Structures Best Financial Protection for Minors, Short-Term AND Long-Term

Parents should focus on a long-range view to protect a child’s financial future.

Settlement planning in cases involving a minor present a unique set of challenges for everyone at the settlement table. A court-approved agreement is a given in protecting the interests of the child. And in the best of worlds, parents or guardians work cooperatively with all parties involved to create opportunity and bright futures for their children by focusing on a plan of distribution that will anticipate major life milestones, like education and housing, along with other possible future income and/or medical needs.

Where we sometimes see a disconnect is the short-term focus parents have on higher yields versus a long-range view that could be much more important in protecting a child’s future financial success. We’re reminded of the famous quip from Will Rogers, “I am more concerned with the return of my money than the return on my money!”

What they fail to consider are two significant pitfalls that may occur prior to their child reaching an age of greater financial maturity and more sound financial decision-making. The first involves the judgment of a young adult who is suddenly handed a significant amount of money. The return on that money is a moot point if the settlement funds are prematurely squandered. The second involves the entrance of other people (particularly “bad influencers”) into a young person’s life not anticipated at the time of settlement.

With these concerns in mind, let’s look at how various settlement alternatives protect both the short- and long-term interests of a child.

Court-Restricted / Conservatorship Accounts

In the case of a court-restricted account, funds are protected until the minor turns 18. Good, yes, but the funds are then available all at once. I think we can imagine what happens to most 18-year-olds with unfettered access to a lot of money. It’s not exactly a recipe for success! Also keep in mind that earnings in court-restricted accounts are small AND taxable. If a young adult is interested in postsecondary education, those monies available at age 18 will also be counted against financial aid eligibility.

Alternatively, a trust has some advantages depending on the size of the settlement, the nature and extent of the injuries, and the need for health care in the future. Possible downsides with a trust, however, are the added administration/management fees and taxes on earnings inside the trust. Also, unless the minor will be deemed incompetent at the age of majority, the money is technically his or hers. Thus, probate courts typically won’t withhold money once the child turns 18.

That leaves us with only one surefire way to create a plan of distribution beyond age 18, which can be used either alone or in conjunction with a trust.

Structured Settlements

The unique status given to structured settlements by Congress makes this option particularly advantageous for anyone receiving an injury settlement, but especially for minors. Here’s why:

• A court-approved structure is nearly bulletproof, thus protecting a minor from a parent or guardian who tries to access the funds prior to payments coming due.
   
• Backed by only the most highly rated life insurance companies, structures are exceptionally secure. That means the funds will be available for those key life milestones and future needs anticipated at the time of settlement. And it means armor against the kind of bear market chaos we have seen far too often in the past 20 years, from the dot-com bust to the housing crash to the current pandemic.
   
• Payments from a structure can be disbursed over time, from age 18 and after, thus mitigating the risk of a teenager or young adult dissipating their settlement fund prematurely while vulnerable to the influence of others who promise big returns that may never be delivered.
   
• A structured settlement is not subject to ongoing management fees or expenses, and there are no federal or state income taxes on growth.

Structures are not considered “assets” when applying for financial aid.

Long-Term Benefits for Life’s Milestones, Opportunities

One of the best reasons to choose a structured settlement is right there in the name: structure. Payments can be created and scheduled for many years to come, providing a good start and financial security into adulthood, including:

• Guaranteed lump sums for those big steps forward in life, like buying a home or starting a business.
   
• Future payments timed for big-ticket medical expenses, like the latest prosthetics, cosmetic surgery for scarring or even home care.
   
• College or trade school costs, knowing that a structured settlement is not considered an "asset" by FAFSA so is not counted against financial aid.
   
• Monthly safety net income after college or trade school for rent, car payments, utilities and more.

For more information about settlement planning for minors, don’t hesitate to contact your Ringler advisor.