Blocked Account or Structured Settlement for Minors: what is better??

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After settling a lawsuit involving a child, parents often expect relief — but another decision appears immediately. The judge or lawyer asks a deceptively simple question:

“Where do you want the money to go — a blocked account or a structured settlement?”

This moment is the financial fork in the road. Both options exist to protect the child until adulthood, but what they do with the money over the next 5, 10, or 15 years is dramatically different.

This article compares both options in plain English so you can make a confident, informed choice. It also links to authoritative sources like Wikipedia, Investopedia, Cornell Law and IRS/SSA guidance for accuracy.

Before we begin, you can also read our related article: Can Parents Sell a Minor’s Structured Settlement?

1. The Fork in the Road: Why This Decision Matters

You have two primary choices for protecting a minor’s settlement:

• Option A: A Blocked Account held at a bank.
• Option B: A Structured Settlement funded by an annuity.

Both are court-approved methods, but they behave very differently. One is safe but financially stagnant. The other is safe, potentially growing, and can control how the child receives funds at different ages.

And yes — your decision directly affects whether the settlement grows, keeps up with inflation, or loses value over time.

2. Option A: The Blocked Account (The Safe but Stagnant Choice)

A blocked account is typically a basic savings account or certificate of deposit (CD) placed under a court order. No withdrawals are allowed until the child turns 18 — unless a judge signs off.

✔ How It Works

The account is opened at a bank (Chase, Bank of America, Wells Fargo, etc.) and “blocked” per the court’s minor settlement rules. Many states call this a “Minor’s Compromise Blocked Account.”

✔ Advantages

• FDIC insured: Up to $250,000 per depositor (See FDIC rules).
• Simple: Easy to set up quickly.
• Low or no fees: Banks typically do not charge setup costs.

✘ Disadvantages

1. Very Low Interest Rates
Most blocked accounts earn 0.1% to 1% APY. Meanwhile inflation averages 2–3% annually. Money sitting here loses real value every year.

2. Taxable Interest (“Kiddie Tax”)
Interest earned in the account is taxable as the minor’s income. Under IRS rules on the Kiddie Tax, interest above a threshold (~$2,500) is taxed at the parents’ highest marginal rate — a surprise for many families.

3. The “Age 18 Cliff”
On the child’s 18th birthday, the bank must release 100% of the funds. No safeguards. No restrictions. No second chances.

This can be risky for teens who aren’t ready to manage large sums.

3. Option B: The Structured Settlement (Growth + Control)

A structured settlement is an annuity purchased from a life insurance company (often A or A+ rated). Payments are scheduled for specific future dates you design — for example:

• A college payment at 18
• Another at 19, 20, 21
• Housing or health payments at 25

Structured settlements are legally recognized under the U.S. tax code and explained well on Wikipedia and Investopedia.

✔ Advantages

1. Tax-Free Growth
Per IRS Section 104(a)(2), if the case involves physical injury, all interest/growth is 100% tax-free.

2. Higher Returns Than Bank Accounts
Structured settlement annuities often outperform basic savings accounts. Growth rates vary, but historically exceed bank APY.

3. Age-Based Control
You can prevent an impulsive 18-year-old from receiving a giant lump sum. Payments can be staggered or delayed.

✘ Disadvantages

1. Inflexible
Once the judge signs the annuity contract, the payout schedule cannot be changed.

2. Minimum Funding Requirements
Many insurers will not create annuities below $10,000–$20,000.

4. Blocked Account vs Structured Settlement: Head-to-Head Comparison

5. Hidden Costs Parents Rarely Consider

✔ The Kiddie Tax Trap

Blocked account interest is taxable. Under the IRS Kiddie Tax rules, interest above roughly $2,500 per year can be taxed at the parents’ highest rate — reducing the real return even further.

✔ Inflation: The Silent Value Killer

If inflation averages 3% and the blocked account earns 1%, the settlement loses buying power every year.

Example:
$50,000 placed in a blocked account for 10 years may only have the spending power of ~$40,000 by the time the child turns 18.

6. Decision Guide: Which One Should You Pick?

Scenario A: Settlement Under $15,000

Verdict: Blocked Account
At this level, annuity minimums and fees may not make sense. If allowed, place it in a high-yield CD for slightly better returns.

Scenario B: Settlement $20,000+

Verdict: Structured Settlement
The tax-free compounding and long-term planning benefits outweigh the blocked account’s simplicity.

Scenario C: Child With Disabilities

Verdict: Special Needs Trust + Structure
This helps preserve benefits like SSI/Medicaid (see SSA guidance on resource limits: SSA.gov).

6.5. Bonus Option: Custodial Accounts (UGMA/UTMA)

For very small settlements or funds not subject to court supervision, parents sometimes use a custodial account under the UGMA or UTMA laws. These accounts allow a parent or guardian to manage money on behalf of the child.

✔ Pros

• Simple setup at most banks and brokerages
• Access to higher-growth investment options
• No court involvement

✘ Cons

• Not blocked — the adult custodian can access funds (with fiduciary responsibility)
• Subject to the Kiddie Tax
• All money transfers to the child at age 18 or 21 (depending on the state)

For court-supervised settlements, UGMA/UTMA is usually not allowed, but parents sometimes use it for small gifts, insurance proceeds, or separate savings.

7. FAQ: Real Questions Parents Ask

Which banks offer blocked accounts?

Most major national banks do: Chase, Wells Fargo, Bank of America, and credit unions. Call in advance — some branches are unfamiliar with court-ordered accounts.

Can I withdraw money for school supplies or electronics?

Usually, no. Many judges restrict withdrawals to medical emergencies or special education expenses — not daily living costs.

What if the bank collapses?

FDIC insurance covers up to $250,000 per depositor, per bank, per ownership category.

Is the structured settlement safe?

Yes. It is backed by major life insurers and regulated under state law. Many parents prefer this option for long-term discipline and growth.

8. Conclusion: The “Safe Choice” Isn’t Always the Smart Choice

Many families choose a blocked account because it sounds safe. But the real question is:

“Is the child’s future safe — or does the money slowly shrink until they turn 18?”

If your settlement is small, a blocked account works fine. But for medium and large settlements, a structured settlement often provides stronger protection, tax-free growth, and better long-term planning.

Next Step: Ask your lawyer for a structured settlement quote so you can compare it side-by-side with the blocked account option. Making a data-backed choice today protects your child for decades.