Detailed answer
If you have settlement money that will be held for a child, one common way to provide ongoing, reliable payments is to fund an annuity or set up a structured payment arrangement that an insurance company will pay over time. Under New York practice, you generally must protect a minor’s money through a court-approved arrangement or an appropriate custodial/trust vehicle before the money is distributed. The main options are (1) a court-approved structured settlement (annuity), (2) a custodial account under the transfer-to-minor statutes, or (3) a trust (including a special needs trust if the child has a disability). Which path you choose affects control, flexibility, tax treatment, and when the child can access funds.
How a structured settlement (annuity) for a child usually works
- Settlement terms are negotiated between the parties (claimant/parent/guardian and defendant/insurer). The parties may agree that part or all of the settlement will be paid as periodic payments instead of a single lump sum.
- An insurance company (or annuity issuer) issues an annuity contract to fund the periodic payments. The defendant or its insurer buys that annuity so the payments are guaranteed by the issuer.
- Because a minor is involved, a judge often must review and approve the settlement and the manner in which payments will be handled to ensure the child’s best interests are protected.
- Once the court approves, the annuity is purchased and payments begin according to the agreed schedule (e.g., monthly, annually, or as lump-sum deferred payments at certain ages).
Where New York court involvement typically appears
When a settlement involves a minor, New York courts routinely require some form of approval or protective device so the child’s money cannot be spent improperly. That review commonly happens through the court that has jurisdiction over the settlement—often the court where the lawsuit was pending or Surrogate’s Court if a guardian/conservator application is made. See New York consolidated laws for statutes governing probate/guardian matters and civil procedure for guidance on court procedures and the protections available: New York Surrogate’s Court Procedure Act (SCPA) and general civil procedure resources: New York Civil Practice Law & Rules (CPLR).
Common paths to protect settlement funds for a child in New York
- Court-approved structured settlement (annuity)
- Best where you want regular payments (for living costs, education, medical care) and predictability.
- Court approval protects the child and locks in a payment schedule. The annuity issuer assumes the payment obligation.
- Custodial account under transfer-to-minor rules (UTMA/UGMA)
- Money is managed by a custodian for the child until the statutory termination age. This gives the custodian some flexibility, but the child will ultimately receive control at the statutory age.
- Trust
- A trust (testamentary, inter vivos, or a court-ordered settlement trust) gives the most control over timing, purpose, and conditions for distributions. A trustee manages the funds for the child. Special needs trusts protect public benefits if the child is disabled.
Typical step-by-step process
- Talk to an attorney who handles minors’ settlements and structured settlements in New York. They will explain options, prepare the settlement documents, and handle the court approval so the judge can evaluate what is in the child’s best interest.
- Decide on payment structure. Determine whether periodic payments (annuity) or a trust or custodial account best meets the child’s needs. Consider timing of major expenses (education, care), whether you need inflation protection, and whether you need to preserve eligibility for government benefits.
- Get annuity quotes and choose an issuer. Structured settlement brokers or the defendant’s insurer will arrange the annuity purchase. Compare financial strength of issuers and payment options. The annuity contract should be part of the settlement paperwork submitted to the court.
- Prepare and submit documentation for court approval. Your lawyer will file the settlement papers asking the court to approve the compromise and the funding method (annuity, trust, or custodial). The court will review to ensure fairness and protection of the child’s interests.
- Court issues an order approving the settlement and the funding plan. After approval, the insurer purchases the annuity, or funds are placed in the trust/custodial account per the court order.
- Ongoing management. If a trustee or custodian is named, they must manage the funds prudently and report as required by the court or by statute. Periodic payments from the annuity will be sent per the contract.
Tax and benefit considerations
- Payments that stem from personal injury settlements are often not taxable under federal law (IRC §104) for damages for physical injury or sickness; other parts of a settlement (punitive damages, interest) may be taxable. Consult a tax advisor about federal tax issues.
- If the child receives means-tested public benefits (Medicaid, SSI), large lump sums can affect eligibility. A properly drafted special needs trust or structured payments may preserve benefit eligibility.
Key documents you will likely see or need
- Settlement agreement and release
- Proposed court order approving the settlement and describing funding method
- Annuity contract or confirmation from the insurer
- Trust agreement or custodial account paperwork
Helpful Hints
- Hire counsel experienced with minors’ settlements and structured settlements in New York early. They will coordinate court papers, annuity paperwork, and protective devices so the settlement avoids later challenges.
- Ask the insurer for several annuity illustrations showing different payment schedules (monthly, annually, deferred lump sums at certain ages) so you can compare options and affordability.
- Consider a trust if you need control over distributions at particular life stages (college, medical care, home purchase) or to protect public benefits.
- If the child has a disability, discuss a special needs trust to preserve eligibility for Medicaid/SSI. Misrouting funds to a minor’s direct control can jeopardize benefits.
- Request the annuity issuer’s financial ratings and confirm the contract language on survivor benefits, assignability, and change provisions.
- Keep clear records and copies of court orders, annuity contracts, and trust/custodial account statements. Courts and benefit agencies may ask for them.
- Expect the court to require a hearing or review period before approving settlement for a minor; plan time into your settlement timeline for that step.
- Understand who can petition the court to modify a settlement or payment schedule later—typically a parent, guardian, or interested party with standing under New York practice.
Where to look for official New York rules
For statutes and court procedure that commonly affect how a minor’s settlement is handled in New York, review the consolidated laws and rules that govern probate, guardianship, and civil procedure. Useful state law resources include:
- Surrogate’s Court Procedure Act (SCPA) — for Surrogate’s Court procedures and protections.
- Civil Practice Law & Rules (CPLR) — for civil procedure and practices when a settlement arises from litigation.
- Estates, Powers & Trusts Law (EPTL) — for laws governing trusts and transfers to minors under state law.
Final practical advice
Setting up an annuity for a child’s settlement funds is a multi-step process involving negotiation, selecting a funding vehicle, and usually court approval in New York to protect the child. Work with an attorney (and, when appropriate, a tax advisor and a structured settlement professional) to select the right vehicle, draft the settlement and court papers, and close the transaction properly so the child’s money is secure and used as intended.
Disclaimer
This article is for general informational purposes only and is not legal advice. It does not create an attorney-client relationship. Laws change and facts matter; consult a New York-licensed attorney about your specific situation before taking action.