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Minors Personal Injury Settlements | The Negative Consequences of CDs v Structured Settlements

by John Darer CLU ChFC MSSC CeFT RSP CLTC

If You Bank It, Don't Bank on Maximum Financial Aid

Structured Settlements Avoid the Kiddie Tax and Can Be Designed To Minimize Impact on Financial Aid

Parents or guardians of minors who are receiving a settlement in a personal injury or wrongful death case, should give due consideration to how the settlement will impact the ability to receive financial aid for college.  Having a lot of money in a bank account, or in a CD coming due at age 18, could reduce or even eliminate, the possibility of receiving needs based financial aid.  Depending on the school, the FAFSA (for federal student aid) or CSS Profile (for institution based student financial aid) may be used. Each of those forms requires a significant percentage of student assets be used in its calculation of Expected Family Contributions (EFCs). At present that is 20% for FAFSA and 25% for the CSS Profile. 

Structured Settlement Annuity is Not an Asset of Minor

A structured settlement annuity is not an asset of the minor. The structured settlement annuity is owned by a qualified assignment company in most cases. In rare instances it is owned by the Defendant or Defendant's insurer. The minor only has the right to receive payments when due and would have had no control over the establishment of the structured settlement. Furthermore, in accordance with terms of the structured settlement and in compliance with tax code, the periodic payments cannot be accelerated, deferred, increased, or decreased, by the recipient of such payments".  [ see IRC 130(c)(2)(B)]

Tax Difference Between Structured Settlements and CDs

Damages for personal injury or wrongful death are income tax free,  subject to IRC 104(a)(2). While a lump sum from a personal injury or wrongful death settlement would be income tax free,  the interest on a lump sum invested in bank CDs would be taxable. So, for example if you have a 12 year old son and invest in a 5 year CD with Barclay's at time of posting, it would earn 2.75%. The 2.75% would effectively be reduced by the tax on the interest, which could be inflated if there is a kiddie tax  [ See below and  Taxable Equivalent Yield | What is The Value of the Structured Settlement Tax Benefit?]

Kiddie Tax Impact

The interest on a minor's personal injury or wrongful death settlement could be taxed at a high rates if invested in CDs, or other taxable investments. The Kiddie Tax is applied to the amount of the child's unearned income that exceeds $2,100. The Kiddie Tax rate is parent's or parents' marginal tax rate (the highest rate applied to the last dollar earned) which could be as high as 37%, for the 2018 tax year.  [ see IRS Topic 553  Tax on a Child's Investment and Other Unearned Income (Kiddie Tax)]

Notwithstanding the above, there is substantial risk of wasteful dissipation in making a large sum of cash available at age 18. A teenager or young adult could benefit from wealth orientation by speaking to a Certified Financial Transitionist.

Read more about Structured Settlements for Minors

 

Structured Settlement Comparisons: Giving Up The Hartford "Woobie"

The Spencer v Hartford class action settlement apparently isn't the only legacy of The Hartford in today's structured settlements industry.

You see, as of October 15, 2010 , 5 or more structured settlement companies cannot let go of information from a series of brochures comparing structured settlements to alternative investments, produced and provided by The Hartford to its appointed brokers beginning  in 1999.

In a comparison of structured settlements vs bank certificates of deposit (CDs), the following companies STILL state, incorrectly, that the limit of Federal Deposit Insurance Protection ("FDIC Insurance") is $100,000

• Structured Annuities, Inc. of Fort Worth Texas
• Dakota Structured Settlements of Rapid City, South Dakota
• The James Street Group of  Austin, Texas
• Legacy Settlements Group of Kansas City, Missouri
• Millennium Settlement Consulting  of Tallahassee Florida

This isn't the first time I have mentioned this.  (See "Two Texas Structured Settlement Companies Can't Get Lard Unless They Boil The Hog" December 6, 2009) What is it about what is now misinformation that leaves these folks attached to it like a thumb sucking infant holding on to their "woobie"?

On October 1, 2008, FDIC limits were temporarily increased to $250,000 in response to an increasing threat of bank runs during the ensuing financial crisis. The temporary period for the lmit increase was due to expire December 31, 2009,  but was later extended through 2013. Subsequently, the increase was made PERMANENT on July 21, 2010 with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act  (" Dodd-Frank"; see HR 4173 §335)

Two other firms (as of October 15, 2010). use modified versions of the information originally supplied by The Hartford. While both firms correctly state that the limit is $250,000 per account owner,  Huver Associates incorrectly states that the limit expires December 31, 2013. That was made moot by "Dodd-Frank". 

The Hartford ceased writing structured settlements in 2008. In early 2009 this author made Hartford aware that some of its agents were using the 1999 brochures or modified version thereof (with the above cited and other inaccuracies) and some were attributing it to The Hartford. Our then contact at The Hartford indicated that The Hartford was going to do something about it.

In the opinion of the structurd settlement watchdog, it is not right for the structured settlement experts and settlement planners to (a) use misleading and/or inaccurate information in comparisons, to promote structured settlements;  and  (2) to blame it on what is figuratively "the empty chair", The Hartford. 

The structured settlement watchdog would like to help by bringing in an expert with 27 years of "expertise" on how to part with your "woobie"

Sage advice on giving up your Hartford "woobie"?

 

Federal Deposit Insurance FAQ

The Video below explains how the Federal Deposit Insurnce Corporation works.  Source: FDIC