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Structured Settlement Money and Children

Updated on August 24, 2007

We pray nothing harms our children, but if something goes terribly wrong, we need to understand the legal realities that may come into play including the concept of structured settlements and how structured settlement cash is paid out over time.

What is a Structured Settlement?

A Structured Settlement is simply a way to settle a civil suit by paying out compensation over time instead of in one lump sum. The term can also refer to one structured settlement lump sum payment, paid out at a future date. Both the principal and interest of structured settlement money is exempt from federal tax. These arrangements are typical in bodily injury cases, for example as the result of a dog bite, car accident, or even a playground injury.

Structured settlement funds are used to pay for medical treatment as well as attorney's fees and other legal costs. Money is typically deposited into a blocked bank account for these expenses until the child turns 18. The remaining funds are used to purchase an annuity, which will later pay out funds to the child for such things as college tuition, a down payment on a house, or a yearly living allowance for a specified period of time.

Studies done in the mid-1980s proved that settlement money was often squandered within several months of being received so Congress established new incentives that compel people to take the money over time instead of all at once.

Keeping the Money Safe and Tax Free

To be considered a qualified structured settlement by the IRS, proper documentation and procedures must be followed. Also, a stream of periodic payments is required. This ensures favorable tax treatment. These payments are almost always is funded by a qualified asset.

In the case of minors, courts have set strict guidelines for the qualified asset. To reduce financial risk, it must be either a highly rated annuity or a package of US government obligations. Because the annuity is more practical, purchasing an annuity to fund a structured settlement is the common practice.

Why a Structured Settlement?

If legal settlements were paid in cash, it could result in abuse when accident victims are children. Structured settlements provide a way to prevent parents from having access or controlling all of their child's settlement money.

Because minors cannot enter into contracts, they cannot agree to their own settlement. A court must confirm the settlement to make it binding on the minor. Once it is binding, that means the victim has agreed to accept the money in exchange for giving up further legal claims. This rule applies when children's settlements exceed several thousand dollars. This is also referred to as court approval, court confirmation, guardianship, a friendly suit, or minor's compromise proceeding. Courts will only approve settlements, when the child's money is protected.

Structured settlements are not the only way to protect a child's money, but they are considered by many to be the best. While courts will also accept an UGMA account, a court-controlled blocked bank account, US Treasury instruments, Certificates of deposit, and restricted trusts, these have significant drawbacks. In general, they pay low rates of interest and are cumbersome and/or costly to administer.

If Your Child is Permanently Disabled

If a child is disabled to the point that he must permanently rely on government assistance, structured settlements are imperative. The can direct the victim's proceeds to a special needs trust, which will preserve eligibility for government assistance.

Related Reading

What to Expect From Your Child's Structured Settlement

School Safety Basics

Teach Kids to Be Safe, Not Scared

How to Teach Kids About Money

Keep Kids Safe From Strangers in Summer


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