travel plan settlement qsf

Anderson v. Travelex Insurance Services, Inc. and Transamerica Casualty Insurance Company

Case no. 8:18-cv-00362-jmg-smb (d. nebraska), if you are a person in the united states who has been identified by defendants travelex insurance services, inc. and transamerica casualty insurance company as insured under a single-trip travel protection plan purchased within the class period (january 1, 2014 to december 31, 2017), and for whom a claim for trip cancellation benefits was initiated, you could get benefits from a class action settlement., important dates.

September 14, 2021 — Exclusion Deadline

September 14, 2021 — Objection Deadline

September 22, 2021 — Final Approval Hearing

• This Settlement does not relate to the COVID-19 pandemic or travel protection plans purchased after December 31, 2017.
• If you think you are a member of the Settlement Class but did not receive an e-mail or a postcard mailing, you may contact the Settlement Administrator at Travel Plan Settlement, 1650 Arch Street, Suite 2210, Philadelphia, PA 19103. Class membership was determined based on records that were previously collected in connection with the Settlement.
• The Settlement provides money for Settlement Class Members. Defendants will provide a settlement fund of $3,237,500. This money will be available for payment to approximately 105,294 potential Settlement Class Members, and will also be used to pay for any court-approved attorneys’ fees and expenses, a Class Representative service payment, and administration costs. A portion of the Settlement fund that is not directly distributed to Settlement Class Members may be distributed to a charity with the Court’s approval.
• The notice provides only a summary of the terms of the Settlement Agreement (which is available for review on this Settlement website). Capitalized terms in the notice have a specific, defined meaning. If the meaning of a capitalized term is not included in the notice, please refer to the Settlement Agreement for the meaning.

These rights and options – and the deadlines to exercise them – are explained in the Notice .

856.235.8501 | 800.533.7227

856.235.8501 TOLL FREE: 800.533.7227

856.235.8501

Qualified settlement funds – begley report.

by: Begley Law Group

by Thomas D. Begley, Jr., CELA

WHAT IS A QUALIFIED SETTLEMENT FUND?

Section 468B of the Internal Revenue Code [1] authorizes the establishment of Designated Settlement Funds or Qualified Settlement Funds.  These funds are usually collectively referred to as Qualified Settlement Funds (QSFs).  These funds are also sometimes called 468B Trusts.  The purpose of these funds is to permit a defendant in certain types of litigation to deposit funds into a trust and to receive a full and complete release of liability.  The defendant is entitled to a current income tax deduction for the amount paid into the fund at the time the funds are deposited into the trust.  This is an exception to the general rule under which the tax deduction is not permitted until the funds are actually disbursed to the plaintiff, which is normally the time in which the plaintiff has received the “economic benefit” of the settlement.

QSFs arose out of class action lawsuits.  They can be very useful in personal injury actions and other types of cases where there are multiple plaintiffs.  The QSF is usually established prior to trial.  The parties agree on a global settlement.  The defendant pays that amount into the QSF and the plaintiffs can then take their time in allocating the settlement among themselves and in dealing with various liens, such as Medicaid, Medicare, ERISA, and other liens.  The QSF could also be established after a jury award, as long as there is an appeal pending.

A QSF need not be a trust.  It may be a fund, account, or trust under state law, or its assets must be otherwise segregated from the transferor’s (or related person’s) other assets. [2]  Good practice dictates a written trust agreement.  An attorney’s trust account could theoretically serve as a QSF. [3]  The problem is that State IOLTA (Interest on Lawyer Trust Accounts) Rules require that income from the attorneys’ trust accounts be paid not to the clients but to State IOLTA funds.

When a QSF is being used for asbestos cases, special rules apply. [4]

There are advantages to both the plaintiff and the defendant in utilizing a 468(b) trust.

♦ Advantages to the Defendant.   Advantages to the defendant utilizing a QSF include the following:

• Defendant Removed from Litigation. Defendants want to be out of the case. By using a QSF a defendant can pay and go. The defendant pays the funds into the QSF and the plaintiffs later deal with liens, allocate the settlement between themselves,

determine how much should be lump sum and how much to structure, determine whether any Special Needs Trusts are required, and wait while a guardian is appointed for an incapacitated plaintiff, if required.

• Deduction to Defendant. Defendants and their insurers are able to obtain immediate tax deductions, rather than waiting for “economic performance” to occur.

♦ Advantages to the Plaintiff.  Advantages to the plaintiff utilizing a QSF include the following:

• Defendant Removed from Allocation of Settlement. Where QSF trusts are used, the defendant leaves to the plaintiff the issue of allocating the settlement among injured parties. This often gives the plaintiff greater flexibility in shaping the settlement. There are often advantages to allocating portions of the settlement to family members other than the injured plaintiff.
• Plaintiff’s Attorneys’ Fees and Costs. When a QSF trust is used, the plaintiff’s counsel can be paid fees immediately from the QSF and litigation expenses can also be paid.
• Income to Plaintiff. The plaintiff will immediately begin to receive income from the settlement held by the QSF trust. Without the trust, the defendant would be holding the money and the plaintiff would not be receiving the benefit of the income.
• Time is no longer a factor in negotiations with Medicare, Medicaid, ERISA, and third-party insurers. Additional time is available to negotiate and satisfy those liens.
• Forms of Distributions. Establishment of a QSF trust gives the plaintiff time to determine how much of the settlement to take as a lump sum and how much, if any, to structure.
• Conflict Resolution Among Related Plaintiffs. A QSF trust gives the plaintiff’s attorney, who may be representing more than one family member, time to resolve conflicts between them. One parent may have abandoned the injured child, for example. The other parent may be the custodial parent providing almost total care. How much does each parent receive?
• Removes Defense Structured Settlement Broker from the Case. The relationship between plaintiff’s structure brokers and defense brokers can be rancorous. If the QSF purchases the structure, the defense broker is effectively removed from consideration.
• Eliminates the Risk of Insolvency. If plaintiffs believe that the defendant or the defendant’s insurer is financially unstable, the QSF can be used as a vehicle into which funds can be immediately transferred.
• International Litigation. QSFs can be used to collect settlements from defendants that are located outside the country and can be used by foreign plaintiffs to collect from defendants located in the country.
• In cases involving a large number of claimants, an administrator of a QSF can obtain a Qualified Protective Order (QPO) that complies with the requirements of HIPAA and allows for limited use of Protected Health Information (PHI). This avoids the necessity of obtaining specific HIPAA releases from each settling claimant. Those releases would otherwise be necessary to negotiate subrogation claims in personal injury cases. A QSF administrator often retains the services of an outside vendor for lien resolution. The vendor may be required to disclose PHI to a number of different parties in order to secure release or payment requirements to settle the claims. The QPO is a good solution. A QPO is defined as an order of the court or of an administrative tribunal or a stipulation by the parties to the litigation or administrative proceeding that prohibits the parties from using or disclosing the PHI for any purpose other than the litigation or proceeding for which the information was requested. [5] The regulation further requires the return to the covered entity or destruction of the PHI at the end of the litigation or proceeding.
• Assists Structuring Attorneys’ Fees. Once settlement proceeds are deposited in an attorney trust account, it is too late for the lawyer to structure his fee. By making the deposit into a QSF, plaintiff’s counsel has time to consider payment options including whether or not to structure his fee.
• Multiple Defendants. A QSF can also be useful in cases involving multiple defendants or where all disputes with a singledefendant cannot be resolved at one time. All monies can be held in a QSF until all defendants settle.

DISADVANTAGES

A disadvantage of establishing a QSF is the cost. There are fees for the drafting of the trust document including all of the ancillary services, such as obtaining information and explaining the document to all of the parties, filing fees, administration and trustee fees, and, possibly, CPA fees for preparing tax returns. A QSF may not be warranted in smaller cases.

TYPES OF CLAIMS

Which claims are permitted and which are not are considered in the following sections.

♦ Permitted Claims. A QSF can be used in claims involving:

• The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), [7]
• Breach or contract, [8] or
• Violation of law. [9]

In a Private Letter Ruling, [10] the I.R.S. approved the use of a QSF in connection with a bankruptcy case. In that case, the trust was approved by a confirmation order issued by the U.S. Bankruptcy Court, which had continuing jurisdiction over the trust. The trust was established under the laws of the state to resolve employees’ wrongful discharge claims filed under potential theories of tort, breach of contract, or a violation of law. Further, the discharged employees are not general trade creditors of the debtor, nor do their claims belong to any other class excluded by the regulation. Accordingly, the trust is a QSF. The I.R.S. ruled that the debtor is the transferor.

♦ Prohibited Claims .  QSFs may not be used in cases:

• Arising from worker’s compensation or self-insured health plan, [11]
• Involving liabilities to refund the purchase price of or repair or replace products sold in the ordinary course of the transferor’s business, [12] or
• Involving the obligation of the transferor to make payments to its general trade creditors [13] and debt holders relating to a bankruptcy case or workout.

INCOME TAX CONSIDERATIONS

There are several income tax issues that must be considered in connection with QSFs.

♦ Economic Performance.   Economic performance shall be deemed to occur as qualified payments are made by the taxpayer, usually the defendant’s insurer, to a Designated Settlement Fund (QSF). [14] This means that the defendant receives an immediate tax deduction upon depositing the funds in the QSF.

♦ Constructive Receipt.  Deposit of the funds in the QSF is not constructive receipt.  Because the taxpayer’s receipt of income is subject to substantial limitations, constructive receipt is avoided. [15]

♦ Taxation of Qualified Settlement Funds.  Income earned by the QSF is taxed at a rate equal to the maximum rate in effect for such taxable year for trusts. [16] For 2020, the QSF rate is 39.6%. [17] All income is taxed at the same rate, there are no lower brackets. The tax is based not on gross income, but on modified taxable income.

The 3.8% Medicare tax on unearned income also applies. [18] The tax is the lesser of the undistributed net investment income for such taxable year, or the excess (if any) of: [19]

• The adjusted gross income for such taxable year over.
• The dollar amount of which the highest tax bracket begins for such taxable year.

Because QSFs are separate tax entities and pay tax on any interest and dividend income, the after-tax income then becomes part of the settlement fund and distributions to the claimants can be made with after-tax dollars.

♦ Attorneys’ Fees.  

• Plaintiff’s Attorney’s Fees. In most instances, the transferor will transfer to the QSF the entire settlement amount, including that portion that is payable to the personal injury attorney or attorneys for attorneys’ fees under the engagement letters signed between the plaintiffs and plaintiffs’ attorney. In rare instances, the transferor will pay the plaintiff’s attorneys’ fees directly and only transfer to the QSF the net amount due to the plaintiff. When attorneys’ fees are paid to the QSF, they do not represent gross income to the QSF, and when they are paid by the QSF they do not represent a tax deduction to the QSF. The QSF administrator/trustee must determine whether disbursements are subject to withholding requirements and whether disbursements of attorneys’ fees to class counsel in the underlying litigation are reportable. [20]
• QSF Attorneys’ Fees. Normally, a QSF will engage a law firm to perform legal services on behalf of the QSF. Such legal expenses are necessary to administer the QSF and to process claims and are deductible by the QSF as ordinary business expenses. [21] Whether or not the legal fee is immediately deductible or must be capitalized is determined by the origin of the claim.

THE 468B TRUSTEE/TRUST ADMINISTRATOR

The Regulations require that a QSF have an “Administrator.” [22] Unless the QSF is a trust, it is not required to have a trustee. If the QSF is a trust, the same person can serve as both Trustee and Administrator or there can be a separate trustee and a separate Administrator. Generally, the Trustee/Administrator is selected by the plaintiff’s attorney. If there is a separate Trustee and Administrator, the duties of each must be clearly defined in the trust document.

In some instances, a court will require an individual trustee to be bonded, which may be difficult or even impossible. A solution is to appoint the individual as Trust Administrator and appoint a Corporate Trustee. The trust document can give the Administrator the duty to make disbursements subject to court order. The Corporate Trustee would take the QSF deposit, subject to the court order, preventing any release of the funds without prior court approval. A similar result might be achieved by having an individual serve as Trustee/Administrator subject to a “safekeeping agreement” with a cooperating bank. The bank would accept the QSF deposits under court order preventing funds from being released without prior court approval.

DISTRIBUTIONS

The Trustee/Administrator is responsible for making distributions from the QSF to claimants, claimants’ attorneys, State Medicaid Agencies to satisfy liens, CMS to satisfy Medicare liens, ERISA Plans to satisfy ERISA liens, and any other lien holders that require satisfaction from the settlement fund.

STRUCTURED SETTLEMENTS

The Trustee/Administrator will be responsible for arranging structured settlements, including making a § 130 Qualified Assignment to a third-party assignee who will make the periodic payments.

[1] I.R.C. § 468B.

[2] Treas. Reg. § 1.468B-1(c)(3).

[3] P.L.R. 200216013 (Jan. 16, 2002).

[4] I.R.S. § 524b.

[5] 45 C.F.R. § 164.512(e)(1)(i).

[6] Treas. Reg. § 1.468B-1(c)(2)(ii).

[7] Treas. Reg. § 1.468B-1(c)(2)(i); 42 U.S.C. § 103.

[8] Treas. Reg. § 1.468B-1(c)(2)(ii).

[9] Treas. Reg. § 1.468B-1(c)(2)(ii).

[10] Priv. Ltr. Rul. 14-90-64-(2005).

[11] Treas. Reg. § 1.468B(1)(g)(3)(1).

[12] Treas. Reg. § 1.468B(1)(g)(3)(2).

[13] Treas. Reg. § 1.468B(1)(g)(3)(3).

[14] I.R.C. § 468B(a).

[15] Treas. Reg. § 1.451-2.

[16] I.R.C. § 468B(b)(1) and I.R.C. § 1(e).

[17] I.R.C. § 411(b).

[18] I.R.C. § 1411(a)(2).

[19] I.R.C. § 1411(a)(2).

[20] I.R.C. § 6041.

[21] Treas. Reg. § 1.468B-2(b)(2).

[22] Treas. Reg. § 1.468B-2(k)(3).

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Call a settlement expert now, what you need to know, qualified settlement funds  (qsf), what is a qsf what are the benefits of a qsf  what are the limitations, qualified settlement funds  (qsf), qualified settlement funds | what you need to know 2024, what is a qualified settlement fund  (qsf).

A Qualified Settlement Fund (QSF) is a settlement tool that, when established pursuant to Court Order, assumes the tort liability from the original defendant party (or parties) before the settlement is made, at which time the original defendant party (or parties) is (are) dismissed with prejudice. The Qualified Settlement Fund (QSF) then stands in the shoes of the original defendant party (or parties) with the Plaintiffs. The Qualified Settlement Fund (QSF) may enter into a Settlement Agreement with the plaintiffs and can enter into a Qualified Assignment, pursuant to the terms of  Rev. Proc. 93-34 . 

Origin of the Qualified Settlement Fund

The "Qualified Settlement Fund" or QSF, came into being in 1993 when the United States Treasury issued regulations under 26 CFR 1.468B-1. It is sometimes referred to as a 468B Settlement Fund or 468B Settlement Trust, or occasionally by glib salespeople using the septic term "holding tank". Rest assured there is no need to call the "pump out boat". The Qualified Settlement Fund's origins stems back to the Designated Settlement Fund concept introduced in 1986, which enabled defendants to deduct amounts paid to settle class action multi-plaintiff lawsuits, before it was agreed how these amounts would be allocated. In these cases, the defendants and plaintiffs had agreed how much   the defendant(s) or their insurers would pay to settle the cases collectively,   but not individually  . 

Benefits of a Qualified Settlement Fund to Defendant

• Pay and walk away with a full release .
• Tax deduction   A QSF enables the defendant (or insurer) to accelerate its tax deduction to the date that the settlement amount paid is to the Qualified Settlement Fund in exchange for a general release,  rather than when each plaintiff, signs and is paid. 
• End of Year Tax Planning  A QSF may come in useful in end of year or quarter financial planning, where settlement negotiations stretch to the end of the year or the end of a quarter, an already established QSF can be helpful in establishing a paid loss.

Benefits of a Qualified Settlement Fund to  Plaintiffs

A qualified settlement fund may be favored by plaintiff attorneys under appropriate circumstances because:

• litigation can settle now,  constructive receipt can be avoided, leaving all client settlement planning options open (including structured settlements) where the qualified settlement fund involves multiple claimants.  Please note that using a qualified settlement fund involving a single participant may limit the choices if structured settlement annuities are desired.
• enables clients to get proper counseling and wealth orientation (at a pace that is comfortable to them) on multiple claimant cases, while determining appropriate distribution amounts to their clients. 
• in some cases, where there are concerns about the solvency of a defendant or insurer, resolving a case via a QSF eliminates risk of insolvency of the defendant or its insurer
• allows time for an agreement on allocation and negotiation of lien claims.
• it can be very useful to administer mass tort cases where there are multiple disparate defendants contributing to the settlement. 
• with New York state wrongful death cases, a QSF may be an option to help overcome a potential legal malpractice trap created by legislative oversight in a 2005 amendment to EPTL 5-4.6.  There are other ways to tackle the problem besides using a qualified settlement fund, but not after the settlement has concluded.
• on the right case  with multiple plaintiffs, may have more flexibility in making appropriate choices for distribution of the settlement in cash, in structured settlements that can provide a secure income stream, and/or a Settlement Preservation Trust, and/or in a Special Needs Trust to preserve Medicaid and Supplemental Security Income (SSI), and can benefit from interest accumulation of funds, in the Qualified Settlement Fund (QSF), if the distributions are not immediate .
• it widens the options for attorney fee deferral options and structured attorney fees for plaintiff lawyers. Some insurers like Travelers, will not participate in structured attorney fees and a few others will only structure attorney fees if the plaintiff is structuring as well.

When Can a Qualified Settlement Fund Be Considered?

A Qualified Settlement Fund (QSF) should be considered in tort, class action, or environmental (CERCLA), breach of contract cases, or violation of law involving multiple claims and the Respondent(s), Defendant(s) or insurance carrier(s) is (are) willing to comply in exchange for a complete General Release from the Claimants or Plaintiffs.

Who Can Approve the Establishment of a QSF According to Federal Regulations?

§ 1.468B-1 Qualified settlement funds  (c)(1)   "A fund,  account , or  trust  satisfies the  requirements  of this paragraph  (c)  if—

It is established pursuant to an order of, or is approved by, the  United States , any  state  (including the District of Columbia), territory, possession, or political subdivision thereof, or any  agency  or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority" Cite: LII   Electronic Code of Federal Regulations (e-CFR)   Title 26—Internal Revenue   CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY   SUBCHAPTER A—INCOME TAX   PART 1—INCOME TAXES   Research Credit—For Taxable Years Beginning Before January 1, 1990   § 1.468B-1 Qualified settlement funds .

Mechanics of Setting up a Qualified Settlement Fund

A Qualified Settlement Fund, or QSF, is a fund, account, or trust established under applicable state law. A court can order that the defendant (or insurer) pay the agreed settlement amount into a Qualified Settlement Fund "within the meaning of 468B-1 of the Treasury Regulations". This can be a simple checking account or a more complex trust agreement using a bank trust department. Fees vary. One institutional trustee charges a nominal fee of $360 to establish a QSF, however others charge thousands. There is often a per capita cost as well. An experienced trustee or administrator is important as certain formalities must be followed. The settlement proceeds remain in the Qualified Settlement Fund subject to the continuing jurisdiction of the court. After the dispute is resolved, the court approves the allocation and orders the payment of settlement proceeds and the fund may be closed.  We partner with top notch independent QSF administrators to keep costs down without sacrificing quality.

Can a Single Claimant Qualified Settlement Fund Be Used

 to set up a structured settlement.

Yes, a  single claimant qualified settlement fund can be used to set up a structured settlement however, the choices are limited.  Many structured settlement annuity issuers today are reluctant to have their qualified assignment companies accept a qualified assignment from a single claimant qualified settlement fund. Today Independent Life Insurance Company is the only one with an overt appetite for that business. Independent Life structured annuities are not presently available in New York. Efforts by industry members  to get clarification from the United States Treasury have thus far been fruitless and the issue was removed from Treasury's priority guidance list in November 2009.  However it's possible to create periodic payment solutions using non qualified assignments.

Qualified Settlement Funds | Where Lawyers Need to Exercise Extreme Caution With QSFs

1. A QSF is not a solution for every case. Be cautious with settlement planners who aggressively promote them.

2.  A Master QSF may be a fable according to a February 2020 presentation by San Francisco tax lawyer Robert Wood, Esq,  a tax expert referred to in a 2018 Legal Examiner blog as " the most credible and professional authored tax attorney expert in the country when it comes to lawyers fees, QSFs, and attorney fee deferral", by a New York settlement planning firm that aggressively promotes a  Master QSF.  Does the proposed QSF meet the "resolve or satisfy rule" for an event (or "related series of events" as required by Internal Revenue Code Section 1.468B-1(c)(2)? 

3.  Firmwide Qualified Settlement Funds ( Firmwide QSFs)  have been questioned in a recent detailed analysis by the Philadelphia law firm of Faegre Drinker Biddle and Reath LLP, which concluded in July 2022, that a Master Law Firm Settlement Account is an arrangement that is unsupportable under the Treasury Regulations, contradicts existing Internal Revenue Service (IRS), and is inconsistent with case law from the United States Supreme Court that governs the income tax treatment of contingent attorney's fees.  See our July 21, 2022 blog Firmwide QSF's Debunked for more detailed information about Faegre Drinker's analysis of the scheme that should be of interest to plaintiff lawyers as well as defense ortiented lawyers, insurance claims executives and corporations settling claims or litigation acting within their self-insured retetention.

4. One stop shopping may not be healthy when it comes to QSFs and qualified assignment companies directly or indirectly owned by settlement planners.  Per Rev Proc 93-34 Section 4.01(3)  one of the requirements for a qualified settlement fund to be a "party to a suit or agreement" is that the assignee is neither controlled by, nor controls, directly or indirectly , the designated or qualified settlement fund". 

5. Some settlement planners promote a single claimant qualified settlement fund as part of a strategy to create purported qualified assignments funded with factored structured settlement payment streams, which are neither annuities nor insurance  products, despite being marketed in some cases by licensed insurance people and using misleading terms like : secondary market annuity", "secondary market annuities", "SMIA", or "SMA".  The National Association of Insurance Commissioners, in its Statutory Issue Paper No. 160, unequivocally stated that acquired structured settlement payment streams are neither annuities nor insurance products. If it's not an annuity or an obligation of the United States, then it's not a qualified funding asset.  

Without a proper qualified funding asset, the entire qualified assignment for your structured attorney fee or structured settlement could be in jeopardy because all prongs of IRC 130(d) fail, leading to a potential IRC 130 failure of the qualified assignment .  Without the tax exclusion provided by IRC 130, the qualified assignment company has a huge tax liability. 

6. One aggressive promoter suggested in a March 2020 webinar on Qualified Settlement Funds targeted to trial lawyers such as those members of NYSTLA,  PAJ and other state trial lawyers and AAJ, that his firm had a "revenue procedure ruling" from 2003  that says that if you create a proper periodic payment then it can be backed by investments so that it's black and white. That is simply not the case from reading the plain language of Rev. Proc. 93-34, which at Section 3 titled Scope, expressly states "  In addition to the requirements provided by this revenue procedure, an assignment by a designated or qualified settlement fund of a liability to make periodic payments must also satisfy all the other requirements of section 130 to be a qualified assignment" . Referring to IRC Section 130(d), the only permissible qualified funding assets are annuities and obligations of the United States.  Once again, factored structured settlement payment streams are not annuities and in the 40 states that (as of July 2023) have adopted the 2017 Revisions to the Life & Health Guaranty Association Model Act (#520), there is no investor protection for attorneys or plaintiffs investing in the factored structured settlement payment in the event of annuity issuer insolvency.  As other states adopt, please note that once the Model Act is approved in a state, there are provisions relating to acquired stuctured settlement payment rights exclusion for insolvency,that apply retroactively (i.e. no "grandfathering")

Where a QSF is appropriate for our clients, we partner with qualified,experienced and insured independent QSF trustees.

To learn more about qualified settlement funds or adminstration of QSFs,  please give us a call 888-325-8640

Last updated February 8, 2024

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468b Qualified Settlement Funds

A qualified settlement fund is a trust that holds settlement funds before distribution to claimants and law firms. Milestone is a qualified settlement fund administrator that brings tailored services to law firms.

Administration that's dependable, efficient, and agile

A qualified settlement fund, also called a QSF or a 468b trust, is a critical part of the post-settlement process for many case types. As QSF administrator, Milestone aims to serve as a dependable and agile partner to law firms, working to ensure that each distribution process happens as efficiently as possible.

Contact Milestone to learn more about our services as a qualified settlement fund administrator.

Get more from QSF administration

Your partner after settlement, efficient distribution, digital payment methods, organized accounting, frequently asked questions, where did qualified settlement funds originate.

As structured settlements became popular in the late 1970s and 1980s, defendants and their insurance carriers wanted to make sure that they could deduct payments in the year in which they were paid, rather than when the money was distributed to claimants. Congress enacted Section 468B of the Internal Revenue Code in 1986 to address such concerns and set up “designated settlement funds.” Designated settlement funds were fairly limited in the way they could be used, and in 1993 the IRC passed regulations creating the qualified settlement fund, which can address a broader range of legal claims with increased flexibility.

Which practice areas benefit from a QSF?

A QSF is most beneficial when settling these types of cases:

• Personal injury
• Product liability
• Patent and intellectual property
• Discrimination
• Sexual harassment
• Sexual abuse
• Medical malpractice
• Wrongful death

How do law firms establish qualified settlement funds?

A 468b trust must:

• Be established pursuant to a court order and is subject to continuing jurisdiction of the court (26 CFR § 1.468B(c)).
• Resolve one or more contested claims arising out of a tort, breach of contract, or violation of law.
• A trust under applicable state law.

To set up a QSF, the law firm of record will establish an escrow or trust agreement with an administrator. The agreement sets the stage for the litigating parties to understand their respective roles.

Typically, defendants will need a representation that their payment as a transferor is qualified and therefore deductible, and that they are fully released of all the claims brought against them. Then, once the QSF is established, the defendants pay the agreed-upon amount into the trust, and their involvement ends there. Thereafter, the administrator manages the funds and ongoing claim resolution. Milestone routinely establishes and administers qualified settlement funds in all 50 states.

Which part of the Internal Revenue Code discusses qualified settlement funds?

26 CFR § 1.468B-1 Qualified settlement funds. (a) In general. A qualified settlement fund is a fund, account, or trust that satisfies the requirements of paragraph (c) of this section.

(b) Coordination with other entity classifications. If a fund, account, or trust that is a qualified settlement fund could be classified as a trust within the meaning of § 301.7701-4 of this chapter, it is classified as a qualified settlement fund for all purposes of the Internal Revenue Code (Code). If a fund, account, or trust, organized as a trust under applicable state law, is a qualified settlement fund, and could be classified as either an association (within the meaning of § 301.7701-2 of this chapter) or a partnership (within the meaning of § 301.7701-3 of this chapter), it is classified as a qualified settlement fund for all purposes of the Code. Read the full statute.

How do plaintiffs benefit from a qualified settlement fund?

Here are the main benefits of qualified settlement funds to plaintiffs.

Extended Plaintiff Advocacy

By placing settlement proceeds within a QSF, a plaintiff may enjoy additional advocacy of their best interests. Plaintiffs hereby gain a professional administrator who manages the funds and any ongoing claim resolution issues. While the money remains in a QSF, the plaintiff can work closely with a settlement planner and his or her attorney to discuss financial planning options best suited for the plaintiff and their family moving forward. Trial attorneys can enjoy the relief and accomplishment of placing their client in the best hands possible once their job of legally advocating for a client culminates.

Time To Plan

The most well-known benefit of a QSF for plaintiffs is time to plan. Many negotiations and complexities accompany decision-making when deciding what to do with settlement proceeds. Plaintiffs can take more time to consult with their attorneys and settlement planners to discuss future planning. This may include liens negotiations, the possibility of a trust or investment account, Medicare set-asides, structured settlements, and other possibilities.

Other Benefits

Plaintiffs are able to utilize a QSF as a financial planning tool. With settlement proceeds in a QSF, a plaintiff may decide to establish a settlement structure with their funds, so he or she can spread their settlement income over multiple months/years instead of receiving one lump sum. With regard to many personal injury cases, settlement monies received by plaintiffs are tax-exempt.

To explore options for your case or a client’s case, consider having a discussion with a qualified settlement fund administrator at Milestone to gain a better understanding of the benefits for your specific circumstances.

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Qualified settlement funds: a legal and financial analysis showing why they can be so beneficial to you and your client.

GRG Subject Matter Experts  |  November 01, 2007

To download a pdf of this article, please click here .

The richest person in the Entertainment Industry, David Geffen, once said, “It’s the perfect definition of a settlement – both parties didn’t get what they wanted.” Fortunately, Qualified Settlement Funds (“QSFs”) allow a claimant or claimants involved in a legal dispute to avoid such a result. QSFs were established to enable claimants and defendants to determine how and when settlement funds are taxed and deductions obtained. Further, they are a valuable settlement tool whereby claimants can address critical settlement-related issues without the stress of settlement negotiations, because they release defendants from alleged tort (or other) liability through the doctrine of novation. QSFs, therefore, are both a useful settlement tool and asset providing unique tax benefits to claimants and defendants alike.

Legislative History

The framework for the QSF was created by Congress in 1986 when Tax Reform Act[1] added Section 468B to the Internal Revenue Code.

Section 468B regulates the establishment and administration of Designated Settlement Funds or “DSFs.”[2] Not only did DSFs arise to assist in class action lawsuits, but also to allow insured and self-insured defendants to determine when their settlement payments are deducted.[3] Once DSFs were available, it was only a matter of time before their use was extended. That extension came from 1992 Treas ury Regulations,[4] which became effective on January 1, 1993.[5] Those Treasury Regulations set forth the following three requirements for a settlement fund, account or trust to be treated as a QSF:[6] A fund, account, or trust satisfies the requirements of Reg. 1.468B-1(c) if:

It is established pursuant to an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;

It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability (I) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (he reinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or (II) Arising out of a tort, breach of contract, or violation of law, or (III) Designated by the Commissioner in a revenue ruling or revenue procedure; and

The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related parties).[7]

It is no coincidence that the requirements for a QSF and DSF are so similar. The requirem ents for a QSF, although not specifically mentioned in Section 4 68B, clearly fall within the realm of a DSF.[8] As mentioned above, the impetus behind the QSF was to merely extend on the DSF; the only difference being that a QSF allows for a broader range of claims to be considered, including environmental and breach of contract claims.[9] The legislature simply wanted the benefit of the DSF to reach a larger audience.

QSFs are useful tools that ensure proper client counseling can occur before, during, and even after settlement. QSFs uniquely introduce a degree of breathing space to the settlement process that is made valuable by:

Allocating the settlement proceeds among the claimants;

Verifying and negotiating liens and / or subrogation claims;

Determining the appropriate role and underwriting[10] of a structured settlement annuity;

Evaluating the need to preserve governme ntal entitlement benefits (e.g. the need for the

establishment of a special needs trust); and

Enabling a host of other decisions to be made without the pressure associated with the litigation itself.

This breathing space is made available because, as mentioned above, while temporarily parked in the QSF, the assets are not constructively received by or an economic benefit to a claimant.

Furthermore, given the valid concerns that lawyers have about adding unreasonable delay or expense to the transfer of settlement funds to clients, QSFs may be created and administered to:

Facilitate placement of a structured settlement annuity without requiring the signature / participation of the defense;[11]

Resolve and satisfy any and all private companies or government agencies that may have a reimbursement right or lien against a claimant’s settlement amount.

“Fast track” the payment of settlement proceeds to those clients who determine quickly that they are not interested in any form-of-settlement options besides a lump sum award;[12]

Minimize expen ses to settlement;[13]

Make monies available to settle claims and while not being subject to the defendant’s creditors;

Allow monies to earn interest for the benefit of the plaintiff (unlike a typical Interest on Lawyers’ Trust Accounts (“IOLTA” account).

QSFs also permit defendants to disengage from litigation and qualify for economic performance. Payments made by defendants are in exchange for a release from the presen t claimants and possible future claimants. Once a payment is made to a QSF, the litigation process will cease for a defend ant, thereby reducing legal costs and freeing the resources being used in such litigation. Further, QSFs permit defendants to deduct their payments to a QSF as if the defendants had paid claimants directly or paid into an irrevocable and unconditional fund established to receive payments for the benefit of claimants, thereby permitting a current income tax deduction if available.

The ability of defendants to be completely released from pr esent and future claimants, despite a cause of action remaining alive, is permitted through the legal doctrine of novation (party substitution), which has the added affect of adding a new party as substitute obligor who was not a party to the action (the new party is always the QSF Administrator), and discharging the original defendants by agreement of all the parties, completely extinguishing any alleged liability of defendants.[14]

A Deeper Benefit – Lien Resolution

As mentioned above, QSFs introduce an amount of breathing space after a settlement value is determined that is not otherwise available. This breathing space will allow the lawyer to concentrate on any potential liens that may exist against a client’s settlement. Why is this important? In torts, resolution of healt h care liens represents a great deal more than merely an administrative function. Personal injury lawyers traditionally develop expertise in litigation and tort law relevant to establishing the plaintiff’s personal injury claim. The law and legal processes relevant to vindicating personal injury claims are distinct from developing law and legal processes relevant to evaluating a health care plan’s right of recovery and resolving the plan’s reimbursement claims and liens. Further, as seen in recent settlements, for certain clients the lien resolution strategy may arguably be as important a factor in the client’s final “net” (in pocket) recovery as any other aspec t of proving and litigating the case. Equally important, the process also must ensure that plaintiff s’ future benefits will not be denied as a direct result of improperly considering the agencies’ interest in any settlement.

The “broad sweep” of expenditures that Medicare, Medicaid, private health insurers, and the Department of Veterans Affairs may attempt to recover must be vigorously evaluated and audited. For instance, in light of recent changes in lien-related laws and regulations, it is imperative to scrutinize carefully the nature of the damages that were originally claimed by plaintiffs; the objective compensation criteria utilized to allocate the aggregate settlement proceeds; as well as the language in the release to determine what the health care agencies may be entitled to recover.

By establishing a QSF, counsel is able to avoid tackling both the client’s tort action and subrogation action simultaneously; settle the underlying tort case, remove the defendant from the equation, and then allow counsel to focus on any subrogation issues that might exist. While it is likely still advisable to hire outside counsel to resolve the liens that relate to a settlement, a QSF allows counsel to take the time necessary to locate a reputable firm to perform this service and furthermore, it allows that firm the peace of mind in knowing that they possess the time necessary to adequately co nsider the client’s situation and how those liens may affect their final recovery. Lastly, i t is important to note that a QSF not only permits the lien resolution process to proce ed with no further involvement from a defendant, but also takes the pressure off of counsel and his or her client to quickly determine how their receipt of the settlement proceeds will affect their government benefits. Time is likely an attorney’s most valuable tool when dealing with government benefits preservation and lien resolution. Thus, a QSF is exactly that – TIME.

Establishing a QSF

In order to establish a QSF, counsel must ensur e that all of the requirements set forth in Reg. 1.468B-1 are met. The most common way a QSF is established is through court order. Pursuant to Reg. 1.468B-1(c)(1), courts possess the authority to sign an order creating a QSF. Further, in United States v. Brown, the Tenth Circuit Court of Appeals stated that a “[Qualified Settlement] Fund satisfies subparagraph (1) of § 1.468B-1(c) if it is established pursuant to an order of … a court of law.”[15]< span style="mso-spacerun: yes;"> Because a Court has jurisdiction over an underlying litigation, it also has jurisdiction over the establishment of a QSF which is created to resolv e the settlement matters relating to the legal dispute.

The second prong of Reg. 1.468B-1 is satisfied so long as the QSF is established to resolve a claim arising Under CERCLA or arising out of a tort, breach of contract, or violation of law, or designated [an acceptable claim] by the IRS Commissioner in a revenue ruling or revenue procedure. It is important to note that a QSF may not be established to resolve a claim arising under (1) a worker’s compensation act or self-insured plan; (2) an obligation to refund the purchase price of, or to repair or replace, products regularly sold in the ordinary course of the taxpayer’s trade or business; (3) an obligation of the taxpayer to make payments to its general trade creditors or debt holders that relates to a bankruptcy case, or a work-out; or (4) a designation [an unacceptable claim] by the commissioner in a revenue ruling or a revenue procedure.[16] The third prong of the QSF establishment requirements demand that the QSF be in conformity with the situs state’s laws regulating the formulation of trusts or that its assets be segregated from the other assets of the transferor.

Lastly, while it is typical for all of these elements to be present simultaneously, they need not be. For example, the treasury regulations provide that if there is a fund that meets the criteria for both the second and third prongs of Reg. 1.468B-1, but has yet to obtain an order authorizing its establishment, the transferor and the settlement fund administrator can make an “election back” for the fund to be a QSF upon the later of (1) the date the requisite purpose and asset segregation or trust tests have been met or (2) January 1 of the calendar year in which requirements 1, 2 and 3 are met in totality.[17]

Procedural Process. The claimant or defendant moves for the entry of an order by the court to (a) establ ish a QSF and (b) completely release any lia bility of the defendant and its liability insurer once the insurer pays the agreed-upon settlement amount in the QSF’s account. The motion is to stipulate that the claimants and the Fund Administrator will agree to t he terms of the Fund Administrator’s allocation of the amount placed in the QSF through the execution of fund agreements and releases[18]. The motion is to further specify that no settlement proceeds are to be set apart for any individual claima nt, or otherwise made available so that he or she may draw upon or otherwise control said settlement proceeds.

Next, the motion should authorize the fund administrator to distribute immediately all attorney fees to counsel for claimants consistent with existing contingency fee contracts,[19] and state that further court approval for such fee distribution shall only be necessary to the extent required by law (i.e., for minors or incompetents). The motion should also state that as soon as possible after the entry of the order, the fund administrator will file with the court a declaration of supporting materials setting forth:

The release and indemnity agreement, completely extinguishing the defendant’s liability;

The claimants’ agreement for allocation and form of the se ttlement; and

The agreement and release between the QSF and individual claimants

It is important that the claimant or defendant also move for the entry of an order by the court (a) appoint a QSF fund administrator,[20] and (b) establish terms of the QSF. This motion should be simultaneously submitted with the entry of an order.

Next, the claimant or defendant moves for the entry of an order by the court (a) to approve settlement with the defendant, and (b) for dismissal with prejudice of the defendant(s). Once the court executes this order the defendant’s only remaining requirement is to provide the fund administrator with the information statement set forth in Reg. 1.468B-3(e)(2). This statement must provide for the amount transferred to the QSF, including identifying information for the transferor and the QSF (name, address, and taxpayer identification number), the date of transfer, and the amount transferred. The statement must be provided by February 15 of the year following the date of this order.

Lastly, the fund administrator is to petition the court for (a) approval of distribution to the plaintiffs, and (b) certification of fund agreements. The petition states that the fund administrator certifies that fund agreements and releases were reached for all claims of which the Fund Administrator possesses actual knowledge, and requests the court to enter its order authorizing disbursement of the funds pursuant to those fund agreements and releases.

What the Settlement Agreement Must Say

The importance of the language contained in a settlement agreement cannot be overstated. A QSF allows for the time necessary to resolve all liens for injury-related payments made by the both private companies and governmental agencies as well the time necessary to choose the appro priate income stream to both meet a claimant’s needs and protect their government benefits. A QSF can be rendered useles s if the language in a settlement agreement can be construed as bestowing an economic benefit on or constructive receipt to the claimant. Such a construction would elimi nate the ability to capitalize on the tax benefits of a structured settlement and jeopardize a claimant’s government benefits.

In order to ensure that the client avoids such pitfalls, it is important that the settlement agreement recite the following:

This Release is given in exchange for a $100,000 payment by the Releasees into the Jon Doe Qualified Settlement Fund. The receipt for which will be acknowledged, and the funds distributed according to the terms and conditions of the Order establishing the Doe Qualified Settlement Fun d and Appointing the Fund Administrator issued by the Probate Court of Alpha County (State of Beta). Releasees further agree to enter into Fund Agreements with the Fund Administrator, in which they accept the Fund Administrator’s allocation of the ir derivative, separat e or other claims.

Further, and equally as important, is that the Defense or their insurer make their settlement payment made payable to “Alpha Beta as Fund Administrator of the Doe Qualified Settlement Fund.” Making the check made payable to the settlement administrator as administrator of the QSF eliminates a potential argument from the IRS that the receipt of funds by the Fund Administrator was constructive receipt by or an economic benefit to the claimant. By confirming that both the settlement agreement and the settlement payment language mirror the above, counsel is protecting the client from any subsequent claim of taxation by the IRS.

Makings of a Fund Administrator

The claimant’s counsel should qualify potential fund administrators with the same standards that they use for other experts to whom they turn to for assistance in resolving clien t matters (i.e., physicians, investigators, expert witnesses, etc.).[21] For instance, does the candidate fully comprehend to following?

Motion Practice. Has he or she drafted such documents in the past? Has he or she served as a fund administrator before?

It is very important that a settlement administrator make a determination on the tax status of future QSF distributions near the beginning of the fund’s existence. A QSF administrator must determine from the facts and circumstances giving rise to a QSF being established whether or not one or more of the transferors would have had to report a distribution via a Form 1099 or withhold any tax had the defendant made the distribution directly to the claimant.[37] A QSF must fulfill reporting and withholding obligations on distributions from the QSF as if the QSF was the original defendan t. As a result of th is obligation, it is always important that the settlement administrator require that the defendants provide to them the necessary information to make the appropriate withholding and reporting determinations. The failure of which to do so could prevent the settlement administrator from having the information necessary to meet their QSF obligations. Failing to report or withhold the right information or money may subject the QSF to large IRS penalties that the settlement administrator may not even become aware of until 36 months later.[38] For example, failing to prepare and file a Form 1099, when one is required, may subject the fund to a penalty of at least $100 per document, which in the case of a large class action, w here hundreds of 1099s may be necessary, is an overwhelming mistake.[39] Thus, i t highly important that a QSF administrator pay close attention to both the tax requirements of a QSF and those that would have applied had the defendant paid the claimant directly.

Tax Benefits

The Defendant. As previously mentioned, QSFs arose largely as a result of insured and self-insured defendants wanting to deduct their settlement payments in the year in which a payment is made to a QSF, rather than the year a settlement administrator decides to disburse those funds. A defendant is permitted to deduct the transfer of cash into a QSF without recognizing a gain or a loss in the year in which the payment into the QSF is made. Howeve r, if a defendant decides to transfer property, the defendant must account for the gain or loss on the transfer equaling the difference between the fair market value of the property and the taxpayer&a mp;rsquo ;s income tax basis in the property.[22] In such a scenario, the defendant will be permitted a deduction for the transfer into the QSF equal to the fair market value of the QSF, but certain types of non-publicly traded securities or partnership interests must be accompanied with a “qualified appraisal.”[23] The Claimant. Often the most important aspect of a QSF is how the settlement proceeds held in a QSF are recognized by a claimant or claimants from a tax standpoint. If the QSF and settlement agreement are drafted properly and the settlement payment is made payable to the Fund, then a claimant need not recognize a taxable event until a payment is received from the QSF itself. Once a disbursement is made from the QSF to a claimant, the claimant will need to report its receipt to the IRS and will be taxed on its receipt as if the defendant had paid the claimant directly. Therefore, if the payment by the defendant into the QSF was in lieu of lost wages due to the claimant, then the QSF’s payment to the claimant must be recognized as wages and taxed accordingly. But, if the defendant’s payment into the QSF was as a result of personal injuries suffered by the claimant, the claimant could avail itself of Section 104(a)(2)’s personal injury tax exemption and possess the monies tax free. The essence behind a claimant’s ability to avoid recognizing a taxable event upon the defendant’s payment into the QSF is such payment’s failure to be neither constructive receipt, economic benefit, nor a cash equivalency.

Constructive Receipt. Section451 provides that “the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer.”[24] Treasury Regulations help further refine the definition of constructive receipt by stating, “ gains, profits, and income are received by the taxpayer are to be included in g ross income from the taxable year in which they are actually or constructively received by the taxpayer.&r dquo;[25] Further, the Treasury Regulations state, “income, although no actually reduced to taxpayer’s possession, is constructively received in the taxable year during which it is credited to this account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given.[26] But, income is not constructively received if the taxpayer&r squo;s control is subject to substantial limitations or restrictions.[27]

While a defendant’s payment into a QSF in order to settle an existing lawsuit is a payment into a fund, it is not into such a trust or fund that allows the claimant the ability to draw upon the settlement monies at any time or withdraw funds by providing notice to the settlement administrator. The QSF is created to help fully settle claims that exist betwee n the defendants and claimants. While the total settlement value is finalized upon the defendants’ payment into the QSF and subsequent release, the claimants’ claims are still alive and the portion that is to be disbursed to the claimants is yet to be determined. The fund administrator is to settle fully the existing claims with the approval of and upon the order of the court by entering into subsequent qualified settlement fund agreements and releases (the “Fund Agreements”) with persons or entities asserting those claims. Until such time that Fund Agreements are executed, no settlement proceeds are to be set apart for claimants, or otherwise made available so that they may draw upon or otherwise control said settlement proceeds. The substantial limitations placed on a claimants’ receipt of settlement proceeds quashes the potential for constructive receipt to exist.

Economic Benefit Doctrine: The economic be nefit doctrine developed from case law and requires a determination that the actual receipt of property or the right to receive property in the future confers a current economic benefit on the recipient. Sproull beca me the seminal case on this doctrine and set forth the required elements, which are, as restated in Thomas v. U.S.:

There must be some fund in which money or property is placed;

The fund must be irrevocable and beyond the reach of the creditors of the party who transferred the funds to the escrow or trust; and

The beneficiary must have vested right to the money, with the receipt conditioned only on the passage of time.[28]

While a defendants payment into a QSF would satisfy both of the first two elements of the economic benefit doctrine, a QSF beneficiary (the claimant) would never satisfy the third elemen t because claimants do not possess vested rights i n the money that is placed into a QSF until the settlement administrator determines a claimants allocated portion of the settlement monies and enters into and executes with court approval a fund agreement with the claimants and disburses the cash from the QSF to them. All of these requirements stand in stark contrast to the economic benefit doctrine’s requirement that the claimant’s possession be conditioned solely on the passage of time.

Cash Equivalency Doctrine: The cash equivalency doctrine is another common law doctrine that the IRS attempts to use on occasion to find future payments or rights to payments taxable in the year an ag reement is made as opposed to the year in which the money is physically received. The doctrine is defined quite well in Cowden,[29] where the court said:

If promise to pay of a solvent obligor is unconditional and assig nable, not subject to set-offs, and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for the use of money, such promise is the equivalent of cash and taxable in like manner as cash would have been taxable had it been received by the taxpayer rather than the obligation.[30]

A defendant’s payment of settlement monies into a QSF is neit her unconditional nor assignable by the claimant. Further, the payment is subject set-offs as a result of potential third parties that may possess a subrogation interest in a claimants recovery. As mentioned previously, there are several step s that must be accomplished before a claimant possesses any rights to the monies that are placed into a QSF and those very steps help to eliminate the potential application of the cash equivalency doctrine.

Single Claimant QSF: There exists significant debate over whether a QSF is a viable settlement tool for a single claimant involved an in injurious incident where no other derivative action at law exists. The main arguments in opposition to the single claimant QSF are the same taxation doctrines that apply to multiple claimant QSFs – “economic benefit” and “constructive receipt.” Similar to above neither doctrine is triggered by a single claimant QSF.

First, neither th e definition above for economic benefit nor the IRS’ definition from PLR 200138006, “In order for a taxpaye r to include an amount in income under this doctrine, the amount must be set aside irrevocably, for the taxpayer’s sole benefit, without restrictions or conditions based upon the occurrence of future events,& rdquo; captures a claimant’s position with respect to a QSF. [31] The money that is placed in a QSF, as discussed above, is not set aside for the taxpayer’s sole benefit and possesses a multitude of conditions and restrictions that are based on future events. Second, the fact the a taxpayer/claimant must execute fund agreements with the Fund Administrator in order to receive his or her share of the QSF settlement proceeds stands in direct contrast to the definition of constructive receipt regardless of whether the QSF involves a claimant or claimants. Third, in addition to the arguments that stand in opposition to either the economic benefit or constructive receipt doctrines, Rev. Rul. 93-94, the ruling by the IRS that provides the rules under which a QSF will be considered a “party to the suit or agreement” for the purposes of Section 130, continuously references singular “claimant” as opposed to the plural “claimants” throughout the ruling. It is hard to fathom that the IRS would repetitively reference the singular form of a word unless it intended to do so. In conclusion, a QSF is a se ttlement tool that can be utilized by either many claimants or a singular claimant involved in one of the aforementioned Reg. 1.468B-1(c)(2) categories.

The Qualified Settlement Fund

In order for a settlement administrator to properly administer a QSF, it is important that the administrator obtain an EIN number for the fund itself.[32] The most important administrative duties include making the necessary tax payments when due as well as withholding and reporting the appropriate amount of m oney and information. An administrator is obligated to make tax deposits at a federal depository using the Form 8109(B), the Federal Tax Deposit Coupon, quarterly for tax estimates and on March 15th for the final tax return. A QSFs tax liability is determined by applying the maximum tax rate[33] to the QSF’s “modified gross income” for the given tax year.[34]

In a world where the average individual believes the IRS is rarely on his or her side, QSFs are the exception. Regardless of whether or not you are an attorney for a class of claimants or a single injured claimant with derivatively injured spouse, parents, or chrildren, QSFs can be an excellent resource for an attor ney’s practice. Resolving liens is a complicated and convoluted aspect of tort law and demands significant attention and the same can be said for government benefit preservation and advising a claimant about the tax ramifications of their settlement.

All of these aforementioned areas of law are often not a part of the general expertise of an attorney’s practice and this is only compounded during a lawsuit where a defendant is trying to avoid liability and resolve their case a s soon as possible. Because of this, it is advisable to become the tortoise and not the hare. Counsel should provide himself or herself with the opportunity to focus on the areas of law the client hired him or her to advocate and let the QSF serve as a safety net. The client that receives his settlement award first only to later lose government benefits or be subject to litigation as a result of an ERISA lien is far worse off than the cli ent that receives their settlement awar d second, but free and clear of any further claim or litigation.

It highly important that a QSF administrator pay close attention to both the tax requirements of a QSF and those that would have applied had the defendant paid the claimant directly.

[1] PL 99-514.

26 USC 468B: A DSF is defined as (A) which is established pursuant to a court order and which extinguishes completely the tort liability of the defendant or the defendant's insurance carrier to the plaintiff, (B) with respect to which no amounts may be transferred other than in the form of qualified payments, (C) which is administered by persons a majority of whom are independent of the defendant or the defendant's insurance carrier, (D) which is established for the principal purpose of resolving and satisfying present and future claims against the defendant (or any related person or formerly related person) arising out of personal injury, death, or property damage, (E) under the terms of which the defendant (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and (F) with respect to which an election is made by the defendant.

John J. C ampbell, “468b Qualified Settlement Funds in Single Claimant Plaintiff Physical Injury Settlements,” The Medicare Set Aside Bulletin, Issue 18 (August 1, 1005). (QSFs came about to help in class action lawsuits where the individual shares of a settlement to various class members are not determined and to allow insured and self-insureds to deduct their settlement payments when made as opposed to when a settlement trust trustee disburses the funds).

Reg. 1.468B-1.

See Restatement (Second) of Contracts, section 280 (1981).

Reg. 1.468B-1(c).

See U.S. v. Brown, 334 F. 3d 1197 (10th Cir. 2003) and John J. Campbell, “468 b Qualified Settlement Funds in Single Claimant Plaintiff Physical Injury Settlements,” The Medicare Set Aside Bulletin, Issue 18 (August 1, 2005).

Don McNay and William Garmer, “Is a qualified settlement fund right for your client?” Trial Magazine (January 2002.

Unless provided with evidence to the contrary, annuity companies assume a claimant has a normal medical condition and, therefore, a normal life expectancy. As a result, published annuity rates are by sex and age only. However, substandard (i.e., lower) annuity rates are available if the annuity company is p rovided with evidence that the claimant’s life expectancy is less than normal. Many serious injuries can reduce a claimant’s life expectancy. However, it is not necessary that the reduced life expectancy be caused by the injury that is the subject of the claim. Any claimant, th erefore, may qualify for a substandard rate. Physicians who are employed for that purpose by the annuity companies make the evaluation of a claimant’s life expectancy. Their evaluation is based on a review of medical information provided to them.

Section 130(c) “qualified assignment means any assignment to make periodic payments as damages, or as compensation under any workmen’s compensation act, on account of personal injury or sickness if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim and if the other factors of Section130(c) are met. Rev. Proc. 93-94, 1993-2 CB 470, provides the r ules by which a QSF will be considered “a party to the suit or agreement, or the workmen’s compensation claim” for purposes of Section 130(c).

If the “form-of-settlement” component of the client-counseling model is employed early, lawyers should be able to identify these clients prior to settlement and shape the QSF motion practice to allow the QSF Administrator to transfer funds to these “fast track” clients as soon as the defendant tenders the settlement proceeds to the QSF.

For instance, if the administer is appropriately licensed, his or her fee might be offset by (1) a portion of the standard money management fees charged by the financial institution at which the funds are on deposit; and /or ( 2) a potion of the interest earned or growth on the proceeds while they are invested in the QSF fund – This is similar to most escrow arrangements wherein interest is not applied to the fund corpus due to the higher cost of administration; and / or a portion of the structured settlement commission paya ble to a broker when certain clients chose to st ructure all or part of their settlement award. Such cost-saving arrangements should be disclosed to the client and / or approved by the court as part of the 468B fund pleadings.

If the “form-of-settlement” component of the client-counseling model is employed early, lawyers should be able to identify these clients prior to settlement and shape the 468B motion practice to allow the 468B Administrator to transfer funds to these “fast track” clients as soon as the defendant tenders the settlement proceeds to the 468B.

U.S. v. Brown, 348 F.3d 1200 (2003).

Reg. 1.468B-1(g).

Reg. 1.468B-1(j).

The fund agreements and releases must state that, as part of the release and indemnity agreement, the defendant paid and clients consented to certain sums in full and final settlement of all claims that the claimants had or may have against the defendant. In addition, the agreement shall specify claimants enter into the fund agreements and releases in order to provide payments in f ull settlement and discharge of all claims against the QSF that are or might have been subject to the original lawsuit.

The fund administrator distributes attorney’s fees and costs upon receiving an affidavit by the attorney and finding it to be in compliance with the contingent fee agreement relating to the claims for which the settlement proceeds are being received by the Fund.

The Fund administrator must submit themselves to the jurisdiction of the court for purposes of proceedings relating to this appointment.

Compare Smith v. Farber, 704 A.2d 569 (N.J. Super. App. Div. 1997) and Swann v. Waldman, 465 A.2d 844 (D.C. 1983) and Geller v. Harris, 685 NYS2d 734 (N.Y. App. Div. 1999).

George W. Kuney, Qualified Settlement Funds: A Tool to Shelter Gains and Taxable Income with Payments on Accou n t of Disputed Claims, 24 Calif. Bankr. J. No. 2 , pgs. 137-144 (1998) Citing Treas. Reg. 1.468B-3(a)(1)

George W. Kuney, “Qu alified Settlement Funds: A Tool to Shelter Gains and Taxable Income with Payments on Account of Disputed Claims,” 24 Calif. Bankr. J. No. 2, pgs. 137-144 (1998) citing Reg. 1.468B-3(b).

Section 451.

Reg. 1.451-1(a) (as amended in 1999).

Reg. 1.451-2(a) (as amended in 1979).

Sproull, 16 TC 244, 247 (1951), aff’d. 194 F. 2d 541 (6th 1952); Thomas v. U.S. 45 F. Supp. 2d. 618, 620 (1999), aff’d. 213 F. 3d 927 (6th 2000).

289 F. 2d 20 (1961).

PLR 200138006 (May 7, 2001).

Reg. 1.468B-2(k)(4).

< p class="MsoNormal" style="margin: 0in 0in 0pt; text-align: left;" align="left">The Economic Growth and Tax Relief Reconciliation Act of 2001, PL 107-16, implemented a staged tax decrease in the tax rates that began in 2001 and was accelerated by the Jobs Growth Tax Relief Reconciliation Act of 2003, PL 108-27. As a result of these acts the maximum tax rate to be applied to the gross income of QSFs is 35% until 2011 when it is set to go back up to 39.6%.

Reg. 1.468B-2(a).

Reg. 1.468B-2(b).

The IRS uses a standardized calendar to address EIN related issues.

Jude P. Damasco and Todd F. Taggart, “Taxation and reporting of qualified settlement funds,” The Tax Adviser (1996 American Institute of Certified Public Accountants Inc.).

Allocation Issues (conflict/tax/public benefits/liens). Does he or she understand how to avoid the multiple plaintiff conflicts consistent with the ABA Model Rules of Professional Conduct for lawyers? Does he or she understand how to allocated proceeds between wrongful death and survivorship in order to minimize tax implications? Does he or she understand the client’s public benefits? (I.e., is it helpful or harmful to allocated proceeds to the derivative claim of the parent of an injured child on Medicaid?) Does he or she understand how to allocated an individual plaintiff’s damages amount pain and suffering, medicals, wage loss etc.

Tax Filing Procedure. Does he or she fully understand the tax filing and accounting requirements: obtaining W9 forms from all attorneys that are to be paid from the QSF; obtaining the taxpayer ID number for the QSF fund; Preparing quarterly estimated tax payments for the QSF; maintaining accounting records necessary to complete tax return for the QSF; preparing Form 1099's for all attorneys (and claimants if required); preparing the annual tax return for Qualified Settlement Fund; and final accounting and affidavit?

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What Is A QSF And When Should It Be Used?

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By: Tab H. Keener

Downs.Stanford, P.C.

Dallas, Texas

A Qualified Settlement Fund (QSF) allows tax payers involved in litigation to receive settlement funds and potentially avoid tax ramifications until the funds are otherwise paid to the taxpayer. Often times a QSF is used in mass tort or other types of class action litigation. A defendant may pay money into the QSF and receive a release of claims by court order while multiple claimants decide upon an allocation among themselves. [1]

Insurance companies and large self-insured businesses typically resist the use of a QSF. Their concern is magnified when a suit involves a single injury and derivative claimants (as in wrongful death and survival actions). The uncertainty is that claimants may have essentially received the economic benefit of the money immediately upon payment into the QSF. The worry is that taxpayers, if taxed, would be motivated to sue the entity funding the settlement to offset the unexpected tax liability.

A. Birth of the QSF

Structured settlements became popular in the late 1970s and 1980s. Insurance companies funding structured settlements became concerned that payments made to an entity rather than the claimant would not be tax deductible - as it clearly would be if paid to an individual. Defendants and their insurance carriers wanted to make sure that they could deduct payments in the year in which they were paid rather than when the money was distributed. Congress enacted Section 468B of the Internal Revenue Code in 1986 to address such concerns.

When Section 468B was first enacted it only addressed a Designated Settlement Fund. [2] 468B was later amended to add an additional section giving the Secretary of the Treasury additional authority to draft regulations further addressing the potential tax ramifications of such a fund. [3] Through a series of regulations, the QSF was created. First, a fund is a QSF it if is established pursuant to an order of, or approved by, the United States, any state (including the District of Columbia) and is subject to the continuing jurisdiction of that governmental authority. [4] Second, the fund must be established to resolve or satisfy one or more contested or uncontested claim asserting liability [5] The third and final requirement is that the fund must be a trust under applicable state law, or its assets are otherwise segregated from the assets of the transferor (and related persons). [6]

B. Questions Concerning Use of a QSF When Only a Single Injury Is Involved

Defendants and their insurers often have concern about the potential future tax liability associated with a QSF, which is afforded different tax treatment than a typical settlement annuity. [7] By comparison, a settlement annuity grows tax free to the benefit of the claimant while earnings in a QSF are taxable to the fund itself. For example, the tax rate is 39.6% according to 2009 tax rate schedules. Due to the doctrines of constructive receipt and economic benefit, the taxpayer could face serious tax ramifications, possibly in the amount of hundreds of thousands of dollars. This is especially true in the case of a young minor child who would have many years of earnings growth. After reaching the age of majority, the child could bring suit contending that she was not adequately protected through the creation and use of the QSF and should now be entitled to recover the amount of lost earnings due to unfavorable tax treatment.

To alleviate these problems claimants and their attorneys may suggest providing additional indemnification and promise to execute a Compromise Settlement Agreement. However, no revenue ruling or regulation clearly states that a QSF may be used when dealing with a single claimant or single injury involving derivative claimants. [8] A QSF is often suggested by claimants and their attorneys to bypass an approved list of annuity companies or in an effort to cut out brokers suggested by defendants and their insurers.

In conclusion, until additional regulations are promulgated, clearly stating that a QSF may be used with single or derivative claimants, counsel should be wary to agree to use a QSF. During settlement negotiations, counsel should be vigilant to ensure that a QSF is not part of any settlement agreement among the parties until these issues are resolved.

For more information about Downs.Stanford, visit http://www.primerus.com/law-firms/downsstanford-pc-dallas-texas-tx.htm or http://www.downsstanford.com .

[2] Section 468B of the Internal Revenue Code is titled Special Rules for Designated Settlement Funds. The statute sets forth the definition of a Designated Settlement Fund (DSF) and includes six detailed elements that must be satisfied to establish a DSF. See 26 U.S.C. Section 468B.

[3] By the Technical and Miscellaneous Revenue Act of 1988, Congress amended 26 U.S.C. Section 468B to add subpart (G), which is authority for the QSF regulations.

[4] 26 C.F.R. Section 1.468B-1(c)(1).

[5] 26 C.F.R. Section 1.468B-1(c)(2).

[6] 26 C.F.R. Section 1.468B-1(c)(3).

[7] See I.R.C. 104(a)(2), 130, and 468B.

[8] Cf. 26 C.F.R. Section 1.468B-1(c)(2) allowing one or more claimants.

The use of qualified settlement funds at the end of a case

Qsfs are useful to address conflicts of interest between multiple plaintiffs or attorneys in a case or to pay government liens.

A Qualified Settlement Fund (“QSF”) is an account administered by a third party. Although administration can be by the defendant by solely opening a segregated account, plaintiffs generally do not want the defendant holding the settlement money longer than necessary. QSFs are used to avoid conflicts of interest for the attorneys in multiple-plaintiff cases, to provide interest earnings to plaintiffs while disputes are resolved, to avoid personal liability of attorneys for unpaid government liens, and to release and dismiss defendants while liens and other issues are resolved. For defendants of questionable solvency, QSFs also assure receipt of the settlement proceeds promptly while other issues are being resolved.

The account holds settlement or judgment proceeds. While it holds the proceeds, the parties resolve disputes about how to allocate the proceeds, including among battling attorneys. They also determine and pay any liens from the account. The account can last weeks, months, years or even decades in the case of asbestos and Agent Orange. Asbestos QSFs have already lasted since 1988 following bankruptcy of the asbestos manufacturers.

Wrongful-death cases

In some states the wrongful-death proceeds are governed by distribution schemes to prevent disputes. For example, some states distribute the proceeds in accordance with the laws for intestate succession. Other states use a formulaic approach that avoids disputes. In many states, either the heirs must prove the amount of their dependence on the decedent or demonstrate to the court other forms of entitlement, leading to disputes. The disputes can last a long time. A QSF can be used to hold those proceeds until the disputes are resolved.

In the meantime, the legal fees and costs can be paid from the fund and each heir can be separately represented in settling the disputes.

Class actions and multi-plaintiff cases

The most common use of QSFs is in cases with large numbers of plaintiffs, whether certified as a class or not. Product-liability cases, drug cases, sexual abuse cases are all common situations in which QSFs are used.

Channeling injunctions and future claimants

Qualified-settlement funds are formed to resolve and satisfy claims. One of the most difficult tasks in doing so is what to do with claims that have not been made at the time the QSF is established and funded. The problems are several: (1) such claims are unknown in amount, which makes payment of current claimants difficult to calculate; (2) such claims are unknown as to timing, particularly for conditions with a long latency period between exposure to the product and manifestation of the illness; and (3) the amount of money available to pay future claims is unknown when QSFs are to receive the proceeds of pending or future insurance litigation or future earnings of the debtor.

Section 524, subdivision (g) of the Bankruptcy Code appears to be limited to an asbestos claim, but courts have allowed other claims to be included, e.g., claims for lead exposure in In re Eagle-Picher Indus . (S.D. Oh, 1996) 203 B.R. 256. Even without section 524, subdivision (g), however, bankruptcy courts issue injunctions to channel future claims to a QSF using the court’s power under section 105 of the Bankruptcy Code.

Attorneys’ conflict of interest

When multiple plaintiffs exist in a case, the attorney can have a conflict of interest in allocating the settlement proceeds. The California ethics rules for aggregate settlements are codified in the Business and Professions Code. Remedies for their breach is generally fee forfeiture. Those rules require that, before agreeing to an aggregate settlement, every plaintiff must be told the amount of his or her settlement. In addition, if the amount of his or her settlement is different from the amount for other plaintiffs, then the plaintiff must be told why. Only after that process can a plaintiff’s lawyer say yes to an amount offered by the defendant. Thus, QSFs can be important in assuring compliance with the ethics rules.

In large cases, that compliance does not necessarily require allocation to each plaintiff before the settlement amount is agreed to. Rather, the allocation process can be established using a third party. That process will normally include a grid classifying each injury into a category. Then, rather than making specific allocation in advance of agreeing to the settlement, the agreement of each plaintiff is solicited to the use of the grid and a third party to assign each plaintiff to the grid position. Then an appeal is offered for plaintiffs who disagree with their grid position. That process, in lieu of specific advance settlement allocations, satisfies the ethical rules.

If one or more parties has governmental liens, then personal liability attaches to the attorney for nonpayment of those liens if the attorneys hold the settlement proceeds in a trust account. Thus, determination and payment of liens is important. The QSF can do that, removing the risk to the attorney. In addition, the QSF can pay parties with no liens and pay parties as those liens are resolved.

A structured settlement

When a defendant or insurer refuses to enter into a structured settlement, the fund can be used to accomplish a structured settlement. The fund should not be used for this purpose if only a single plaintiff is present because annuity issuers will not issue an annuity where only a single plaintiff is present. There is no tax reason for not doing so, but the business practices in that industry have caused this result.

What causes of action qualify for a QSF?

You can use a QSF in all tort cases and environmental liability cases and discrimination cases. You cannot use a QSF in workers’ compensation cases. Most commonly, QSFs are used in large class-action settlements. For example, when the defense and the plaintiffs’ counsel have agreed on an amount to settle all claims in an aggregate amount, then the money is put into a QSF. At that point, the defendants get a release and dismissal and the QSF administrator starts the process of allocating the gross settlement amount among the plaintiffs.

The mechanics

The terms of the account are normally governed by a document that looks like a trust agreement, although QSFs are not trusts under local law because they lack grantors. The terms provide the source of the funds (the defendant or its insurer), how distributions are to be made, the duties of the fund administrator, and the disposition of settlement proceeds at the end of the fund. The last terms are important because large cases often end up with money at the end due to plaintiffs who could not be located, did not respond to mail or other reasons.

To establish the QSF, the parties file a petition with the court overseeing the litigation or the arbitrator conducting the arbitration and obtain an order approving the establishment of the QSF and retaining jurisdiction over the account. That jurisdiction is seldom exercised, however, and the QSF terms provide that the QSF terminates when the QSF has spent all of its money. If the parties are more comfortable with court supervision, then the QSF terms can provide that all distributions are subject to advance court approval, require periodic accountings, reports of investment performance and the other information traditionally required of a court-supervised trust.

The defendant’s deduction for settling

In a multi-plaintiff case, the normal rule is that the defendant can deduct a settlement at that time the money is paid to a plaintiff. The QSF was added to the Internal Revenue Code to permit the defendant to deduct a payment in multi-plaintiff cases when the settlement is paid to the fund, rather than when the money is paid to each plaintiff. The same is true for the property-casualty insurer. That is, to obtain reserve relief, all that the insurer needs to do is pay the settlement amount to the fund, rather than to individual plaintiffs. The defendant or its insurer must file a form with the IRS reporting the transfer to the QSF and provide a copy of that form to the QSF administrator.

The QSF provision in the Internal Revenue Code is a deduction provision. Before the provision, the Congress had prohibited defendants from deducting structured settlements that would not be made until far into future years. The IRS thought that taking such deductions was a distortion of the defendant’s income, and the government won some cases. But taking on deductions one by one was impractical. So, Congress enacted a prohibition against deducting any payment to settle a case until those payments were made to the plaintiff. That cut off defendants trying to accrue future structured payments before they were actually made. At the same time, however, it slowed mass-tort settlements because the allocation of an aggregate settlement can take years and the litigation would continue. The QSF provision permits the litigation to end when the aggregate settlement number has been agreed to and transferred to a QSF.

Regrettably, there are few tax lawyers for the defendant (or for the plaintiffs) involved in settlement negotiations. Thus, the benefit of using the QSF is often never noticed by the defendant or its insurers.

The bank for holding funds

Any bank can serve as a custodian. If the fund administrator provides a list of the claimants and their entitlement in dollars with the account-opening documents, then FDIC insurance is available on a per-claimant basis, rather than on the gross amount in the fund.

Releasing the defendants and its insurer

When the defendant or its insurer transfers the settlement proceeds to the fund, the plaintiffs provide a release to the defendant that dismisses the defendant from the litigation. The defendant and insurer do not need to wait until the settlement proceeds are paid to the plaintiffs in order to be released and be dismissed from the litigation. The court is required to retain jurisdiction over the fund until the fund terminates. Although the defendant has been released and dismissed, the docket number remains active. In most small- and medium-sized cases, such jurisdiction is never exercised. In large class-action cases, orders are sometimes obtained for distributions and fees are approved under various class action theories.

Operation of the fund

The fund administrator will take instructions from the plaintiff’s attorney in most cases. The attorney will notify the administrator when a distribution is ready to be made following allocations or the resolution of disputes. In large class actions, the administrator will decide, with court approval, when a distribution is appropriate.

The fund administrator will decide on investments or on a checking account for shorter cases with less money. The fund administrator will also file annual tax returns on Form 1120-SF reporting income earned and distributions made.

Investment of fund assets

While held by the fund, the account earns interest that can be paid to the parties at the end of the dispute. Amounts held in a client’s trust account, of course, remit interest to the State Bar Association.

The tax rate on a fund is the highest rate in the Internal Revenue Code, with very limited deductions. Although the fund is sometimes invested in tax-free instruments, diversified portfolios can make sense for funds that last many years.

In addition to the tax motivation for tax-free investments, investment must be conservative, bearing in mind the time horizon for distributions, amount of damages likely to be paid to each present and future claimant and any unknown claimants. The problem of unknown claimants is particularly acute in some product cases. In asbestos, for example, the period between exposure and manifestation of disease can be many years. In some drug cases, future unborn claimants must be considered. Actuarial assumptions must sometimes be made to support current distributions when future distributions are hard to determine.

End of QSF life issue

In larger multi-plaintiff cases, the fund will often find itself with cash after all efforts to distribute the proceeds have been exhausted. For example, in the Boston Archdiocese cases, 20 years have passed. There is still a six-figure balance in the fund. Claimants do not want to go through the claim process because it brings up difficult memories. In the large drug cases, many claimants do not respond to mailings because they have moved with no forwarding address. Skip-tracing often does not result in valid addresses for those claimants.

The law provides that such extra cash can be distributed using the cy pres doctrine. That is, a charity can be located whose charitable purposes relate to the claim in the case in some way. With court approval, a distribution of the remaining cash is made to one or more such charities. Of course, later-arriving claimants are out of luck following those distributions, so every effort must be made to locate those claimants before making the charitable distributions.

In some very large cases, the amount remaining can support the creation of a charity to serve the needs of the remaining unpaid clients and also the needs of the aid claimants who have ongoing medical or other issues, such as the need for psychological counseling for PTSD claimants.

Using multiple funds in the same litigation

Where there is more than one class of plaintiffs, a QSF can be established for each class. The most recent example of multiple funds in the same litigation is the Flint water cases. When lead was discovered in the Flint water supply, thousands of individuals filed cases against multiple defendants and later consolidated. Under a settlement agreement, the amounts of the settlements were divided into a number of sub-qualified settlement funds. There were QSFs for minor children, minor adolescents, minor teens, future minors, property damage, business economic relief and others. Each plaintiff was assigned to a sub qualified settlement fund and within each sub qualified settlement fund, plaintiffs were paid the same amount.

David Higgins

David Higgins' practice has, for 25 years, been limited to the tax and related issues that arise in the settlement of litigation. He is the administrator and tax counsel to the nation’s largest qualified settlement funds and has distributed hundreds of millions of dollars to thousands of plaintiffs. More information about QSFS is at higginsqsf.com.

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Understanding Qualified Settlement Funds (QSF): A Comprehensive Guide

Introduction

When legal settlements or judgments involve multiple parties and complex financial arrangements, Qualified Settlement Funds (QSF) come into play as a crucial tool for managing the distribution of funds. QSFs are accounts established to receive and administer settlement funds before they are disbursed to the intended recipients. 

QSFs act as a financial intermediary, providing a secure mechanism for holding funds and ensuring equitable distribution among claimants. This structured approach not only streamlines the settlement process but also safeguards the interests of all parties involved, fostering a fair resolution in intricate legal scenarios.

Let’s dive into the specifics of what QSFs are, their benefits, complexities, and how to implement them effectively.

What is Meant by Qualified Settlement Funds (QSF)?

A Qualified Settlement Fund (QSF) is a trust, account, or fund established to resolve legal claims and disputes. It serves as a temporary repository for settlement funds, allowing time for proper allocation and distribution among plaintiffs or beneficiaries. QSFs are typically used in cases involving class action suits, mass torts, or other situations where numerous claimants are involved.

Benefits of Qualified Settlement Funds:

• Flexibility and Time:

QSFs provide flexibility in distributing settlement proceeds. Claimants do not need to rush into decisions, allowing time to assess tax implications and plan for long-term financial management.

Implementing Qualified Settlement Funds (QSF) as statutory trusts demands a deep understanding of legal intricacies, ensuring a seamless process that adheres to regulations and maintains fund integrity.

• Tax Advantages:

Funds within a QSF are not taxed until they are disbursed to the claimants, providing potential tax advantages. This delayed taxation allows for strategic financial planning, especially in cases involving substantial sums.

• Complex Cases:

In complex legal scenarios with multiple plaintiffs, defendants, or disputed claims, QSFs simplify the process. They allow the parties involved to resolve issues without the pressure of an imminent disbursement deadline.

• Preservation of Assets:

QSFs ensure that settlement funds are preserved and invested properly, maximizing returns and ensuring that claimants receive the full benefits to which they are entitled. By expertly managing investments, QSFs not only preserve funds but also optimize returns, securing the financial future of the claimants they serve.

Complexities Associated with Qualified Settlement Funds:

• Legal Compliance:

Establishing and managing a QSF involves adherence to intricate legal regulations. Ensuring compliance with tax laws and relevant regulations is essential to avoid complications.

• Investment Decisions:

Properly managing and investing the QSF’s assets require financial expertise. Making sound investment decisions is crucial to preserving the fund’s value over time.

• Tax Implications:

While QSFs offer tax advantages, understanding the tax implications for both the fund and individual claimants is vital. Improper handling can lead to unexpected tax liabilities.

• Administrative Challenges:

Managing the paperwork, communications, and administrative tasks related to a QSF can be overwhelming, especially in large-scale cases with numerous claimants.

How to Implement Qualified Settlement Funds:

Here are a few steps required to implement Qualified Settlement Funds successfully. 

• Legal Consultation:

Seek legal advice from professionals experienced in managing QSFs. They can guide you through the legal requirements and ensure compliance with applicable laws.

• Financial Expertise:

 Engage financial experts to manage the fund’s investments. Their expertise can help preserve the fund’s value and optimize returns. Having financial experts oversee investments ensures the fund’s stability and growth, guaranteeing claimants receive their entitled benefits with confidence.

• Administrative Support:

Consider outsourcing administrative tasks to specialized firms. They can handle communication with claimants, paperwork, and other necessary administrative functions, relieving you of the burden.

• Regular Audits:

Conduct regular audits of the QSF to ensure compliance, proper accounting, and adherence to legal and financial regulations. Regular audits of the QSF are essential to maintain transparency, accountability, and legal compliance, providing stakeholders with the assurance of a well-managed fund.

Bottom Line

In conclusion, Qualified Settlement Funds (QSFs) offer a vital solution in managing complex legal settlements. Their flexibility, tax advantages, and ability to simplify intricate cases make them invaluable tools in the legal landscape. However, the complexities associated with their establishment and management necessitate careful planning, legal expertise, and financial acumen. By understanding the benefits and challenges, and by seeking professional assistance, parties involved in legal settlements can navigate the intricacies of QSFs effectively, ensuring fair and just distribution of funds to the rightful claimants.

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Understanding Qualified Settlement Funds (QSFs): Benefits, Challenges, and Administration Essentials

Qualified Settlement Funds (QSFs) provide flexibility, administrative efficiency, and tax advantages to distribute settlement and judicial award proceeds. Understanding what a QSF is and how it is for the mutual benefit of the defendants, plaintiffs, and the administration challenges involved is essential for all parties involved in a lawsuit settlement or judicial award.

WHAT IS A QUALIFIED SETTLEMENT FUND (QSF)?

A Qualified Settlement Fund is a tax construct used to manage and distribute money from legal settlements or judicial awards. In essence, it enables the transfer of settlement funds from the defendant into the QSF, which is distributable to the claimants. QSFs prove helpful in situations where secondary disputes, third-party liens, claims on the funds exist, or other issues regarding fund distribution are present.

HOW QUALIFIED SETTLEMENT FUND BENEFITS BOTH DEFENDANTS AND PLAINTIFFS

QSFs provide numerous benefits to the defendant(s) and lawsuit plaintiffs, including, but not limited to:

•Immediate Tax Benefits for the Defendant: By establishing a QSF, the defendant can resolve the matter and receive an immediate tax deduction in the year of the settlement or judicial award.

•Immediate Tax Benefits for the Plaintiff: Plaintiffs can defer taxation until the funds are disbursed from the QSF. 

•Simplification: A Qualified Settlement account simplifies the settlement process by facilitating administration and ensuring a fair and unbiased outcome.

•Flexibility: QSFs provide the advantage of time – for the plaintiffs to resolve liens and contractual obligations and the QSF administrator to finalize allocation and distribute settlement funds. The flexibility of time allows for unhurried and thorough planning.

QSF CHALLENGES

Despite all of their benefits, managing a Qualified Settlement Fund can be very challenging due to the following reasons;

Compliance: QSFs need to comply with IRS regulations, and which failing to do so could lead to adverse tax implications. It takes tax expertise and experience to navigate through these complexities.

FDIC Insured Investments: Handling a QSF involves ensuring that the entire settlement is FDIC-insured and that no adverse investment risks are present to preserve capital for disbursements.

Communication and Reporting: Transparent communication with all the parties in interest, providing timely and accurate reports on the QSF account status, is crucial for maintaining confidence and ensuring compliance.

Tax Reporting: The administration of a QSF requires handling intricacies of ongoing tax reporting responsibilities, meticulous accounting practices, and accurate tax identification of the distribution of funds. 

Role of a QSF Administrator

A QSF administrator oversees the management and allocation of settlement funds held within a QSF. Their role involves acting as a trustee, prioritizing the interests of the claimants, and ensuring adherence to regulatory standards.

QSF ADMINISTRATION SERVICES

Experienced QSF administrators provide turnkey QSF account creation and administration services. The most comprehensive solutions offer turnkey online platforms to ensure the seamless creation and operation of the fund. 

Most importantly, a QSF administrator should have no “conflicts of interest” and not be involved in selling or offering the claimant’s investment or insurance products.

Finally, not all QSF administrators are licensed; a licensed provider necessarily provides a higher level of service than a provider without a government license. Ask to see the trust or fiduciary license of the QSF provider you are considering.

In summary, understanding Qualified Settlement Funds and their management is crucial for all parties engaged in the settlement procedure. Tested solutions such as QSF 360  from Eastern Point Trust Company , a leading Qualified Settlement Fund account provider, make available a turnkey online process that facilitates the creation of a QSF in as little as one business day, along with a fully integrated administration suite of Qualified Settlement Fund services.

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Qualified Settlement Funds: An In-Depth Analysis

Qualified Settlement Funds (QSFs) are powerful financial tools designed to provide flexibility and tax efficiency in complex dispute resolution scenarios. These funds are instrumental when plaintiffs and defendants negotiate a settlement but cannot agree on tax language or reporting specifics. In this comprehensive guide, we'll explore the origins, benefits, and practical applications of QSFs and the implications for various stakeholders involved in the settlement process.

Section 1: Origins of Qualified Settlement Funds

Qualified Settlement Funds originate from Section 468B of the Internal Revenue Code. This section was introduced as part of the Tax Reform Act of 1986 to streamline the settlement process in multi-plaintiff lawsuits. Initially, QSFs were predominantly used for class actions and other complex cases involving multiple plaintiffs. However, their use has expanded to include various legal disputes, from personal injury cases to breach of contract claims.

Section 2: Establishing a Qualified Settlement Fund

Establishing a QSF is a relatively straightforward process. The fund must satisfy three fundamental requirements:

• It must be established under the jurisdiction of a governmental authority, which will also exercise ongoing supervision over the fund.
• The fund must be set up to resolve or satisfy one or more legal claims. These can range from tort claims to violations of law.
• If established as a trust, the fund must qualify as a trust under applicable state law, necessitating a trust agreement and trustee.

Section 3: Tax Implications for Defendants

When defendants contribute to a QSF, they can immediately claim a tax deduction for the settlement payments. This feature is a significant benefit, as under ordinary tax rules, defendants cannot claim a deduction until the plaintiff receives the money. A QSF effectively creates an exception to these rules, allowing defendants to claim deductions even if the funds remain tied up in the QSF for an extended period.

26 CFR 1.468B-3(c) clearly states that “economic performance” occurs upon the funding of a QSF:

(c) Economic performance—(1) In general. Except as otherwise provided in this paragraph (c), for purposes of section 461(h), economic performance occurs with respect to a liability described in §1.468B–1(c)(2) (determined with regard to §1.468B–1(f) and (g)) to the extent the transferor makes a transfer to a qualified settlement fund to resolve or satisfy the liability.

Note that 26 U.S. Code §461 - General rule for taxable year of the deduction - is the statute that controls when an expense is deductible upon “economic performance.” Below are the applicable provisions of §461(h) as stipulated in §1.468B-3(c) as being satisfied.

(h) CERTAIN LIABILITIES NOT INCURRED BEFORE ECONOMIC PERFORMANCE

(1) IN GENERAL For purposes of this title, in determining whether an amount has been incurred with respect to any item during any taxable year, the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs.

(2) TIME WHEN ECONOMIC PERFORMANCE OCCURS Except as provided in regulations prescribed by the Secretary, the time when economic performance occurs shall be determined under the following principles:

(A)  Services and property provided to the taxpayer If the liability of the taxpayer arises out of—

(i) the providing of services to the taxpayer by another person, economic performance occurs as such person provides such services, (ii) the providing of property to the taxpayer by another person, economic performance occurs as the person provides such property, or (iii) the use of property by the taxpayer, economic performance occurs as the taxpayer uses such property.

(B)  Services and property provided by the taxpayer If the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services. ‍ (C) Workers compensation and tort liabilities of the taxpayer If the liability of the taxpayer requires a payment to another person and—

(i) arises under any workers compensation act, or (ii) arises out of any tort, economic performance occurs as the payments to such person are made. Subparagraphs (A) and (B) shall not apply to any liability described in the preceding sentence.

(D) Other items In the case of any other liability of the taxpayer, economic performance occurs at the time determined under regulations prescribed by the Secretary.

Section 4: Tax Treatment of Qualified Settlement Funds

The tax treatment of QSFs is relatively straightforward. The IRS assigns a QSF its own Employer Identification Number (EIN). The QSF is taxed separately but not on the money contributed by the defendants. Instead, it is taxed on the earned income, such as interest and dividends. However, the QSF can deduct certain expenses, often resulting in no tax due.

Section 5: Benefits of Using Qualified Settlement Funds

QSFs offer myriad benefits for all parties involved in the dispute resolution process. For defendants, they provide an opportunity to claim tax deductions immediately and remove themselves from ongoing litigation. For plaintiffs, they offer time to make crucial decisions regarding the allocation of settlement funds, the negotiation of lien claims, and the implementation of financial planning strategies. Moreover, QSFs facilitate the resolution of disputes among multiple plaintiffs and lawyers, contributing to an efficient and fair settlement process.

Section 6: Qualified Settlement Funds and Structured Settlements

Structured settlements, which involve payments made over time, can also be facilitated through QSFs. These settlements can offer tax, financial planning, and asset protection advantages. Notably, a QSF allows the timing of a structured settlement to be delayed until after the defendant is out of the picture. This feature allows plaintiffs to consider the various financial options available to them, including the form of structure, the exact annuity payout, and family needs.

Section 7: The Role of Trustee in Qualified Settlement Funds

The trustee of a QSF plays a critical role in managing the fund. Almost anyone who is not a minor or legally incompetent can serve as a trustee. While the trustee does not need to be a trust company or specialist, they need to be able to manage the QSF's assets responsibly, as the trustee is responsible for making distributions from the QSF to claimants, dealing with any liens, and arranging structured settlements, as necessary.

Section 8: The Duration of Qualified Settlement Funds

There is no explicit limit on the duration of a QSF. In simple cases, a QSF may exist for a few months, providing enough time to resolve lien issues, determine the allocation of funds, and consider structured settlement options. A QSF may need to exist for several years in more complex cases. The needs of the QSF, including but not limited to ongoing disputes regarding the distribution of funds and related factors, should dictate the duration of a QSF.

Section 9: The Use of Qualified Settlement Funds in Different Types of Claims

QSFs can be used to resolve various legal claims, including those arising from tort, contract breach, or other violation of law. However, there are certain types of claims where using a QSF is prohibited, such as liabilities arising from a workers' compensation act, obligations to refund the purchase price of products sold in the ordinary course of business, and liabilities related to bankruptcy cases or workouts.

Section 10: The Role of Qualified Settlement Funds in Tax Planning

Contrary to some misconceptions, forming a QSF does not complicate tax planning for plaintiffs. A QSF can enhance the plaintiff's chances of achieving the desired tax treatment. When plaintiffs and defendants cannot agree on tax language or reporting specifics, a QSF can bridge these difficulties, allowing the plaintiff to negotiate the appropriate tax reporting with a neutral party, such as the QSF trustee.

Section 11: Conclusion

Qualified Settlement Funds afford the defendant immediate tax deductions and are a flexible tax-efficient tool that can facilitate smooth and equitable dispute resolution. By providing a “safe harbor” for settlement funds during the allocation and planning phase, QSFs enable all parties to navigate complex settlements more effectively. Whether you're dealing with a multi-plaintiff lawsuit, a complicated personal injury case, or a contentious contract dispute, a QSF could be an essential part of your strategy.

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Qualified Settlement Funds

A QSF is a temporary trust established to receive settlement proceeds from a defendant or group of defendants.  Its primary purpose is to allocate the monies deposited into it amongst various claimants and disburse the funds based upon agreement of the parties or court order, if required.  Upon disbursing all of the monies the QSF ceases to exist. 

There are many reasons to use a QSF in a complicated settlement.  Most importantly they are quite easy to establish. A QSF may hold benefits for all parties as it relates to taxes, timing of income and settlement planning needs.  A tax-free structured settlement and a tax-deferred attorney fee structure can be properly created through the use of a QSF.  The parties can influence timing of income through the use of a QSF.  QSF claimants are typically not taxed on funds in the QSF until those funds are distributed (assuming the damages are taxable).  A QSF also gives some extra time and flexibility for claimants to make decisions related to settlement planning issues such as special needs trusts and Medicare Set Asides along with structured settlements.

• Medicare Secondary Payer Act
• Medicare Set Asides
• MSP Compliance
• Public Benefits
• Settlement Planning
• Taxation of Damages
• Ahlborn for Medicare Conditional Payments?
• Apportionment for MSAs
• CMS Query System
• Congressional Investigation of MSP Practices
• Dual Eligibility
• Florida Ahlborn Rulings
• Florida Medicaid Reduction Formula
• Health Insurance Coverage
• Liability Medicare Set Asides
• LMSA - Federal Court Approves
• Mandatory Insurer Reporting
• Mandatory Insurer Reporting Discovery
• Medicaid Ahlborn Reduction
• Medicare (MSP) Legislative Reform
• Medicare Administrative Process Exhaustion
• Medicare Advantage Plan Recovery Rights
• Medicare as Payee on Settlement Check
• Medicare Conditional Payment Resolution
• Medicare Conditional Payments
• Medicare Condtional Payment Recovery
• Medicare Condtional Payment Recovery in WD Cases
• Medicare Ripeness
• MSA Allocations
• MSA Contingency
• MSA not necessary
• MSAs - Enforceability of Settlement
• MSAs - Who Pays if CMS Increases?
• MSP Ethical Issues
• MSPRC Alerts
• No LMSA Required
• Qualified Settlement Fund
• Set Aside Administration
• Settlement Ethics
• Structured Settlement Class Action
• Structured Settlement Liability
• Taxation of Injury Damages
• before event fired.
• after event fired.