Structured Settlements and The Minor Claimant

Whether a settlement involves a catastrophic injury involving lifetime injuries, permanent scarring or disfigurement, or the loss of a parent or sibling, it is always particularly difficult when a child is involved. Once a claim settles and a minor is poised to receive settlement funds, plaintiff attorneys need to switch gears to take into account the child’s long-term financial stability and security.

Since the majority of cases involving minors require court approval, the Minor’s Compromise will set forth the terms of the settlement and how the proceeds are to be distributed. Courts take particular interest to protect a minor’s financial future. In qualified cases, one method is to allocate a portion of the child’s net recovery into a structured settlement annuity with periodic payments that are guaranteed and 100% income tax-free. 

Structured settlements arise out of a personal injury claim or a wrongful death action.

Under Internal Revenue Code § 104(a)(2) the amount of any damages (other than punitive damages) that are received whether by suit or agreement, and whether as lump sum payments or as periodic payments on account of personal physical injuries or physical sickness are excluded from gross income. All payments paid from a structured settlement annuity contract that are in compliance with the Code will flow to the claimant on a tax-free basis. However, in order to be in compliance and preserve the tax-free nature of the settlement, specific language properly referencing the Code must be included in the Settlement Agreement that is signed by both the claimant party and the liability insurer funding the annuity. 

Structured settlements constitute a bi-lateral agreement between the plaintiff and defendant parties wherein the liability insurer funds the annuity and agrees to make the future periodic payments to the claimant/annuitant via the execution of the Settlement Agreement. Once signed, the insurer exercises their right to assign that obligation to a third party Assignee (a wholly-owned subsidiary of the annuity company underwriting the policy). This is perfected by executing a Qualified Assignment Agreement in accordance with Internal Revenue Code Section 130. The Assignee then assumes the obligation from the defendant/insurer, and the annuity policy becomes a contract between the life insurance company issuing the annuity policy and the claimant/annuitant party. 

Once the liability insurer has funded the annuity and the Qualified Assignment Agreement has been signed by all parties, the defendant/insurer receives a full and final release and will have no ongoing obligation to make any of the future annuity payments to the claimant/annuitant going forward.

A structured settlement annuity when properly set up for a minor can target specific financial needs.

These tax-free annuities provide the minor with future financial security and can take the form of a college fund, or provide for anticipated future medical surgeries, and in some instances, lifetime income that will allow an injured minor who has suffered lifetime disabilities to obtain financial independence. Often, parents and family members take on the arduous task of providing around-the-clock care for their injured child. A structured settlement provides a safety net for the minor that more often than not saves them from becoming a ward of the state in later years when either funds are depleted or family care givers can no longer perform the necessary daily tasks that are required.  

Contrary to investing in the stock market, the annuity company rather than the investor assumes the financial risk. As such, annuity payments paid out over the lifetime of a claimant will continue to be paid by the life insurance company for the balance of the claimant’s life, however long that may be. Volatility in the stock market can pose a financial risk to even the most sophisticated investor that can lead to diminished returns over time. In Grillo vs Petteitte  (Grillo v. Pettiette, et al, 96th District Court, Texas: Tarrant Country, Cause No. 96-145090-92 and Grillo v. Henry, 96th District Court, Texas: Tarrant Country, Cause No. 96-167943-97) Grillo’s attorney failed to offer her a structured settlement that would have provided her with lifetime income. Instead, and in only a matter of a few years, the severely handicapped child ran out of funds needed to provide for her future medical care. To add insult to injury, the failure to structure the settlement proceeds precluded her from receiving Medicaid and Medicare benefits until she turned 18. Grillo sued her attorney for legal malpractice and won her case, and much of the $4-million-dollar settlement was structured. 

A structured settlement also possesses a unique and symbiotic relationship with a Special Needs Trust in that tax-free income from the annuity could be used to fund the SNT while preserving the child’s eligibility for public benefits regardless of whether the need is immediate or anticipated. 

In conjunction with any annuity payment schedule, cost of living increases can be included that can range anywhere from 3% to 6% compounding annually to offset inflation. Parents can rest assured that their child with life-long medical needs will have guaranteed financial stability for the remainder of their life. 

Structured settlements have long been credited for not only protecting minors from themselves but from predatory relatives as well. 

Most teenagers can’t think of ways fast enough to spend down a lump sum settlement that waits for them on their pivotal 18^th birthday. One very important and definitely a popular facet of structured settlements is that they do not provide our teenager with access to the full settlement proceeds at the age of 18. At this age, parents should be reminded that they would no longer have legal authority over how their child spends their settlement proceeds. And as well, parents, although oftentimes with the very best of intentions, can find themselves in a financial predicament whereby they later develop convenient amnesia and forget the why and for whom the annuity was originally established. A structure will prevent against spendthrift behavior and a parent from intercepting and spending payments that were always intended for the benefit of the minor. Annuity payments are paid pursuant to the scheduled contract and each payment is made payable directly to the young adult.  

Periodic payment annuities ensure against early dissipation of the settlement proceeds.

The Prudential Insurance Company put out a study demonstrating that settlements between $75,000 and $100,000 whereby minors had 100% access to these funds when they turned age 18 had completely depleted their assets inside of 9 months. 

The argument that structures are fixed and determined and the terms cannot be accelerated or deferred makes them an inflexible investment, should only make them more attractive to parents and legal guardians. It is the very reason behind this “set it and forget it” investment strategy that has saved so many young adults from self-destruction and has saved parents from having to rescue their child from financial discourse. 

Because both the interest and the principle are tax-free, a structured settlement typically outperforms similar investment vehicles. 

Structures have the added feature of both the interest and principle being tax-free whereas other investments are taxed on the first dollar earned. Internal rates of return for structures out-perform CD’s and bank savings accounts on average by approximately 1.5%. There are no ongoing annual management, brokerage, or monthly service fees with a structure which makes them an ideal “set it and forget it” investment. In a side-by-side comparison between the performance of a structured settlement and other similar investments, why would a parent decide against a higher payout yield for their child? 

There are practically limitless format designs that can be devised using a structured settlement. Depending on the nature of the financial need and the amount of resources available, annuity formats can be tailored to target a minor’s financial goals and provide parents with the peace of mind that they have acted in the best interest of their child. Whether the child’s recovery is $50,000 or $500,000, structured settlements are a socially responsible method of indemnification. 

If you have a case where you believe a structured settlement would be in the best interest of your client, please contact  our office for a free evaluation.

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