Structured Settlement is the special form of compensation amount payable for any form of damage done to a party (like injury by medical negligence) by another party against whom the victim files a lawsuit. This compensation money consists of one part of the amount paid to the claimant initially and the other part of the larger amount which is paid out to that party through installments instead of paying the whole compensation as a lump sum. These installments can be variable depending on the agreement between the two parties like – a smaller annual amount for next 20 years or a larger amount per year for next 10 years etc. Moreover, the amount for initial few years could vary from the installment amount for years thereafter.
Structured Settlement is the gift of the legal arrangement of 1983 which makes it an innovation in the financial and insurance arena. Interestingly, the claimant can also choose to have no payments for few initial years and fixed annual installments thereafter to fund retirement needs.
The origin of structured settlements can be traced back to 1960s when a drug sold widely to treat morning sickness in pregnant ladies, called Thalidomide, caused huge deformities and birth defects in small children. This was for the first time in Canada that structured settlement was used to pay off the claims of a large number of the affected people since the drug manufacturer did not have enough money to settle all claims at once in lump sum amount.
Structured Settlements for Minors
In more recent times, structured settlements are becoming popular with the settlement of claims for children who have suffered in injury in an accident or due to medical negligence. For instance, suppose that a child suffers a severe personal injury loss in an accident and its entitled to the total compensation amount of $2, 00,000. Although he could receive the amount as a lump-sum, but there would be rare chances that the funds would reach the beneficiary in whole! Thus, to prevent such a waste of resources, structured settlements offer a safer alternative. The child may choose to be given $10,000 yearly for first 5 years and $15,000 for remaining 10 years in installments over next 15 years of his life. Structured settlements not only assure that the child receives the benefits of the settlement amount but also receives a continuous flow of non-taxable income to support his needs. There are no costs for the child and the settlements are backed by top-rated highly credible insurance companies.
Structured Settlements are a viable option for people due to various reasons, of which a few could be the involvement of a child in the personal injury loss, if the total amount of loss is greater than $10,000 and the same could be carried forward to the succeeding years in installments, need for a stable and guaranteed constant flow of income for some time etc.
Benefits of Structured Settlement for Minors
There are certain salient features as well as benefits of structured settlement as a compensatory mechanism for minors. They are as follows:
- According to the NSSTA (National Structured Settlement Trade Association), in order to make this form of compensatory mechanism more widespread, the Congress (United States) in 1982 laid down specific tax rules called the Periodic Payment Settlement Tax Act and the Section 104 (a) (2) of Internal Revenue Code stated that the whole amount of structured settlement would be tax-free to the claimant. Thus whole of the compensation or the settlement amount is tax-free. Moreover, the interest payable on the settlement amount is also tax-free.
- The structured settlement for minors is usually designed to meet the future health related and medical needs of the child. So a structured settlement for a minor may provide a monthly annuity payment apart from provisions for lump-sum payments at specific life events such as when he becomes an adult or when he graduates. Also, terms and conditions for spending the money may be designed in such a way that restrict any parent or guardian of the child from using money for any purpose other than those mentioned in the agreement.
- There is no risk of default generally, or this method of settlement would not have been agreed upon by the court if the defendant were not credible in the first place. Besides, structured settlement is a source of a guaranteed income stream with the freedom to spend the money as per the child’s needs.
- Many a time, the minor involved in the case is too young to handle the money himself. In that case a parent or guardian is assigned the right to spend the money judiciously. Structured settlements with properly laid down terms and conditions not only ensure that the money is spent judiciously and sensibly for the child’s needs but also keeps extravagant and acquisitive relatives at bay. For someone who has never handled too large an amount at once, chances are that the parent/ guardian might lose that lump-sum money due to his poor financial knowledge and bad financial choices. This risk can be easily avoided by agreeing upon settlement of minor’s claims through structured settlement wherein payment in annual installments ensures a continuous flow of income and avoids any risk of windfall losses due to a bad financial choice.
- Last but not the least the law of many states requires that the compensation money to a minor should be kept in a specially restricted bank account from which no money can be withdrawn without prior court authorization. Thus, the parent or the guardian must write an application asking for the court’s approval of the expenditure he or she wishes to make for the child. This is done to protect the minor’s money till the minor becomes an adult in the eyes of the law and to save him from any wasteful expenditure by the parent or guardian.
Thus, structured settlement for minors has the potential to benefit the child not only till he grows up but many years thereafter to meet his educational, medical and other needs. Thus a fair and fine contact can attend to the financial and economic needs of the minor and can provide a guaranteed and risk-free income stream to the child.