Detailed Answer — How to protect and structure settlement money for a child under South Dakota law
If a child receives settlement money (for example, a personal injury recovery), the money cannot simply be spent by a parent or custodian without following South Dakota procedures that protect the child’s financial interests. The usual, safest path is to have the court supervise the settlement and to use a structured annuity or other court‑approved investment so the child has money over time while a fiduciary manages the funds.
1. Who must approve the settlement and why
Because a minor cannot legally manage a settlement on their own, South Dakota courts typically must approve settlements for minors and, if needed, appoint a guardian (or conservator) for the child’s estate. Court approval protects the child from losing all benefits, from imprudent spending by others, and ensures funds are used for the child’s care. For the governing provisions on guardianship and probate procedure, see South Dakota’s codified laws on probate and guardianship (Title 29A) at the South Dakota Legislature website: https://sdlegislature.gov/Statutes/Codified_Laws/.
2. Typical court process (hypothetical example)
Example facts: a 10‑year‑old child receives a $200,000 settlement for injuries. Typical steps a lawyer or guardian will take:
- File a petition with the appropriate circuit court asking the judge to approve the settlement on behalf of the minor and to appoint (or confirm) a guardian of the minor’s estate if one is needed.
- Provide the court with the settlement agreement, evidence of the child’s injury/needs, a proposed disposition (for example, buy an annuity that pays monthly for the child’s benefit), and any required notices to interested parties (parents, other guardians, government benefit agencies).
- The court reviews the proposal and often holds a hearing. The judge may require additional protections—e.g., a bond for the guardian, designated restricted accounts, or approval of the annuity contract to be purchased.
- If the judge approves, the court signs an order authorizing the payment and specifying how the funds must be handled (for example: purchase of an annuity contract from an identified insurer, creation of a blocked bank account, or placement under a conservatorship with required accounting).
3. Options for structuring the funds
Common methods courts approve for protecting a child’s settlement funds:
- Structured annuity (periodic payments) — The defendant or insurer purchases an annuity from a licensed life insurance company that will pay the child (or the child’s guardian) periodic sums over time. Annuities can be set to begin immediately or at a future date and can provide level payments, increasing payments, or payments timed around expected needs (e.g., college).
- Blocked account or restricted bank account — A bank account that requires court permission for withdrawals above a set limit. Suitable for smaller settlements or when partial flexibility is desired.
- Guardianship/conservatorship with court‑supervised investments — A guardian or conservator manages the funds but must follow fiduciary duties, post bonds if required, and file periodic accountings with the court.
- Combination approach — Part of the recovery purchased as an annuity for long‑term needs and part placed in a restricted account for near‑term expenses.
4. How to set up a structured annuity for the child
Steps commonly taken when a court approves an annuity purchase:
- Ask the insurer for a written annuity quote showing the payment schedule, guaranteed rate, name of the annuity owner (often the defendant’s insurer or a qualified assignee), and the annuity issuer’s financial rating.
- Provide the court with the annuity contract (or a sample) and ask the court to authorize purchase of that specific contract in the court order. The court may require that the annuity be issued by a licensed, financially stable company.
- Execute any required court documents or stipulations (for example, naming the child as the payee or naming the guardian/estate as the payee subject to court supervision).
- After court approval, the defendant (or insurer) pays the purchase price to the annuity issuer; the insurer issues the annuity and the scheduled payments begin as ordered.
5. Who manages the money and what oversight exists
A guardian of the minor’s estate or a court‑appointed conservator manages non‑annuitized assets. South Dakota law requires fiduciaries to act in the best interests of the minor, keep records, and file accountings with the court. If the court ordered an annuity, the issuing company is responsible for making payments according to the contract; the guardian will typically supervise use of those payments for the child’s care.
6. Tax and benefit considerations
Many personal‑injury settlements that compensate for physical injuries are excluded from gross income under federal tax law, but other components (punitive damages, interest, non‑physical losses) may have different tax consequences. Structured settlement payments derived from a qualifying negotiated settlement have special federal rules (including the use of a qualified assignment in many cases). Because taxes and public benefit coordination can be complex, consult a qualified tax advisor and an attorney before finalizing the plan.
7. Common pitfalls to avoid
- Purchasing an annuity from an unlicensed or poorly rated insurer. The annuity issuer should be licensed to do business in South Dakota and financially stable.
- Failing to get explicit court approval. If the settlement involves a minor, failing to obtain court approval can cause later legal problems and may require reopening the settlement.
- Not accounting for future needs such as education, medical care, or loss of government benefits (e.g., Medicaid or SSI). Large lump sums can unintentionally disqualify a child from means‑tested benefits unless structured correctly.
- Choosing an irrevocable schedule too inflexible for realistic future needs. Some annuities permit survivor options or limited flexibility; discuss options before purchase.
8. Helpful South Dakota resources and statutes
Start your research or case filing with these official resources:
- South Dakota Codified Laws (probate, guardianship, and related statutes): https://sdlegislature.gov/Statutes/Codified_Laws/
- South Dakota court information and local circuit court contacts (to find the appropriate court and local procedures): https://ujs.sd.gov/
Takeaway: The safest path for settlement funds for a child in South Dakota is a court‑approved plan that either purchases a structured annuity from a licensed insurer or places funds under court supervision (guardian/conservator or blocked account). That protects the child, keeps funds available for long‑term needs, and satisfies court fiduciary standards.
Important disclaimer: This article provides general information about South Dakota procedures. It is not legal advice. Laws change and every situation is unique. Before you sign settlement documents, buy an annuity, or petition a court, consult a licensed South Dakota attorney who handles minor settlements, guardianship matters, and structured settlement transactions.
Helpful Hints — Practical checklist when planning an annuity for a child
- Engage an attorney experienced with minor settlements and guardianship in South Dakota early—court forms and notices vary by county.
- Obtain at least two written annuity quotes from financially rated insurers licensed in South Dakota. Compare payment schedules, guarantees, and optional riders (cost of living adjustment, survivor benefits).
- Ask the court to approve the specific annuity contract in the settlement order so payments cannot be diverted later without court permission.
- Ask the court whether a bond is required for the guardian and who will pay for it; factor bond cost into your plan.
- Consider splitting funds—some liquid dollars for current needs and an annuity for long‑term security.
- Coordinate with a tax advisor if settlement proceeds include non‑physical injury components or interest. Don’t assume all settlement money is tax‑free without confirmation.
- If the child receives means‑tested benefits, check with a benefits specialist or attorney before accepting a lump sum—structuring may be necessary to preserve eligibility.
- Keep meticulous records, bank statements, and receipts; a guardian must provide accountings to the court on a schedule set by the judge.
- Before signing annuity contracts, read provisions about surrender rights, transferability, and what happens if the annuity issuer becomes insolvent.