by John Darer CLU ChFC MSSC CeFT RSP CLTC
What is the minimum size for a structured settlement? At least two of the primary companies writing structured settlement annuities will accept a minimum of $5,000. But does it make sense to structure $5,000?
Says one industry colleague in a bar publication, "Is your client a minor? For example, $5,000 awarded to a 5-year-old child could be placed in a Blocked Account with minimal interest rates. However, a structured settlement could easily double, if not triple",
The investment and is both state and federal tax-free. Additionally, the parents have the opportunity to direct the distribution past the minor’s 18th birthday". (emphasis ours)
- The "minimal interest rates" offered on a 5 Year CDs today range from 2.39% to $2.6% at the time of posting. Source: BankRate.com
- There is a Kiddie Tax exemption on the first $2,100.00 the child earns as investment or interest income (updated 2018)
- Now do the math, assuming $5,000. What's the net return?
- Consider that in some cases today one can get a zero (or even a negative) return for a structured settlement cash flow of 5 years or less.
- Consider that one of the life insurance companies offering structured settlements for $5,000 charges a $750 qualified assignment fee AND a small case policy fee of $300.00 on a case of $5,000 premium meaning that 21% of the premium is eaten up in fees.
- Consider that another life insurance company offering structured settlements for $5,000 has a qualified assignment fee of $500.00 and a small case policy fee of $400.00 , meaning that on a case with $5,000 in premium 18% of the premium is eaten up in fees
- Note that a small case fee does not apply over certain amounts, which vary by the life insurance company that issues the structured settlement annuity contact as qualified funding asset.
- Because of such fees, a structure for $5,000 premium or other small premiums, should only be considered for very young children, where there is a significant time for deferral or the very rare case where need for spendthrift protection beyond majority age overrides return.
- The article states that Orange County Superior Court requires the purchase of an annuity where the net amount distributable exceeds $25,000 and the child is under 15 years of age. Given the information presented above this author, who is also California licensed, suggests that Orange County judges even more carefully scrutinize the proposed cash flows to be sure that the structured settlement is indeed in the best interest of the minor.
- In addition to the CDs, over certain durations and for amounts in multiples greater than $5,000, carefully selected structured settlement payment rights purchased on behalf of the minor in the secondary market, as an asset class, might make sense since such cash flows yield more than even CD rates do. Whether or not the Court would approve such purchases by a trust on behalf of a minor is another story.
In conclusion, I am not downplaying the benefits of structured settlements for minors. I'm saying let's get real with the application of structured settlements for minors.