Investment of a Child's Money
In California, the courts which approve the settlement of a minor are given limited alternatives for directing the investment of the money for the minor. Probate Code section 3611 sets out those choices, when there is not a court-supervised guardianship of the minor's estate.
Two main factors influence the court's evaluation of proposals for the investment of a child's funds from a settlement:
First is the ongoing legal responsibility of the child's parents to support her until she is 18 or otherwise emancipated. A child does not have the obligation to support herself, unless there are no alternatives available. "Support" doesn't necessarily include the payment of ongoing medical expenses or other life-care expenses which will be incurred for the child because of the injuries she suffered in the accident. "Support" might not include the purchase of a special item or care that are beyond the parents' ability to afford.
Second, is that the money is the child's, and it might be very unfair and inequitable to unreasonably delay the child's ability to use that money. No matter how well intended suggesting the delay of the child's receipt of large sums of money, too long a wait is not fair - and can be seen as being an insult - to the child. Using an annuity to provide for the payment of college (or other post-high school transition to adulthood) expenses over four or five years seems appropriate in all cases. Sprinkling little bits of money between years 18 and 30 and then giving a very large sum on the child's 35th birthday seems penurious and unfair.
The main investment alternatives used by courts in California are:
Pay to Responsible Person/Parent on behalf of Claimant
If the child's total estate will be less than $5,000 in value, including the net recovery, the Court is authorized to release the money directly to a parent on behalf of the child, without the need for any spending restrictions or reporting but with the understanding that it is the child's money and should be delivered to him on his 18th birthday. If the Court authorizes this method of disposition of the money, the parent receiving the money will need to sign a Receipt, which is filed with the Court.
Deposit in "Blocked" Bank Account
Usually, if the net recovery is less than $10,000 and the child is older than 12, or if there is a probable need for funds for the child before his 18th birthday, the court will direct the parent to deposit the money in an FDIC insured deposit account which is "blocked". The "blocked" feature means that nothing can be released from the account, unless authorized by separate court order, until the child's 18th birthday at which time the money can be paid to the child.
If the money will be deposited in a "blocked" account, make sure to ask the Court for permission to deposit the money in a CD or other higher earning account, not a "passbook savings" account, to maximize the yield on the account. No maturity date can extend past the 18th birthday, and there must not be a loss of interest at the time the child has the right to receive the money.
Periodic Future Payments Funded Through Annuity Contract
If the net recovery is large, or will be held for a long time, then the Court will want the Petitioner to make arrangements for a schedule of periodic payments to be paid to the minor over time. This is the only mechanism which is authorized by the Probate Code which will spread out the receipt of money past the child 18th birthday. Therefore, this is advantageous for college fund planning.
There is a tax-related benefit of these periodic payments. If the settlement is "structured" properly, and documented properly, it will meet the requirements of the Federal Tax Code and, because the child is receiving the periodic payments in the settlement, rather than a fund of money which he has invested which earns interest, all of the money will be as payment for a personal injury and not be included in the recipients taxable income. (It is "income tax free" under current Regulations.)
These periodic payments are usually made by an Assignment company which assumes the duty to make the payments. The approved portion of the net recovery is paid to the Assignment company with direction that it use the money to purchase a single premium annuity contract from the approved annuity contract company - usually a life insurance company.
Special Needs Trust
If a child is receiving, or is eligible for, "needs-based" public benefits (Medi-Cal or SSI) and will need those benefits in the future, you need to evaluate the need to protect the net proceeds recovered for the child while protecting the child's eligibility for the public benefits. One of the "non-countable" assets which a benefit recipient can have is a properly established and administered "Special Needs Trust". The payments cannot pay for the usual living expenses or the medical expenses of the child/beneficiary (since this is what Medi-Cal and SSI pay). However, if the trust can pay ONLY for the special needs of the beneficiary, including the payment for medical equipment and care not provided by Medi-Cal, or the purchase of items which are also not included in the items of property which must be counted to determine eligibility, then this trust is not counted in determining eligibility.
There are very specific requirements for such a trust which must be based upon a written "declaration of trust", and established by the Court. The Court will require that any existing liens, including to the government programs, are paid before the trust is funded. The Trust must make those government programs the primary residuary beneficiaries of the Trust.
The trustee can receive a lump sum either entirely to be invested and managed, or along with an annuity to take advantage of the favorable tax treatment.
If this is a necessary investment and management vehicle, arrangements must be made for the preparation of the declaration of trust and the establishment of trust administration. The Petition must include the Declaration, and all government liens must be resolved as of the current obligations. You must serve notice of the hearing and a copy of the petition on all of the benefit programs the child is a beneficiary of.
See more practical legal advice.