This post discusses the use of a structured settlement in settling an infant’s case. Part I discussed the general nature of the infant’s settlement, and Part II discussed obtaining money from the settlement for minor purchases.
A structured settlement is the purchase of an annuity with the net settlement funds. The annuity earns tax-free interest and allows a pay-out tailored to the infant’s needs as dictated by the parent. In comparison, in the all-cash settlement discussed in Part I, the net settlement is placed into a saving account, and all the money is available to the child on his 18th birthday. Also, the interest accrued on the account is taxable each year.
Here is an example of a structured settlement:
The infant’s case settles for $150,000. Fortunately, the injury has resolved.
The parents review a structured settlement which would do the following:
1. $50,000 would be paid to the attorney for his legal fee;
2. The remaining $100,000 would be used to purchase an annuity which would pay the child a total of $135,000 as follows: $25,000 on each birthday starting on 18, 19, 20, 21, and 22; and $15,000 on birthday 23.
The parents have decided to have the structured settlement so that the infant can earn the highest rate of tax-free return and so that the child’s higher education will be funded. Also, the parents want to prevent their son from squandering his entire settlement when he turns 18.
Here are the chief advantages of a structured settlement:
- the injured client is guaranteed a high tax-free rate of return which is much higher than the taxable saving account;
- the parents can structure the pay-out to fund college expenses or some other future needs in the child’s life;
- the structured settlement prevents the child from improvidently spending all his money when he turns 18; and
- if the child is permanently injured and will need permanent care and training, then the settlement funds can be allocated to future use, such as the purchase of a handicapped van every 5 years.
The disadvantages are the following:
- even when the child reaches majority, he cannot override the decisions being made for him by his parents, the attorney, and the judge;
- in our shaky economy, nothing is as safe as cash in a bank;
- if the child has a need to get the money earlier than prescribed in the annuity, there may be harsh penalties if he were to sell his annuity at a discount to one of the many companies who purchase such structured settlements.
We have handled all types of settlements involving infants. If your child has been injured in an accident, please feel free to call us at 800-581-1434 for a free consultation.
Mark E. Seitelman, 2/9/10, www.seitelman.com.