Detailed Answer
When someone settles a legal claim and the payee is a minor, Virginia law and court practice require special steps to protect the child’s money. You can put settlement funds into an annuity (a structured payment stream paid by an insurance company) so the child receives regular payments over time instead of a lump sum. Below is a clear, step-by-step explanation of how that generally works in Virginia, the common options, and the key legal and practical issues you must consider.
1. Who must approve the settlement?
If the injured person is a minor, a Virginia circuit court usually must approve the settlement or the method the parties propose to hold and disburse the money. The court’s goal is to protect the minor’s best interests. For rules on civil actions and court procedures generally, see the Virginia Code on civil remedies: Va. Code Title 8.01. For guardianship and conservatorship processes that may apply when money must be managed for a minor, see: Va. Code Title 64.2 (Guardians and Conservators).
2. Common legal vehicles to hold settlement funds for a child
- Structured settlement annuity: The defendant/insurer purchases an annuity from a licensed insurance company that pays the child periodic tax-advantaged payments (often for life or for a set term).
- Guardianship or conservatorship account: A court appoints a guardian/conservator who places funds in an account and manages distributions under court supervision.
- UTMA/Minor’s custodial account: If Virginia law allows a custodial transfer, an adult manages property until the child reaches the age set by statute. (Check whether UTMA-style transfers are used instead of a court-ordered guardianship in your case.)
- Blocked account or trust: The court may order funds placed in a blocked bank account or trust with distribution rules the court approves.
3. Why choose an annuity (structured settlement)?
Key advantages of a properly structured annuity:
- Predictable periodic income for the child.
- Potential federal tax advantages on personal injury settlement payments (federal tax rules may exclude certain recovery amounts; consult tax counsel or accountant).
- Protection from immediate dissipation of funds and from creditors in many circumstances.
4. How the annuity setup usually proceeds
- Negotiate settlement terms. The parties agree that part or all of the settlement will be structured as periodic payments. The defendant/insurer commonly agrees to purchase an annuity from an insurance company to fund those payments.
- Draft the proposed payment schedule. Work with the insurer/annuity broker and counsel to choose timing, amounts, inflation adjustments, and contingencies (e.g., survivor benefits should the child die).
- File the settlement with the court and request approval. The parties submit the settlement agreement, the annuity contract (or commitment from the insurer), and a proposed order asking the court to approve the settlement and any required appointment (guardian, blocked account, or trust). The court reviews to ensure the arrangement serves the child’s best interests.
- Court signs the order. The order may specifically direct the insurer to buy the annuity, appoint a guardian/conservator, approve the trust terms, or direct how funds are held and disbursed.
- Insurer issues the annuity contract. Once issued, the annuity pays according to the approved schedule. The court’s order and the annuity contract together control administration of payments to the child.
5. Practical considerations and documentation
- Use an insurance company licensed to do annuity business in Virginia. The Virginia Bureau of Insurance and State Corporation Commission maintains licensing oversight: Virginia Bureau of Insurance and State Corporation Commission.
- Ask for the annuity prospectus, the insurance company’s financial ratings (e.g., AM Best), and sample contract language showing payment schedule, death benefits, and transferability.
- Decide whether payments should begin immediately or be deferred, whether payments escalate for inflation, and whether there should be lump-sum disbursements at certain milestone ages (e.g., age 18, 25, 30).
- Consider who will receive and manage payments if the child cannot (e.g., through guardianship or court-approved custodian) and whether the court will retain ongoing review authority.
- If the insured/annuity is to be irrevocable and nonassignable, know that many courts prefer these protections to prevent diversion or misuse of funds.
6. Taxes
Federal tax treatment of personal-injury settlements and structured payments can be complex. Some personal-injury recoveries for physical injury or physical sickness are excluded from income under federal law. That is federal tax law (Internal Revenue Code) and not Virginia-specific, so consult a tax advisor about any tax consequences on periodic payments or interest earned inside an annuity.
7. When a court-appointed guardian or conservator may be required
If a court declines to approve a direct annuity assignment to the child, or if the settlement includes a lump sum to be held for the child, the court often appoints a guardian or conservator under Virginia guardianship statutes to manage funds until the child reaches the age of majority. Read more about guardianship law here: Va. Code Title 64.2.
8. Sample hypothetical (illustrative only)
Hypothetical: A 10-year-old child receives a $300,000 settlement for an injury. The parties agree that $240,000 will purchase an annuity that pays $10,000 a year starting immediately and $60,000 will be used for current medical bills and a small blocked account for emergencies. The parties submit the annuity contract and proposed payment schedule to the circuit court. The court approves the plan, orders purchase of the annuity from a licensed insurer, and appoints the child’s parent as guardian with court authority to approve minor disbursements remaining in the blocked account. After the annuity issues, the child receives $10,000 annually according to the insurer’s payment schedule.
9. Common pitfalls to avoid
- Failing to get court approval for settlements involving minors. An unapproved settlement may be set aside.
- Using an annuity issuer without verifying licensing and financial strength.
- Not clarifying who controls any lump-sum payments, or how distributions will work at ages of majority.
- Ignoring tax consequences—consult a tax advisor before finalizing the structure.
10. Next practical steps
- Talk with the defense insurer or payer and request a proposal for a structured settlement annuity.
- Talk with a Virginia lawyer experienced in settlements for minors (a probate/guardianship or personal-injury attorney) to prepare the settlement paperwork and proposed court order.
- Ask the court clerk which forms or procedures your circuit court requires for minor settlement approval and guardianship filings.
- Check the insurer’s licensing at the Virginia State Corporation Commission and request financial ratings for the annuity issuer.
Resources
- Virginia Code (civil procedure and statutes): Virginia Code.
- Virginia guardianship statutes: Va. Code Title 64.2.
- Virginia insurance oversight and company licensing: Virginia Bureau of Insurance and State Corporation Commission.
Disclaimer: This article is educational only and does not provide legal advice. It does not create an attorney-client relationship. Laws change and every case is different. For advice specific to your situation, consult a licensed Virginia attorney experienced in minors’ settlements, structured settlements, or guardianship matters.
Helpful Hints
- Begin the settlement planning early so the court can approve the structure before funds move.
- Ask the insurer for a written commitment to buy the annuity and sample contract language to include with your court filing.
- Confirm whether your local circuit court requires a specific form or hearing for approval of minor settlements.
- Consider milestone lump sums in the annuity (e.g., at age 18, 25) so the child has access to funds for education or major expenses.
- Verify the annuity company’s ratings (AM Best, Moody’s, S&P) and licensing status in Virginia before you finalize the contract.
- Ask whether the annuity payments are transferable or assignable; many structured settlements are nonassignable to protect the child’s future payments.
- Keep court orders, annuity contracts, and all settlement documents in a secure file and provide copies to the guardian and the insurer.