The mechanics of a child's structured settlement

A child's structured settlement typically requires the following actions:

• The victim's attorney and the tortfeasor's representative (insurance adjuster or defense lawyer) must enter into an agreement to resolve the claim or litigation by using a structured settlement.
• The child's parents have to work with his attorney and a structured settlement specialist to determine the schedule of payments and, if necessary, how much of the net settlement should be deposited into a blocked bank account.
• The victim's lawyer and the tortfeasor's representative must provide special documentation of the settlement, including a structured settlement agreement (as opposed to a standard release) and possibly a qualified assignment agreement.
• The victim's attorney must prepare for and, with the child and one parent, appear before a judge for confirmation of the settlement and disposition of the net settlement funds. This hearing is referred to as court approval, court confirmation, guardianship, friendly suit, or minor's compromise proceeding.

The order must be worded properly or the agreement must be properly documented in a way that satisfies the structured settlement provisions of the Internal Revenue Code.

The payer can be the defendant or tortfeasor, if that is acceptable to the plaintiff or victim. More commonly, the defendant or tortfeasor relies on his liability insurer to settle the claim. The liability insurer then has the obligation to make a number of long-term payments to the victim. The liability insurer typically purchases an annuity to fund the stream of payments to the victim.
If the liability insurer is willing to retain on its books the obligation to make the stream of payments to the victim, the liability insurer will buy and retain the annuity contract, and directly make the payments to the victim.

If the liability insurer does not wish to retain the obligation to make the payments, however, it will buy the annuity contract and then assign both the obligation and the annuity contract to a third party called an assignment company. The latter will make the payments to the victim. The victim's intelligent choice under this arrangement is to require the life insurer to guarantee that the assignment company will make all payments in a timely manner. The contract of assignment must contain certain provisions in order to be a "qualified assignment" under the Internal Revenue Code.