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Settlement Planning for Kids, Part II: A Settlement Planner’s Recommendation

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In Part I of this post, I introduced the issue of allowing a child full access to their settlement recovery.  While it is the child’s money, there are few teenagers and young adults who can manage large sums of money.  Spreading out access to the money over time can be in the child’s best interest.

Acknowledging the fact that each situation should be taken on a case-by-case basis, I think this is a good approach:

  1. Small amount at 18: The child should be able to access a small amount of money ($10,000-$15,000, or less than 10%).  This provides the child with the opportunity to begin making financial decisions and mistakes, without risking the entirety of their money.
  2. More access at ages 23-24: We then recommend using a trust or a periodic payment obligation.  By slowly bleeding in the assets, the child will have to learn how to budget and by age 24, will likely have expenses that have accrued from college and young adult life.
  3. Balance after age 25: Lastly, we reserve the balance of the recovery for after age 26.  We typically recommend a 10-year plan from ages 25-35, in either monthly or quarterly payments that will roll to a traditional investment account.  This allows the child time to learn about investing, learn what to look for in a trustworthy advisor, and allows you, as the parent, to stay involved in what your child is doing.  Rarely is there a huge chunk of money available in one’s life, and generally speaking, most people are better able to make good decisions with smaller sums.

One last noteworthy comment on this matter is the concept of distributions to the activities that you want to reinforce.  We recently finalized a trust that provided a $5,000 payment to the child at 18, and no further disbursements until those assets totaled $10,000, giving the child an incentive to invest wisely and grow the money.  We’ll see how he does, but overall, I liked the idea.

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Related Posts:

Settlement Planning for Kids, Part I: What are My Options?

What is the Toughest Settlement to Plan For?

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