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John Bair
John Bair
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What is the Toughest Settlement to Plan For?

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teenmoney

Oftentimes, anything involving teenagers feels like a challenge for parents; planning a teen’s settlement is no exception.  Lawsuits involving teens can be terrifying for parents—the injury of the child, compounded by the stress of litigation, can be a lot to handle.  Settlement can be equally stressful—not many teens are equipped to handle such large sums of money responsibly, and parents often struggle with how to protect their teen from the risks associated with settlement.

Having consulted on thousands of settlements in the last 15 years, I’ve come to learn that cases involving teens age 13-17 with settlements in the range of $100,000-$500,000 can pose the greatest challenge to the lawyers representing them, the courts and the child’s parents.  This post is intended to act as a quick reference guide for those involved in settlements for teens:

What are the parents’ biggest concerns?

For the parents of a teen who is about to receive a settlement, there can be countless concerns.  In order of priority, these seem to be the biggest

  1. That the child doesn’t come in to all of the money at age 18
  2. That the money is safeguarded, and achieves a modest return
  3. That the money will be made available in amounts that increase in tandem with the child’s maturity (e.g. less money at age 20, more at 25, then more at 30)
  4. That the parent will have the ability to positively influence the child’s decision making and financial risk taking, even into their 20s

Some wrongly assume that the parents want carte blanche over the money; in my experience, that is rarely the case.  The parents simply want to protect their teen.  What don’t the parents want?

  • They don’t want to come between the child and the child’s money
  • They don’t want the access to large sums of money to discourage the child from pursuing college or employment
  • They don’t want the child to spend all of the money frivolously
  • They don’t want the money to be stretched out for the child’s entire life, unless the child is severely disabled
  • They want to strike a balance between receiving the money when it’s needed and preventing the child from accessing all of it until the child is mature enough to handle it

Why is this age group the toughest?

Why are teens the toughest age group when it comes to settlement?  Simply put: time.  Young children have time on their side—time to allow the money to grow in a trust or a traditional structure, bridging the benefits among protection, fiduciary oversight and accruing enough earnings to offset any professional fees.

Teens, on the other hand, don’t have that luxury.  In most cases, the teen will want a payout from age 18, to perhaps age 25 or 30, giving the assets a horizon of 10 years or less for growth.  With guaranteed yield in the 2% range, it can be difficult to achieve much in such a short duration.

How should a teen’s settlement be approached?

We think the following is a very prudent approach to these types of cases:

Step 1- Treasuries: Monies to be paid out within 8 years should be backed by US treasuries, so there isn’t a 4% commission associated with them.  (For the sake of example, just yesterday we had a competitor offering a $100k lump sum to a teen on the 18th  birthday in 2016, and it was costing the teen $103,000.  In my opinion, that’s just not right.)

Step 2- Annuities: Depending on the total amount of money, an equity-based annuity (tax-free) that gives the teen some upside in the market but also controls the distribution rigidly as irrevocable payments, provides the teen with financial support across the next decade.  Average performance of the indexes should achieve a 5-6% return on this strategy.

Step 3- Trusts: Evaluate the benefits of a pooled trust or an individual trust, so that the periodic payments pay to the teen, a trustee or family member as trustee, so that the teen can’t sell it to companies like J.G. Wentworth for pennies on the dollar.

Any settlement involving a teen requires a careful, detailed approach.  The example above combines the benefits of a few different industries.  Leveraging the services of a wealth manager, a trust company, and an expert in periodic payments gives the family the best opportunity to properly preserve the settlement in a way that will best benefit the teen in the long-term.

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