A structured settlement for a minor is a court-approved arrangement that converts a child’s personal injury recovery into a schedule of future payments funded by an annuity, rather than a single check handed to a parent. The money sits beyond the reach of day-to-day household spending, grows tax-free inside the annuity when the claim involves physical injury, and begins paying out at or near the age of majority on a schedule the court signs off on at the start. Because the terms lock in once the judge approves them, the choices made during setup — payment length, inflation protection, insurer selection, coordination with government benefits — shape what the child actually receives decades later.
Why a Judge Has to Sign Off
Children cannot enter binding contracts, so a parent cannot accept a settlement offer on a child’s behalf without court involvement. Every state requires judicial approval of a minor’s injury settlement, and the court appoints a guardian ad litem — usually an attorney — whose only role is to evaluate whether the deal is fair to the child. The guardian investigates the facts, reviews the proposed terms, and reports a recommendation to the judge. This independent review exists because a parent’s interests and a child’s interests do not always line up; a parent eager to end a lawsuit may accept less than the case is worth.
The judge applies a “best interest” standard, weighing whether the amount adequately covers medical costs, future care, lost earning potential, and pain and suffering. Attorney fees are also scrutinized, and judges can reduce fees they consider unreasonable regardless of what the retainer says. Once the settlement is approved, state law typically restricts the funds until the court authorizes a withdrawal or the child reaches adulthood, which prevents guardians from tapping the money for household bills or expenses unrelated to the child’s needs.
What Goes Into the Settlement Agreement
The settlement agreement is the foundational document, and the details matter because the terms cannot be adjusted later. The agreement needs the child’s full legal name, date of birth, and Social Security number, identifies the legal guardians, and names specific beneficiaries who would receive any remaining guaranteed payments if the child dies before the payment term ends.
A central piece is the qualified assignment, which transfers the defendant insurer’s obligation to pay to a third-party assignment company. Federal tax law governs this transfer and imposes strict conditions: the periodic payments must be fixed in amount and timing, and the recipient cannot speed them up, delay them, or change the dollar amounts.1Office of the Law Revision Counsel. 26 U.S. Code 130 – Certain Personal Injury Liability Assignments That inflexibility is the price of the tax treatment. The assignment company then buys an annuity from a life insurance company to fund the payments. Because the annuity may not pay its final installment for 40 or 50 years, the financial strength of the issuer is not a minor detail.
The Setup Decisions That Define the Payout
Guaranteed Period Versus Life-Contingent Payments
Guaranteed-period payments continue for the full term no matter what. If the child dies before the term ends, the remaining payments pass to the named beneficiaries or the estate. Life-contingent payments stop the moment the recipient dies and nothing passes to anyone. For a child with a serious ongoing medical condition, a settlement built entirely on life-contingent payments could leave nothing behind if the child’s health worsens. Most planners recommend at least a guaranteed period for the core income stream and reserve life-contingent components for supplemental income intended to last a lifetime.
Inflation Protection
A standard annuity pays a flat amount that never changes. Over 20 or 30 years, inflation quietly erodes the real value of every payment. A cost-of-living rider raises payments by a fixed percentage each year, typically 2 to 3 percent, or indexes increases to the Consumer Price Index. The rider has to be built in when the settlement is created; it cannot be added later. Because the insurer spreads the same present value across escalating payments, early payments start lower than they would under a flat schedule. For a child who will not need the money for years, the lower start in exchange for larger later payments is usually the better trade.
When the Money Starts Flowing
Courts rarely authorize distributions while a child is still a minor, except in catastrophic injury cases where funds are needed for immediate medical care. Most schedules begin at or near the age of majority — 18 in most states, 19 in a few. A common structure pairs milestone lump sums with recurring income: a lump at 18 for college, another at 21 or 25 for a home down payment or business startup, and monthly payments covering ongoing living costs into middle age or beyond.
Protecting SSI and Medicaid Eligibility
This is where families most often make a costly mistake. If the child receives Supplemental Security Income or Medicaid, a structured settlement can wipe out those benefits. SSI counts most financial assets toward a strict resource limit of $2,000 for an individual, and a single payment landing in the child’s bank account can push them over.2Social Security Administration. Supplemental Security Income SSI Resources
The standard fix is a first-party special needs trust. Federal Medicaid law allows a trust funded with a disabled individual’s own assets, including settlement proceeds, to be excluded from benefit eligibility if the beneficiary is under 65 and the trust includes a Medicaid payback provision. That provision means whatever remains in the trust at the beneficiary’s death reimburses the state for Medicaid costs before anything passes to heirs. A parent, grandparent, legal guardian, or court can establish the trust.3Office of the Law Revision Counsel. 42 U.S. Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
Timing is critical. The trust needs to be in place before settlement funds are distributed. If payments land in a regular account first, even briefly, the child may face a gap in benefits that takes months to restore. Any family whose child receives means-tested benefits should raise this with counsel before the settlement is finalized.
Blocked Accounts for Smaller Settlements
Not every case justifies the cost and complexity of an annuity. For smaller amounts, courts often order the funds deposited into a blocked account — a restricted bank or credit union account the child cannot access and the guardian can only touch with a court order. The money earns whatever interest the institution pays and is released in full at majority. Blocked accounts are simpler, with no insurance company or assignment company involved. The downside is that interest earned in the account is taxable, unlike the growth inside a structured settlement annuity, and savings rates may lag inflation over a decade or more. For very small settlements, annuity fees and administrative overhead may do more damage than inflation would.
Guarding Against Insurer Insolvency
Because the annuity has to make payments for decades, the issuer’s financial strength is a real risk. Every state maintains a life and health insurance guaranty association that steps in if the insurer fails, with standard coverage for annuity benefits of $250,000 in present value per payee. Anything above that threshold sits outside the safety net, and recovery would depend on filing a claim with the liquidator of the insolvent company.
Settlement planners often recommend splitting large settlements across annuities from two or more highly rated insurers for this reason. A $400,000 annuity funded through one company leaves $150,000 unprotected. Two $200,000 annuities from separate insurers keep the full amount within the guaranty system. Choosing issuers with strong financial-strength ratings from firms like A.M. Best reduces the odds of ever needing the guaranty system, and split funding is inexpensive protection against the worst case.
Tax Treatment
Structured settlement payments for physical injuries or physical sickness are excluded from gross income under federal tax law, whether paid as a lump sum or on a schedule, and the exclusion covers the full payment including investment growth inside the annuity.4Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness The IRS has confirmed the exclusion extends to periodic payments under qualified assignments.5Internal Revenue Service. Tax Implications of Settlements and Judgments The exclusion does not reach punitive damages or settlements for non-physical claims like employment discrimination or defamation, and emotional distress damages fall outside unless they reimburse actual medical expenses. Most children’s injury settlements qualify in full because the underlying claim is physical harm.
What Happens When the Child Turns 18
Control of the settlement transfers automatically at the age of majority. No further court approval is needed, and the young adult gains full discretion over how the money is spent. There is no mechanism for parents or former guardians to retain oversight once the recipient is legally an adult. The annuity issuer will require a government-issued ID and current mailing address before releasing payments, and most agreements let the recipient update beneficiary designations by written notice to the assignment company or annuity issuer. The specific rules depend on the original agreement, so the new adult should request a copy and review it.
Guardians should also prepare the child for what comes next: factoring companies. These firms offer lump-sum cash in exchange for future structured settlement payments and advertise aggressively to young recipients. The math is almost always poor for the seller — an offer of $30,000 today for $60,000 in future payments is not unusual. Federal law discourages these deals through a 40 percent excise tax on the factoring discount, which the buyer pays but passes through in the form of a lower offer. The tax does not apply if a state court issues a qualified order finding that the transfer serves the payee’s best interest and violates no federal or state law.6Office of the Law Revision Counsel. 26 U.S. Code 5891 – Structured Settlement Factoring Transactions Forty-nine states have enacted structured settlement protection acts that require court approval before any sale, and judges must independently find that selling serves the recipient’s best interest, weighing the welfare of any dependents. These laws exist because young adults freshly out from under court oversight are the most frequent targets. Explaining the mechanics well before the 18th birthday gives the child the best chance of keeping the settlement intact.