If your client is a minor receiving a settlement, you know that the financial decisions made now can have a long-term impact on your client’s financial future and quality of care. What you may not be aware of are the various investment options available for a minor’s settlement, as each state has different guidelines and rules when minors receive an award.
The best approach is to first analyze the rules and investment requirements of the court which has jurisdiction over the minor’s award. Sometimes, the court that is tasked with approving a settlement is not the same court which will ultimately approve the plan selected for the investment of the proceeds on behalf of a minor. A knowledgeable settlement planner should know the state-by-state, or county-specific, requirements and all of the applicable investment options for the minor. In some states, a conservator or guardian ad litem might be assigned to protect the interests of the minor. In those situations, the court-appointed representatives will usually engage a settlement planner to help analyze the minor’s needs as well as the various investment options available so they can ultimately recommend a plan for the court to approve.
Making the Recommendation
The investment recommendation involving a minor is heavily dependent on three main factors: the age of the claimant, the amount of the award, and any future health considerations. A minor with relatively limited injuries or those 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.
There are a number of questions that must be answered when determining the best investment vehicle(s) for the minor, including:
In most cases, the court will favor a conservative approach that protects the minor’s assets until the age of majority. If the minor has experienced a more severe injury, additional decisions must be made regarding the needs for round-the-clock care, rehabilitation, medication, and/or home modifications. In those situations, a trust may be considered.
Common Settlement Investment Options
Once the questions surrounding the minor’s needs are answered, a settlement plan can be created to meet those needs. Some of the most common options for managing the settlement funds are:
Structured Settlement: A qualified structured settlement provides a number of attractive benefits. It is generally arranged to begin when the minor reaches the age of majority, unless the proceeds are paid directly into a trust, in which case payments can begin sooner. Payments can be made on a monthly, quarterly, semi-annual 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.
Minor’s Trust: A minor’s trust is another reliable option if the minor has a need for access to the funds prior to the age of majority. There is some flexibility in distribution; depending on state laws, final distribution can be delayed well beyond the age of majority to prevent the minor from receiving a large lump sum at one time. There are fees associated with drafting the trust and paying a trustee, but these are necessary protections to have in place for the minor. Trust interest income is considered taxable income, but the trust itself can sometimes deduct certain distributions related to medical costs and the trustee fees.
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 could be used to fund the trust, while the rest could be used to fund a structured settlement. Aside from the tax benefits, the advantage to 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, Surrogate Bank Account, or Blocked Savings 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 when they reach the age of majority.
Bringing in an Expert
An experienced settlement planner can serve as another advocate for the minor client. The team at The Settlement Alliance-WEST has provided assistance for hundreds of minors’ settlements and will help determine the best strategy for your client. Contact us today at 800-354-2258 or firstname.lastname@example.org.