When a child receives a personal injury settlement, the money almost never goes to the parent to spend. A judge decides how the funds are held until the child reaches adulthood, and the two workhorses are blocked accounts and court-ordered trusts for minor settlements, with a structured annuity as a third option for long-term cases. Which one the court orders turns on the size of the settlement, whether the child has a disability, and how long the money needs to last.
Court Approval Comes Before the Account
Nothing gets deposited anywhere until a judge signs off on the settlement itself. A minor cannot legally accept or reject a settlement, so the parent or guardian files a petition describing the injuries, the proposed amount, and the plan for holding the funds. The judge evaluates whether the amount is fair and in the child’s best interest, and can reject a settlement considered too low. Attorney fees get reviewed at the same hearing, and a judge can cut fees the court finds unreasonable for the size and complexity of the case.
In cases where the parent or guardian has a potential conflict of interest, the court may appoint a guardian ad litem to independently evaluate the deal. Only after approval does the court turn to how the money will be held.
How the Judge Chooses the Holding Vehicle
A blocked account is a bank or credit union account with a court-imposed restriction: nobody withdraws principal or interest without a judge’s written authorization. The bank flags the account internally to reject unauthorized withdrawal attempts. Blocked accounts are cheap to maintain and work well for smaller settlements.
A court-ordered trust makes more sense for larger amounts. The threshold varies by jurisdiction, but courts commonly consider trusts once the settlement exceeds $100,000 to $250,000. A trustee can invest more broadly than a savings account permits, which over years can generate meaningfully better returns. The cost is real: a formal trust document, a trustee appointment, and ongoing administrative fees. Professional trustees typically charge 1% to 2% of trust assets annually.
A third option is a structured settlement annuity, where an insurance company makes periodic payments to the child over time. This is common for larger settlements involving long-term injuries. Payments from a structured settlement annuity tied to a physical injury or sickness claim are excluded from the child’s gross income under federal tax law.1Office of the Law Revision Counsel. 26 USC 130 – Certain Personal Injury Liability Assignments A structured settlement also avoids the lump-sum-at-eighteen problem, since payments can be spread across decades. The tradeoff is inflexibility: once the schedule is set, it generally cannot be accelerated or changed if the child later needs a large sum. Some courts approve a hybrid, splitting funds between a blocked account or trust for shorter-term needs and an annuity for long-term support.
The choice among these vehicles is not the family’s to make. The judge decides, weighing settlement size, the child’s needs, and how long the funds need to be preserved.
Opening the Blocked Account
Once the court orders a blocked account, the guardian handles the logistics. Start by finding a federally insured bank or credit union willing to accept a court-restricted deposit; not every branch does these routinely, so call ahead. Deposits are insured up to $250,000 per depositor at each FDIC-insured bank, a limit worth remembering for larger settlements that may need to be split across institutions.2FDIC. Understanding Deposit Insurance
The guardian brings a certified copy of the court’s deposit order, the settlement check, the minor’s birth certificate, and the minor’s Social Security number. The order specifies the exact dollar amount and states that no withdrawals of principal or interest are permitted without a further written court order. A bank officer signs an acknowledgment confirming receipt and acceptance of the restrictions.
That signed acknowledgment then has to be filed with the court clerk, usually within a few business days to two weeks after the deposit. Missing this step can trigger an order to show cause and possible sanctions against the guardian. The court holds the acknowledgment on file to track where the money sits until the account is released.
Setting Up a Court-Ordered Trust
A trust has more moving parts. A trustee must be identified, and courts generally accept a professional fiduciary, a trust company, or in some cases a responsible family member. The trust document spells out the trustee’s duties, permitted investments, and the circumstances under which distributions can be made before the child reaches adulthood.
Choosing a Trustee
Corporate trustees such as bank trust departments are often preferred because they carry institutional liability and are less likely to mismanage funds. Individual trustees, including family members, are sometimes allowed for smaller trusts but face closer court scrutiny. Courts may require periodic accountings from any trustee showing how funds have been invested and what fees have been charged.
Surety Bonds
Courts frequently require the trustee or guardian to post a surety bond, which acts like insurance against mismanagement or theft. The bond amount is usually set at the settlement total plus one year of expected income. Premiums typically run 0.5% to 1% of the coverage amount annually and can be paid from the trust. Corporate trustees are sometimes exempted because of their institutional oversight and existing insurance.
When the Child Receives SSI or Medicaid
If the child receives Supplemental Security Income or Medicaid, a standard blocked account will destroy those benefits. SSI counts bank accounts as resources, and a single individual’s total countable resources cannot exceed $2,000.3Social Security Administration. Understanding Supplemental Security Income SSI Resources That limit remained unchanged for 2026.4Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Even a modest settlement in an ordinary blocked account would blow past that threshold and disqualify the child.
The fix is a first-party special needs trust, sometimes called a d4A trust after the statute authorizing it. Federal law exempts these trusts from Medicaid’s asset-counting rules when specific conditions are met: the beneficiary must be under sixty-five and disabled, the trust must be established by a parent, grandparent, legal guardian, or court, and the trust must include a payback provision requiring that any funds remaining at the beneficiary’s death reimburse the state for Medicaid benefits provided.5Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
The trust must be irrevocable and established for the sole benefit of the disabled child. A court ordering the settlement paid into a properly drafted special needs trust can keep the funds from counting as either income or resources for SSI purposes.6Social Security Administration. POMS SI 01120.201 – Trusts Established with the Assets of an Individual Small drafting errors can cause the entire trust to be counted as a resource, so families in this situation should work with an attorney experienced in special needs planning. The payback provision is not optional; without it the trust fails to qualify regardless of how everything else is structured.
Getting Money Out Before the Child Turns Eighteen
The whole point of these arrangements is that the money stays locked up. But courts do allow early withdrawals when a genuine need exists, and the bar is deliberately high.
What Judges Approve
The strongest petitions involve emergency medical care not covered by insurance, medically necessary therapies, and educational expenses tied to the child’s disability or special needs. The parent or guardian files a formal petition under penalty of perjury explaining why the withdrawal is necessary for the child’s welfare, backed by itemized medical bills, tuition invoices, cost estimates, and similar proof.
Courts also want to see household income and monthly expenses to confirm the family genuinely cannot absorb the cost. An updated account statement showing the current balance and accumulated interest is typically required. If the judge approves, the withdrawal is limited to the specific amount justified, and the remaining balance stays locked.
Why Requests Get Denied
Judges deny petitions when the expense is vague, the documentation thin, or the parent has not shown an inability to pay from other sources. A request for “general living expenses” will almost certainly fail. So will a petition without invoices or estimates attached. Courts are skeptical of requests that appear to benefit the household broadly rather than the child specifically. When a withdrawal is approved, courts often direct payment straight to the service provider, so a tuition payment goes to the school and a medical bill goes to the hospital.
Taxes on What the Funds Earn
The settlement money itself, received as compensation for physical injuries or physical sickness, is excluded from federal gross income whether the recipient is a child or an adult.7Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness The exclusion applies to both lump sums and periodic payments.
What is taxable is the interest or investment return the money generates while it sits in a blocked account or trust. That growth is unearned income belonging to the child. If the child’s total unearned income exceeds $2,700 in a tax year, the excess may be hit by the “kiddie tax,” which taxes the child’s investment income at the parent’s marginal rate rather than the child’s.8Internal Revenue Service. Topic No. 553, Tax on a Child’s Investment and Other Unearned Income (Kiddie Tax) A $50,000 blocked account earning 4% generates about $2,000 a year and falls under the threshold. A $500,000 trust generating $20,000 in returns will trigger meaningful tax liability, and the trust document can authorize the trustee to pay those taxes from trust assets.
Claiming the Funds at Adulthood
When the child reaches the age of majority, the court’s control ends, but not automatically. The now-adult beneficiary must petition the court for release of the funds, providing proof of identity such as a birth certificate or government-issued photo ID. The judge reviews the proof, signs a release order, and the individual takes that order to the bank or trustee. The bank removes all restrictions and either cuts a check for the full balance including accumulated interest or transfers the funds to a standard personal account.
Don’t Let the Account Go Dormant
If the account sits untouched after the child reaches adulthood, the bank will eventually report the balance to the state as unclaimed property. Dormancy periods generally run three to five years of inactivity.9Office of the Comptroller of the Currency. When Is a Deposit Account Considered Abandoned or Unclaimed? Once the state takes custody through escheatment, the money can be recovered by filing a claim with the state’s unclaimed property office, but the process can take months and interest stops accumulating. Filing the release petition promptly after the birthday avoids the problem entirely.