My six-year old son was hit by a car and will be disabled for the foreseeable future with ongoing medical and hospital costs. My husband says that the court will probably require us to do a structured settlement. What does this mean and why would the court require us rather than take a lump sum and investing it ourselves?

When a minor is involved in a lawsuit as an injured claimant, our courts become very protective of their interests, and rightly so. The settlement of children’s claims must be given court approval in a proceeding called a court confirmation, guardianship, minor’s compromise or, simply, a court approval. The court has some general concerns:

• That the child be awarded the compensation he is due.
• That the money be wisely invested so it will grow over time.
• That the parents or others not take, invest, and use the money for their own benefit.
• That the child not have total access to all of the money at once for fear of losing it or spending it all.

Structured settlements reduce the risk that anyone will embezzle, misuse, or withhold large sums of money belonging to the injured claimant. Under the laws of virtually all states now, you may not take the funds from a large settlement (usually over $5,000) on behalf of your minor child and invest it yourself.

Typically, a portion of the money is set aside in a blocked bank account (which means an account only accessible by the parent or guardian usually by court order). The account is earmarked to pay current medical and other bills, which have been incurred as a result of the accident or may be incurred in the future. The remainder is used to set up the structured portion of the settlement, which will make a series of payments to your child beginning at the age of 18, for either a set number of years or for life.

An injured child’s settlement money used to be completely placed into a blocked account for safety, but such an account pays very little interest, and taxes must be paid on that interest. A structured settlement uses an annuity or a treasury bond to grow the money, to keep it away from the parents, and to keep its proceeds exempt from income tax. It can be set up in any way that makes sense for your individual child.

For example, suppose the insurance company agreed to settle your son’s case with a structured settlement, by purchasing an annuity for $30,000, plus a lump sum up front to cover the current attorney fees and medical bills, and a lump sum for future medical bills. The lump sum would go into a blocked account. The $30,000 could be used to purchase a structured settlement annuity from a life insurance company.

Over several years or even over his lifetime should it be designed that way, you’re child will receive in excess of $175,000 tax-free income (assuming a 7% rate of return on the annuity). Since there will be future medical bills, those can either be paid out of the lump sum to go into the blocked account as indicated above, or figured into the annuity to be paid early (i.e. before age 18). Here is how it might look. Note that these are purely fictitious figures and are an example only. This in no way implies that you or your child would receive this amount of money from any specific settlement agreement.

Now:

• $25,000 to blocked account for attorney fees;
• $5,000 to blocked account for medical providers;
• $15,000 to blocked account for future medical bills;
• $30,000 to purchase a 7-year annuity for structured settlement.

Payments from annuity begin at:

Age 18: $25,000 for freshman year of college, tuition and supplies/ plus $300 per month for expenses for the year = $28,600;

Age 19: same for sophomore year;

Age 20: same for junior year;

Age 21: same for senior year;

Age 22-25: Monthly payments of $2,000

Total money received: Lump Sum up front – $45,000

Structured Settlement over time – $186,400

There are many different ways of designing it. You will want to discuss this with your attorney and a structured settlement broker to find what will work best for your son. You may just want to have monthly payments and no tuition payments. Just keep in mind, that once it is set up with scheduled payments, neither the schedule nor the amounts can be changed. You must anticipate what your child’s needs will be in the future.

Case Studies: Structured Settlements for Injured Children

Case Study 1: The Johnson Family – Securing the Future for a Disabled Child

The Johnson family faced a challenging situation when their six-year-old son was tragically hit by a car, resulting in severe disabilities and ongoing medical expenses. As they explored their options, they discovered the concept of structured settlements. The court, prioritizing the child’s best interests, mandated a structured settlement instead of a lump sum payment.

This approach ensured that the settlement funds would be protected, minimizing the risk of mismanagement or withholding. A portion of the funds was allocated to a blocked bank account, exclusively accessible by the parents through court orders, to cover current and future medical bills.

The remaining amount was used to establish a structured payment plan that would commence when their child turned 18, providing financial support for a predetermined number of years or even throughout their lifetime. The structured settlement allowed the Johnson family to secure the necessary funds for their child’s care while mitigating financial uncertainties.

Case Study 2: The Smith Family – Optimizing Settlement Benefits Through Structured Settlements

In the Smith family’s case, an insurance company agreed to settle their child’s lawsuit using a structured settlement arrangement. By purchasing an annuity for a specified amount, along with lump sum payments to cover attorney fees, medical bills, and future healthcare costs, the Smiths could maximize the benefits of the settlement.

The structured settlement provided their child with a steady stream of tax-free income over an extended period. For instance, assuming a 7% rate of return on the annuity, their child would receive payments starting at the age of 18. These payments would cover college tuition, living expenses, and other financial needs.

The upfront lump sum, combined with the structured settlement payments, ensured the Smith family’s child received financial stability and support throughout their life.

Case Study 3: The Thompson Family – Tailoring a Structured Settlement to Meet Individual Needs

In the Thompson family’s situation, they pursued a structured settlement for their injured child that allowed for a customized approach. The settlement plan included upfront lump sum payments to address immediate expenses, such as attorney fees and current medical bills.

Furthermore, the structured settlement incorporated ongoing monthly payments to provide financial support for the child’s college tuition and living expenses, starting at the age of 18. Additionally, the settlement design encompassed monthly payments from ages 22 to 25, facilitating financial stability during the child’s early adulthood.

It’s crucial to collaborate with an attorney and a structured settlement broker to devise a tailored plan that aligns with the specific circumstances and needs of the child. Please remember that once a structured settlement is established, the schedule and amounts cannot be modified, necessitating careful consideration of the child’s future requirements.