I’m constantly amazed at how easily our little ones get banged up. I’m not talking about small bumps and bruises, either; over the past 15 years, I’ve worked on 1,000+ cases involving children under the age of 10 whose injuries have run the gamut from swallowed magnets, to tipped-over bookshelves at daycare, to defective strollers, cribs and high chairs, to dog bites. Finding a good lawyer is obvious—but what should you do with your child’s settlement?
That’s where settlement planners come in.
Due to solid laws in most states, there are many options for the settlement. Assuming your child isn’t permanently disabled, a well-managed $100K settlement for a child can mean $500K at age 40, or a million dollar retirement fund at age 55. The caveat? The money has to be there when they need it and are mature enough to handle it.
It can be difficult to figure out when to give the child access to the money. On one hand, it is their settlement recovery, but on the other hand, how many 18-year-olds can successfully handle large sums of cash?
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 you might want to 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, most states under the Uniform Transfers to Minors Act (UTMA) 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 collapse to your child at age 18.
If the recovery is only $12,000, that may not create a huge issue. On the other hand, if the recovery is $50,000 or $100,000, do you want your 18-year-old to have full access to the 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, but there is a caveat you’ll want to consider—make sure that you are receiving unbiased advice on this option, and that you fully understand the associated fees and costs.
One of the main benefits of doing 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 used for qualifying expenses such as tuition, books, supplies, and equipment). Because the plan must be set up in the child’s name, you do run the risk of them blowing through it at age 18; that being said, most kids whose parents teach them to be financially responsible aren’t really at risk. Still, even the most responsible 18-year-old can make serious mistakes when given full responsibility for a large amount of assets.
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 settlement advisor. In Part II of this post, I’ll provide more information about what I generally recommend as the best type of approach in these situations.
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A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).