Safeguarding the Financial Future of an Injured Child
By John Bisnar and Patrick Farber
When a child is receiving compensation due to a serious injury or loss of a family member, providing security, growth and wise disbursement of the funds is critical to the child’s financial wellbeing. It is also the duty of the child’s attorney and guardian ad litem.
Reflecting the gravity of the decision, judges in personal injury cases are often leery of approving large, all-cash, upfront settlements for an injured minor. This is especially true when a family must use the settlement proceeds to pay for long-term medical care and living expenses for the child. Judges know all too well that the funds can be squandered to the point that the family can no longer properly care for the injured child. That is why judges often insist that the parties create a structured settlement where guaranteed payments are made for the benefit of the child over the course of a specified period or throughout the child’s life.
Structured Settlement Alternative
Tax-free structured settlements for injured parties have been around since Congress authorized their federal income tax incentives through The Periodic Payment Settlement Act of 1982 (Public Law 97-473). Most attorneys are familiar with how they work: instead of receiving a settlement in one payout, personal injury plaintiffs can choose to receive periodic payments or a combination of cash and structured payments arranged through a structured settlement insurance annuity. These annuities are guaranteed to provide a steady stream of secure, tax-free income for the injured party.
When a structured settlement is agreed upon as the right approach, decisions about how and when to receive the money need to be made prior to a signing a settlement agreement.
For seriously injured minors, the stakes are high. Take the example of Christopher who suffered a severe brain injury in a traffic collision while in junior high school. His mental capability is that of an eight year old without short-term memory. Christopher needs 24/7/365 care for the rest of his life. His parents’ greatest concern was how Christopher would be taken care of when they were no longer capable.
Christopher’s settlement paid enough up front to cover his medical bills, litigation costs, attorney’s fees and medical modifications to his parents’ home. Money was set aside to cover all known needs up to his 18th birthday with additional money added to an “unexpected fund” for unforeseen expenses. The balance of his net recover, a seven-figure sum, was placed into a structured settlement.
With the help of a “life care planner,” Christopher’s legal team mapped out his lifetime needs. The structured settlement was then designed to make guaranteed payments according to Christopher’s anticipated living and medical requirements assuring that he would be taken care of even after his parents were no longer capable of doing so.
Structured Settlement Safeguards
The sense of security of knowing that funds will be there to provide reliable, guaranteed, tax-free income for the injured child during childhood and beyond is often the greatest benefit of a structured settlement.
For parents who may not have the investment experience necessary to suddenly manage a large sum of money, a structured settlement is often the best option as it was for seven year old Roberto. Roberto's life threatening injuries resulted in dozens of surgeries and over $1 million in medical expenses. Shortly before trial in his product defect case, a multi-million dollar settlement was reached.
Roberto’s parents wanted professional assistance with handling Roberto’s settlement proceeds to assure that the money would meet all of Roberto’s future needs and not be squandered. With the help of financial advisors and a life care planner, Roberto’s legal team negotiated a structured settlement in which Roberto would receive payments timed to cover his future medical expenses, college expenses, purchasing a home, retirement funds and everything in between.
The structured settlement agreement relieved Robert’s parents of having to manage a large sum of money. It guaranteed his future was secure with a tax-free flow of funds while earning guaranteed, tax-free income.
Poor investments decisions, unscrupulous friends, financially unsophisticated recipients and market fluctuations can wipe out a lump sum settlement. A structured settlement avoids all these scenarios. And, since financial decisions are made during the settlement process and the money is paid out over time, it is less likely to fall prey to requests for loans, gifts, shaky investments, personal whims and impulse purchases.
Setting Aside Money for College
Structured settlements often include a college expense component. As part of the structure, parents can provide that their child receive periodic payments during their child’s college years and/or a lump sum payout when the child turns 18. The payments can be timed for tuition payments, books and fees as well as monthly living expenses.
When Roberto reaches 18, his structure provides him with enough to buy a car. When he reaches his anticipated college age, the structure provides all the tuition and college expense money that could be foreseen. His structure also provides monthly payments to cover his living expenses through college. These structured payments are designed to be “comfortable”, more than” adequate” yet less than “luxurious.”
An alternative would be for parents to defer most of the structured settlement payments until after their child’s expected graduation. By not having to declare the settlement funds during the child’s college years, the chances for financial aid go up. In addition, the settlement funds are allowed to grow within the structure for a longer period leading to more available cash. Payments taken after graduation can then be used to pay off student loans or be put toward future education needs.
How does a structured settlement option compare to 529 college savings plans? Both structures and 529 plans offer tax-free growth of the principal. However, structured settlement payments are guaranteed while 529 funds are not—they are at the mercy of market fluctuations. Structured settlement funds can be used for any type of education-related funding (at the parents’ or child’s discretion) including cost for trade school or post-graduate work—schooling that does not fall under the 529 umbrella.
With a structured settlement, payouts can be deferred until specific needs arise or until the child is more mature and able to handle the money. Payments can be delayed to age 20, 25, 30 or even 65. Without deferring the payout, the child receives all of their money at age 18 with no strings attached. The structured settlement’s flexibility provides safeguards so the child does not receive the funds all at once on their 18th birthday along with the associated temptations.
Parents and the legal team of an injured child have many critical decisions to make. By establishing a well thought out structured settlement, they will give the child more protection from miss-management, market fluctuations and the impulses of youth. They can provide that the settlements funds are available when they are most needed and growing in value until then.
Patrick C. Farber is a structured settlements broker in California. He specializes in settling medical malpractice, physical injury, non-physical injury, product liability, workers' compensation, mass torts, punitive damages, employment and elder abuse cases with structured settlements in court hearings, arbitrations and settlement conferences. 800-734-3910, patrick.farber (at) patrickfarber.com