Detailed Answer
When settlement money is paid on behalf of a child in Alabama, parents or guardians most often must get the court’s permission before spending or investing those funds. An annuity (often called a structured settlement when used to pay a claimant over time) is a common way to preserve the money, provide a predictable income stream, and protect the child’s long-term financial interests. Below is a step‑by‑step explanation of how the process typically works in Alabama, what the court will want to see, and practical decisions you’ll face.
1) Why the court usually gets involved
Alabama probate courts supervise many settlements for minors. The court’s role is to make sure the settlement is fair, that fees and expenses are reasonable, and that the child’s funds are protected. See the Code of Alabama (Code of Alabama, Title 26 covers guardianship/wards and related probate matters) for the statutes governing probate and guardianship matters: Code of Alabama Table of Contents (1975). You or your attorney will usually file a petition in the appropriate probate court seeking approval of the settlement and of the proposed disposition of funds (for example, purchase of an annuity).
2) Typical options the court will consider
- Immediate cash or a blocked/bonded account. The court may order funds placed in a blocked account (sometimes called a custodial or restricted account) that requires court approval for withdrawals.
- An annuity (structured settlement). The court can approve using settlement proceeds to buy an annuity contract from a licensed life insurance company to provide future periodic payments to the child.
- A combination (part in an annuity, part in a blocked account).
3) How to propose an annuity for court approval
- Prepare the settlement documents. Submit a copy of the settlement agreement showing total proceeds, attorneys’ fees, liens, and net amount available to the child.
- Decide annuity terms. Determine whether you need an immediate annuity (payments start right away) or a deferred annuity (payments begin later); fixed or variable payment schedule; frequency (monthly, quarterly, annual); guaranteed period; and beneficiary designations for contingencies. Provide the court with a clear description of the annuity contract being proposed and the insurer that will issue it.
- Obtain insurer documentation. Provide the annuity contract or a firm quote and a statement from the issuing company showing they will issue the annuity and proof the company is licensed to sell annuities in Alabama. Check insurer licensing at the Alabama Department of Insurance: https://www.aldoi.gov/.
- Provide financial analysis. Many probate judges require an actuarial or present‑value analysis comparing a lump sum to the structured payments so the judge can determine whether the arrangement is in the child’s best interest.
- File a petition and supporting exhibits. File with the probate court a petition to approve the settlement and the annuity purchase, attaching the settlement agreement, proposed order, annuity documentation, insurer certification, proposed payment schedule, and any receipts for liens or medical bills that will be paid.
- Appointment of a guardian ad litem (GAL) or attorney for the minor. The court often appoints a GAL or counsel to represent the child’s interests. Expect the GAL to review the annuity proposal and make a recommendation to the judge.
- Hearing and court order. The court will schedule a hearing. If the judge approves, the court will enter an order authorizing the payment and, if needed, directing the insurer to issue the annuity in accordance with the approved terms.
- Implementation. Once the order is entered, settlement funds are paid per the court order—often the defendant or insurer will pay the annuity issuer directly or will fund a qualified assignment if applicable. The annuity company then issues the contract and begins payments as ordered.
4) Practical items and legal issues to watch
- Who will control the funds until the child reaches majority? The probate order should say whether a parent/guardian, trustee, or other fiduciary will receive payments and under what conditions.
- Beneficiary and contingency planning. The order should specify what happens to unpaid future payments if the child dies.
- Tax considerations. Certain personal injury settlement payments that compensate for physical injury or sickness are tax‑free under federal law (see IRS guidance). Non‑personal injury portions (punitive damages, interest, emotional distress not tied to physical injury) often have tax consequences. Consult a tax professional to understand how payments will be treated for federal income tax purposes; see general IRS guidance on settlement taxability at irs.gov.
- Assignment and transfer rules. If someone later wants to sell or assign the future payments, many states require court approval for transfers of structured settlement payment rights. Even if you don’t plan a sale, make sure the court’s order limits harmful future transfers.
- Fees and commissions. Structured settlement brokers or consultants sometimes charge fees. Courts will inquire into the reasonableness of fees taken from a minor’s recovery.
5) Choosing the annuity and provider
Choose an insurer licensed in Alabama and experienced with structured settlements. Ask for written confirmation that the insurer will issue the specified contract and a detailed schedule of payments. You can search company licensing and consumer complaint history at the Alabama Department of Insurance: https://www.aldoi.gov/.
6) Timeline and costs
The timeline varies. Simple approvals can take a few weeks; complex cases (multiple liens, large settlements, need for a guardian ad litem) may take several months. Costs typically include court filing fees, guardian ad litem or counsel fees for the minor, actuarial or financial analyses (if required), and any broker or consultant fees—these costs should be disclosed to the court and approved before payment from the child’s recovery.
7) When to get a lawyer
If the settlement is significant, involves liens (medical providers, Medicaid, subrogation), or you are unsure what arrangement best protects the child, hire an attorney experienced in representing minors in settlement and probate proceedings. An attorney can prepare the petition, assemble the required exhibits, coordinate with the annuity issuer, and argue the arrangement is in the child’s best interest.
Short checklist to bring to the probate court
- Signed settlement agreement
- Detailed counsel fee and expense breakdown
- Annuity contract or firm quote from a licensed insurer
- Financial/actuarial comparison (lump sum vs structured payments)
- Proposed court order and payment schedule
- Proof of insurer licensing (Alabama Department of Insurance verification)
Disclaimer: This article is for general informational purposes only and is not legal advice. It does not create an attorney‑client relationship. Laws and court procedures change. To act on any matter described here, consult a licensed Alabama attorney familiar with minor settlements and probate practice.
Helpful Hints
- Start early: court schedules, guardian ad litem appointments, and insurer underwriting can add weeks or months.
- Use an Alabama‑licensed insurer and verify their license at the Alabama Department of Insurance (aldoi.gov).
- Ask the court whether a guardian ad litem or minor’s counsel is required—don’t assume it isn’t.
- Get everything in writing: quotes, insurer confirmations, and proposed payment schedules should be exhibits in your petition.
- Make sure the court order clearly states who will receive payments on the child’s behalf and how future disputes are handled.
- Understand tax basics: structured payments from personal injury settlements are often tax‑free, but portions that represent other items may not be. Ask a tax advisor.
- Keep records: save copies of the court order, annuity contract, insurer confirmations, and all correspondence.
- If you are offered a lump sum and are unsure, ask the judge to allow a neutral financial expert or CPA to prepare a present‑value analysis for the court’s review.