The Mechanics of a Child’s Structured Settlement

The steps

A child’s structured settlement typically requires the following actions:

  • The victim’s attorney and the insurance adjuster or defense lawyer will enter into an agreement to resolve the claim or lawsuit by using a structured settlement.
  • The confirmation of the settlement will be in writing and at a minimum will specifically recite that (a) the parties will enter into a structured settlement agreement and will sign a qualified assignment agreement if required, and (b) the insurance company will issue one check solely to the annuity issuer and a second check to the victim and his attorney. 
  • The child’s parents, their attorney and a structured settlement specialist will work together to determine the schedule of payments to the child and, if necessary, how much of the net settlement should be deposited into a blocked bank account. The insurance company can be represented by their own broker in this process but the settlement will not be conditioned upon the purchase of an annuity from the insurance company unless the cost and all of the terms of the insurer’s annuity are better than the cost and terms of the best annuity available on the market. 
  • The child’s parents and the dog owner’s insurance company will sign a properly worded structured settlement agreement (not a standard release) and properly worded qualified assignment.
  • The settlement will be conditioned upon court approval or, in Maryland, satisfying the statutory requirements for minors’ settlements. The child, at least one parent and their attorney will appear before a judge for confirmation of the settlement, variously referred to as court approval, court confirmation, guardianship, friendly suit, or minor’s compromise proceeding, depending on the jurisdiction. In some instances, the process may not require an actual physical visit to court, while in others the parents will have to not only attend the court hearing but also meet with a court-appointed “guardian” who will review the settlement and recommend it to the judge. The court is primarily concerned with the disposition of the child’s funds, not the amount of the settlement itself. 


The order and settlement documents must be worded properly in order to make the annuity payments entirely tax-free. 

The future, periodic payments in a structured settlement usually are funded by an annuity. The defendant or, more commonly, his liability insurer purchase the annuity that provides the payment stream. Arrangements for the purchase should be made by the victim’s lawyer and a plaintiff-oriented broker, also called a “structured settlement specialist.” However, nobody on the victim’s side can come into possession of the annuity purchase money; to do so would destroy the tax-free status of the future payments. 

If the liability insurer is willing to retain on its books the obligation to make the stream of payments to the victim, the liability insurer will buy and retain the annuity contract, and directly pay the victim. In such cases, a qualified assignment usually is unnecessary. More commonly, the liability insurer does not wish to retain the obligation to make the payments, so it will purchase the annuity specified by the victim naming the victim as the beneficiary, and then assign both the obligation and the annuity to a third party called an assignment company. The latter will make the payments to the victim.The contract of assignment must contain certain provisions in order to be a “qualified assignment” under the Internal Revenue Code.

The victim’s intelligent choice under this arrangement is to require the life insurer to guarantee that the assignment company will make all payments in a timely manner. Therefore the documents usually required for a structured settlement are the court’s final order, the annuity proposal, the structured settlement agreement, the qualified assignment, and the guarantee. 

The victim and/or his parents need to permanently store the annuity contract, settlement agreement, qualified assignment, and the court documents pertaining to the approval of the settlement. All of this documentation must be available to the victim until 7 years after the final payment is made because the IRS could conduct an audit until then. In the event of an audit, all of the foregoing documents would be required to prove the tax-free nature of the annuity payments.