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.