When designing a settlement plan for a minor the options should be examined in light of what the judge and ad litem are likely to approve. Some judges have strong preferences, prejudices, and opinions and the ad litems they appoint are often familiar with the judge's predilections and can provide guidance in this regard. Attorneys should guard against prejudice against the "meddling" of an ad litem. The ad litem has a duty to the court and the good ones take that duty very seriously. They need to be entrusted with all of the relevant information as soon as possible and have the entire situation explained to them. Many attorneys get into trouble because they attempt to run through the ad litem instead of using the ad litem to strengthen the settlement plan.
There are a limited number of acceptable options when it comes to investing the money on behalf of a minor. The money can be placed into: the registry of the court, structured settlement annuities, a court-ordered trust arrangement, or a formal guardianship. Each of these has advantages and disadvantages.
Registry of the Court: Court registries take various forms in different jurisdictions. Many jurisdictions have the money deposited into a blocked bank account for the benefit of the minor. Money can only be removed by order of the court. This approach has the advantages of simplicity and security and is the most popular option for small settlements. The disadvantages of using the court registry are fairly obvious. First, the minor may remove all of the funds on the day he or she achieves the age of majority. This may be the worst possible time in the lifespan of a typical person to entrust him or her with a large sum of money. Young people have consistently been found to be at much higher risk of dissipation due to lack of financial experience, education and discipline. Horror stories abound of money from a court registry ruining people's lives as they often use it for immediate gratification or to prolong their adolescence instead of locking in long term security. Second, the rate of return on these accounts is usually miniscule. Third, the only way the parents can access the funds for the children is by petitioning the court for access. This may result in delays and legal expenses. Fourth, the interest is all taxable to the minor. If there is a substantial amount of interest, this can result in the necessity of completing a tax return and may possibly trigger the "kiddie tax" where the unearned income of the minor is taxed at the highest marginal rate of the parent.
Structured Settlement Annuities: Structured settlement annuities overcome many of the disadvantages of the court registry. Payments from a structure may be scheduled to last past the age of majority to provide college funding or even lifetime income. The implicit interest earned on them is tax-free. Structures regularly yield more than taxable accounts. In cases involving a catastrophic injury and a need for lifetime payments, a rated age may substantially improve the payout. The biggest drawback to a structured settlement is that the money becomes illiquid. If the funds are needed before they are scheduled to be paid out, they cannot be withdrawn. Of course, this disadvantage can actually save people from dissipating their recovery.
Court-ordered Trusts: Many states have enabled judges to order money into trusts within parameters that vary from state to state. For example, in some states a judge can order settlement money into a trust held with a corporate trustee that can provide the flexibility that is often necessary to support the needs of an injured child while avoiding the cumbersome reporting requirements of a guardianship. This can be very advantageous in instances where the parents or guardians will need some access to the funds to care for the medical, educational, or other needs of the child. Additionally, there is a growing number of corporate trustees with very reasonable fee schedules that are now catering to the unique needs of personal injury victims.
Guardianships: Establishing a formal guardianship of the estate of a minor can be expensive and cumbersome. However, when the current spending needs of the minor will be met from the settlement funds, it may be necessary. The guardian will be free to choose an appropriate portfolio from a wide selection of investment options (subject to court approval) and may also receive funds from a qualified structured settlement. Certain transactions must receive prior approval from the court and annual reporting is required in most states.