Managing a Minor's Settlement
If your minor client may be awarded damages due to personal physical injury, sickness or wrongful death, you undoubtedly want to make the most informed financial decisions possible. After all, you are responsible for providing counsel on decisions that will likely affect your young client for many years to come.
Your client's settlement funds are intended to pay for medical, rehabilitation, or attendant care requirements and perhaps eventually, to provide compensation for future lost earnings. Although money must be available to cover current costs, it must be managed wisely for future expenses, such as college or assisted living. Paying a young adult a lump sum of money when he or she reaches the age of majority may not be the best solution, since many young adults lack financial maturity needed to manage a significant amount of money.
STRUCTURED SETTLEMENTS VS THE ALTERNATIVES A structured settlement offers an effective solution. Structured settlement payments can provide some funds at the age of majority and spread the rest over a period of time. Let's compare key features of a structure with those of some other common alternatives for protecting a minor's moey, in the state of Texas.
| | | | | | | Income tax free provided the damages received as periodic income (not including punitive damages) are the result of personal physical injuries or illness. |
| | Income payments may be scheduled in any amount over any time period, even for the life of the annuitant. Once established, the structured settlement cannot be changed. |
| | No additional cost to the annuitant. |
| | The annuity issuer guarantees payments according to the terms of the structured settlement agreement. |
| | | | | | | | All earnings are fully taxable. |
| | All monies must be distributed to minor when he or she reaches majority, usually age 18. |
| | Subject to individual court procedures. |
| | No guaranteed rate of return on investments. |
| | | | | | | | All income is fully taxable (except some Municipal Bonds) as it is earned. Capital gains tax applies when securities are sold. |
| | Trustee may impose strict guidelines on withdrawals to avoid depleting principal. State laws may require disbursement of all funds to child by a certain age. Texas Section 142 Trusts require distribution by age 25. |
| | Set- up fees and annual custodial fees. Management fees from the various securities in which the Trust invests may also apply. |
| | Federal Deposit Insurance Corporation (FDIC) insures up to $100,000 on Treasuries and certificates of deposit. Any other investments are not guaranteed. |
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THE BEST OF BOTH WORLDS - AND PEACE OF MIND
Sometimes a combination of financial tools can help ensure the optimal benefit and protection for a minor. For example, structured settlement payments can be paid directly to a trust. Splitting the award between a trust and a structured settlement can optimize the flexibility and future benefits of a minor, with the trust providing for a payout at the child's majority and the structure providing for ongoing income over time.
If your client's injury is permanent, his or her settlement should be too. A structured settlement, alone or in combination with a trust, can ensure that payments will be available as long as your client lives. That can mean an enhanced quality of life for your client, while providing you with a peace of mind.
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