage funds at the age of majority, or should future distributions be staggered?

Common Settlement Options for Minors

A minor with relatively limited injuries or a minor receiving an award due to the injury or death of a loved one will have completely different needs than a catastrophically injured minor. Ultimately, the plan to manage the settlement funds must be developed to meet the best interests of the minor. Here are some common options:

Structured Settlement

A qualified structured settlement is generally arranged to begin when the minor reaches the age of majority or sooner, if the proceeds are paid directly into a trust. Payments can be made on a monthly, quarterly, semiannual, or annual basis, and can also include lump sums for future plans, such as college or the purchase of a home. The investment growth on the funds is 100% income tax-free, the rate of return is guaranteed, and there are no ongoing fees or expenses.

Trust Account

Setting up a trust for a child receiving settlement funds can help protect the money and ensure it is used responsibly over time. Depending on the child's circumstances, the trust may be established as a Minor's Trust to provide structured oversight and distributions until the child reaches a certain age, or as a Special Needs Trust to help preserve important public assistance benefits, such as Medicaid and SSI. A properly designed trust can provide long-term financial protection while allowing funds to be used for the child's health, education, maintenance, support, and quality of life.

Combined Approach

Another option is to combine a structured settlement and a trust. Structured settlement payments can be paid directly to a trust, or as an alternative, part of the settlement proceeds can be used to fund the trust, while the rest can fund a structured settlement. Aside from the tax benefits, the advantage of this approach is the future protection it affords. The trust can be used to provide for the child’s needs prior to the age of majority, while the structured portion can be utilized as an ongoing source of future income.

Registry of the Court, Court-Restricted Account, or Blocked Account

In some states, additional options exist when it comes to handling the proceeds for a minor’s settlement. While this is a very safe investment option, it does come with a few pitfalls. The money usually sits in an account that draws little interest, and any growth on the funds is subject to taxes. The minor will typically receive full access to the funds as long as they are not deemed to be incapacitated upon the age of majority.

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