by: Begley Law Group

by Thomas D. Begley, Jr., Esquire, CELA and Emily M. Schurr, Esquire

            If a personal injury plaintiff receives an award or a settlement but is a minor child or an incapacitated adult, there are essentially five choices for handling the funds.  These are:  (1) deposit the funds in a Trust with a corporate Trustee, (2) place the funds in a Trust with a family member Trustee, (3) leave the money in the Surrogate’s Court, (4) in the case of an incapacitated adult, leave the money with that individual’s Guardian, or (5) in the case of a minor, purchase a Structured Settlement Annuity.  Because the plaintiff is a minor child or incapacitated adult, the option to receive the funds outright is not available.  There are a number of considerations with respect to each of these options:

  • Investment Results. Most professional trustees report average investment returns in a balanced portfolio in the range of 7% per year over a 20-year period.  Investment returns on trusts managed by a family member are less certain.  Most family members do not have the same level of investment expertise as a professional trustee.  If the money is left with the Surrogate’s Court, those funds are invested in Certificates of Deposit, so typically the return is significantly less than a well-managed portfolio by a professional trustee.  If the funds are managed by a Guardian, then the investment results may be uncertain depending on the investment expertise of the Guardian.  Typically, the Guardians are parents or other family members who are not professional money managers.  Investment returns on a Structured Settlement Annuity will depend on the interest rate environment at the time the Structure is purchased.
  • Inflation Protection. For many personal injury victims, the recovery is a very significant asset.  There should always be a discussion of how long the client wants the recovery to last.  If the recovery is significant and the client wants the money to last a long period of time, inflation is a factor that must be considered.  Where there is a corporate trustee, investments can be tailored to increase with inflation.  The same is true of a well-managed trust with a family trustee.  With the Surrogate, inflation protection is limited because investments tend to be with Certificates of Deposit (CD) with fixed income rates.  There may be some inflation protection as the CDs are rolled over.  With a Guardian, inflation protection is uncertain, because it depends on the investment ability of the Guardian.  Most Structured Settlements do not contain annual increases, because to do so reduces the amount of the payments in the early years.  Most Structured Settlements do not offer protection against inflation.
  • A big consideration is a bond.  Normally in these situations, a bond is required unless waived by the court.  A court almost always waives a bond if there is a trust managed by a professional trustee.  If there is a trust managed by a family trustee, courts almost always require the trustee to post a bond.  Many individuals trying to serve as trustee do not qualify financially for a bond.  If the money is left with the Surrogate’s office, no bond is required.  If the money is managed by the personal injury plaintiff’s Guardian, a bond will almost always be required.  Again, individuals do not always qualify financially to purchase a bond.  A Structured Settlement Annuity eliminates the requirement for a bond.
  • Misappropriation by a professional trustee managing a trust is virtually negligible. The likelihood of misappropriation by a trust managed with a family member as trustee rises considerably.  Family member trustees tend to view the settlement as the family bank account and distributions are often made for the benefit of the family as a whole rather than the minor or incapacitated person who was the plaintiff of the lawsuit and the recipient of the funds.  There is virtually no risk of misappropriation if the funds are left with the Surrogate’s Court.  If the funds are managed by a Guardian, there is a higher risk of misappropriation.  A Structured Settlement Annuity minimizes the risk of misappropriation.
  • Court Approval. Do distributions require court approval?  Generally, distributions from a trust administered by a professional trustee do not require court approval.  When a trust is managed by a family member, distributions do not usually require court approval.  This is where mismanagement and misappropriation often come in.  When the money is managed by the Surrogate’s Court distributions do require court approval, which is both time-consuming and expensive.  Where the personal injury recovery is managed by a Guardian, the distributions do require court approval, which again is expensive and time-consuming.  The Structured Settlement Annuity could defer payments until the minor reaches majority, so court approval of distributions would not be required; however, there would be no access to funds during that period of time.
  • Public Benefits. A trust with a corporate or family trustee would protect public benefits, if designed as a Self-Settled Special Needs Trust (SSSNT).  Funds held in the Surrogate’s office are available and, therefore, would not protect public benefits.  The same is true of funds held by a Guardian.  Funds in a Structured Settlement Annuity would be unavailable until the payment date, but public benefits could be protected if payments are then made into an SSSNT and if the Annuity has a commutation rider.