How to Set Up an Annuity for Settlement Funds Held for Your Child

Short answer: You can use a structured settlement annuity to convert a child’s settlement proceeds into future guaranteed periodic payments. For a minor in Texas, this typically requires negotiating annuity terms as part of the settlement and getting the court’s approval or otherwise following the court’s directions for protecting minors’ funds. A structured settlement can preserve tax benefits, provide long-term security, and avoid a large lump-sum under a single parent’s control. This is general information only and is not legal advice.

Detailed answer — how this works and how to set it up

This section explains the main legal and practical steps you will likely follow in Texas when you want to place settlement funds for a child into an annuity (a structured settlement). It assumes the settlement arises from a personal-injury or similar claim where the child is the injured party or beneficiary.

1. Decide whether a structured settlement is the right option

Common ways to protect settlement funds for a minor include:

• Structured settlement annuity (periodic payments paid by an insurance company).
• Blocked or court-supervised bank account (funds deposited and restricted until specified ages or court authorization).
• Custodial account under the Uniform Transfers to Minors Act (UTMA) or similar state fiduciary arrangement.
• Guardianship/conservatorship account if a formal guardianship is required or already exists.
• Special needs or supplemental needs trust if the child receives government benefits (SSI/Medicaid).

Structured settlements are a common choice when you want long-term guaranteed payments, tax advantages for physical-injury awards, and protection from an early large payout. But they are not always best if the child needs immediate, large expenses or will receive government means-tested benefits that a direct payment would disrupt.

2. Understand who must approve or control the funds

In Texas, settlements for minors commonly require court approval or filing procedures to protect the child’s interests. The judge may require that proceeds be handled by a court-supervised method (blocked account, guardianship account, or an annuity purchased as part of the settlement). The court often needs to see the specific written settlement terms and the proposed protection plan before approving final distribution.

Because court procedures and local judges differ, you and your attorney should confirm what paperwork the court will require before finalizing settlement and buying an annuity.

3. Negotiate structured settlement language into the settlement agreement

To create a structured settlement you must put precise terms into the settlement documents. Typical elements include:

• Which payments will be periodic and which (if any) will be a lump sum.
• Start dates, frequency (monthly/quarterly/annual), and duration (life, years certain, or a hybrid).
• Guaranteed minimum number of payments (guaranteed period) and any death/survivor provisions.
• Inflation adjustments or cost-of-living increases, if any.
• Name of the annuity issuer (or the right to choose a rated life/annuity company).
• Who will be the owner of the annuity contract (often a qualified assignment or the defendant/insurer assigns payment rights to an annuity issuer).

Negotiation must include the insurer or defendant agreeing to purchase the annuity (or to make periodic payments through a qualified assignment to an insurance company). Without contractual language requiring an annuity, a defendant/insurer may instead offer a lump-sum payment, which the court might allow only into a blocked account or another protective vehicle for a minor.

4. Choose the annuity issuer carefully

Insurers differ in strength and product offerings. Ask about:

• AM Best or other independent financial strength ratings.
• Claims-paying history and reputation.
• Specific product guarantees and options (period certain, life, inflation riders, survivor benefits).
• Whether the company will name the appropriate owner and payee to satisfy the court’s protection plan for a minor.

5. Coordinate with the court and a Texas attorney

Steps often taken in Texas to get court approval and implement an annuity include:

1. File a petition or motion asking the court to approve the minor’s settlement and describing the proposed annuity or other protective arrangement.
2. Provide the court the full settlement agreement, the annuity contract or final quotes, and evidence that the annuity issuer will perform.
3. Obtain a court order approving the settlement and authorizing purchase of the annuity or deposit into the protective vehicle the court prefers.
4. Use the court order to instruct the insurer/defendant and the annuity company to complete the payment and record ownership/payee names consistent with the court’s instruction.

Because requirements and paperwork vary by county and judge, a Texas-licensed attorney familiar with local practice will make this process smoother and reduce the chance the court will demand a different protection plan after the money has already changed hands.

6. Consider tax and benefit issues

Settlements for physical personal injury or sickness often have favorable federal tax treatment and periodic payments from a structured settlement are commonly tax-free for those injury components. But other portions of a settlement (e.g., punitive damages, interest, or lost wages) may have different tax consequences. Also consider whether paying annuity income directly to the child (or custodian) will affect eligibility for means-tested public benefits (Medicaid, SSI). If the child receives or may receive benefits, you should consider using a properly drafted special needs (supplemental needs) trust or other benefit-preserving vehicle.

7. Protect future flexibility

Structured settlements are designed to be long-term. If you think needs may change, talk to your attorney about options such as including a shorter guaranteed period, survivor benefits, or periodic review clauses. If you anticipate Medicaid/SSI concerns, plan for a trust or other protective structure at the time of settlement.

8. Typical timeline and who you’ll work with

• Settlement negotiation phase — your attorney negotiates structured-payment provisions (days to months).
• Obtain annuity quotes and select issuer (usually a week or two to get firm quotes).
• File motion for court approval and schedule hearing (timing varies with the court’s calendar).
• After court order, insurer funds the annuity and the annuity issuer issues the contract (a few days to several weeks).

A simple hypothetical example

Suppose a 10-year-old child receives a $200,000 settlement for injuries. The parent and the insurer agree the child should not receive a single lump sum. The parties negotiate a structured settlement to pay:

• $18,000 per year for 10 years starting immediately (to pay early medical needs), then
• $12,000 per year from the child’s 20th birthday through age 65, with a 10-year guaranteed period, and survivor benefits to a named beneficiary.

The settlement terms are included in the release. The insurer agrees to a qualified assignment to a rated life insurer, which issues the annuity. The parties present the annuity contract and the settlement agreement to the court for approval for the minor. The judge reviews the terms, ensures they serve the child’s best interest, and signs an order approving the settlement and the annuity purchase. The annuity company then begins scheduled payments when required.

When to get professional help

Get help from professionals when:

• You are not sure what the court will require in your county.
• The child receives (or may receive) government benefits.
• You need to draft a trust or guardianship document.
• The settlement has multiple taxable components.
• You want to evaluate annuity quotes and company strength.

Suggested professionals to involve: a Texas personal-injury or family/guardianship attorney who handles minor settlements, a structured settlement consultant or broker (must work under rules and often collaborates with counsel), and a reputable annuity issuer. If benefits issues exist, a special-needs attorney is important.

Disclaimer

This article is educational only and does not provide legal advice. Laws and local court practices vary. For legal advice tailored to your situation, consult a lawyer licensed in Texas with experience in settlements for minors and structured settlements.

Helpful Hints

• Start planning early: discuss annuity options with counsel before finalizing settlement terms.
• Ask for firm annuity quotes and name the issuer in the settlement to avoid delays and mismatches with the court order.
• Consider long-term security and flexibility — choose guarantee and survivor options that match the child’s expected needs.
• If your child receives government benefits, consider a special needs trust and get benefit-expert advice before finalizing settlement.
• Check the annuity issuer’s financial strength (AM Best, S&P ratings) and insist on a reputable company.
• Keep detailed paperwork: settlement agreement, annuity contract, court order, and insurance correspondence — you may need them for future proof of payment rights.
• Understand taxes: injury awards for physical injuries are often tax-free, but portions of a settlement can be taxable. Consult a tax professional if you have questions.
• Work with a Texas attorney familiar with your local court’s approval process — rules and forms can vary by county.

If you want, I can outline the typical court filing checklist and documents you may need to submit in a Texas county court to request approval of a minor’s settlement.