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If you’re a parent, you’ve already noticed how easily kids get hurt. As a father and a settlement planner, I have seen childhood injuries run the gamut. Bumps and bruises are one thing, but while working on more than a thousand cases involving children under age 10, I have also heard about swallowed magnets, tipped bookshelves at daycare, defective strollers, cribs and highchairs, dog bites, and more. When a kid gets hurt in one of these rare situations involving someone else’s negligence, it often makes sense to file a lawsuit to obtain compensation for medical bills, pain and suffering and more.

Then, good news! A settlement is coming to cover the expenses related to the unexpected injury. It’s much needed money — until you realize it will belong to your child as soon as he or she turns 18. Will your child be mature enough to be a smart planner and benefit from the settlement smartly and for as long as possible? How many 18-year-olds can successfully handle large sums of cash?

As a parent looking ahead to settlement for your minor child, you do have the option to make decisions regarding the future of the money. That’s where a settlement planner comes in.

It can be difficult to figure out when to give the child access to the money. When I consult with parents about when they’d like their children to have full access to their recovery, age 27 is the average answer. Why? It’s the age that best combines need (we all remember being broke at 27, right?) with maturity (few things teach maturity better than working for a few years and learning the hard way how difficult it can be to earn and save money).

Here are some different financial options parents may consider:

Blocked Accounts/Simple Guardianships: In terms of minors’ statutes, all states have a simple guardianship or blocked account. If you are recovering or settling for more than $10,000, under the Uniform Transfers to Minors Act (UTMA) most states require court approval for any planned or unplanned disbursements. Unfortunately, there are two main issues with blocked accounts:

  • The interest growth is paltry, as it’s kept in a savings account at a local bank.
  • The entirety of the account will go to your child at age 18.

If the recovery is only $12,000, that may not create a huge issue. But if the recovery is $50,000 or $100,000, your 18-year-old will suddenly have full access to that money. In all my years of practice, parents who make that decision are few and far between.

529 Savings Plans: Many parents consider investing in 529 savings plans if they are gearing up financially for college. Some courts will allow these plans, but make sure that you are receiving unbiased advice on this option and that you fully understand the associated fees and costs.

One benefit of a 529 plan is that the money grows tax-deferred and if the child attends college, the distributions are exempt from capital gains or earned income (if the money is used for qualifying expenses such as tuition, books, supplies, and equipment).

Because the plan must be set up in the child’s name, you still run the risk of them blowing through it at age 18. Even the most responsible 18-year-old can make mistakes when given full responsibility for a large amount of assets.

So, is there any way to have more control over when a child receives settlement proceeds?

Another good option is a trust. With as little as $50,000, you can find a pooled trust that will safeguard the assets in minority and act as the steward of the assets at 18 and beyond. No trust can legally prevent your child from gaining the legal right to the assets, but it’s a large enough hurdle that it will more than likely accomplish what you are trying to do: grow the money safely, ensure its proper use, and protect your child from making expensive mistakes with the money.

These types of financial decisions carry lifelong implications, so it’s important to work with a seasoned adviser before the money arrives. Together, you can come up with the best plan, so your child will get the most out of the settlement.

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