Lump Sum Settlements vs. Structured Settlements:
CASH ONLY SETTLEMENTS:
1. Additional costs to claimant:
a. Parents or Guardian may need to post a bond to guarantee performance.
b. Amounts over $5,000/yr prior to age of majority in most states, require annual accounting and reporting by the Guardian.
c. Certain States may require a Trust Account or Guardian Ad Litem -necessitating additional fees, which would reduce income for claimant.
Income to minors under age 14 is subject to high rates (kiddie taxes) because they are taxed in the parents’ tax brackets. Also income of child may reduce amount of exemptions permitted by parents. Parents or Guardians must file an Income Tax return for the child.
3. Upon reaching age of majority (18) the claimant has access to all the money and runs the risk of:
a. Squandering the money.
b. If there is a failure to make payment on an indebtedness, the lump sum is subject to creditors.
c If given a lump sum of cash and even if squandered – there is still probable disqualification from student loans, grants, financial aid or governmental assistance.
4. Parents may be subjected to lawsuit by claimant if perceived that monies were improperly expended while claimant was a minor.
ADVANTAGES TO MINORS WHEN SETTLEMENT IS STRUCTURED:
1. Payments are guaranteed to be available at the designated time intervals, i.e. college funds, down payment for house, medical costs, depending on specific needs, without incurring any fees. Encourages financial planning for the future.
2. The principal amount as well as the interest earned within the structure is tax-free.
3. Money is creditor free, bankruptcy proof. Until received, provides protection against squandering.
4. The structure protects the child and assures the money is spent on their behalf. Since the payments can be postponed until age 18, it eliminates the parents concerns of “doing the right thing”.
Generally speaking, there are many compelling reasons why minor claimants should receive settlement funds in the form of a Structured Settlement. Not only do the above reasons apply, but most parents endorse the idea enthusiastically, and appreciate the opportunity to do the best they can for their injured child.
When you consider the public interest in State sponsored tuition pre-payment programs, for example, it becomes obvious that parents want money for their children used in a constructive manner. Structured Settlements give them the opportunity to do this.