By using this site, you agree to our Privacy Policy and our Terms of Use.

The Formation of Qualified Settlement Funds as Trusts According to §1.468B-1

PUBLISHED 05/23/2023
Formation of Qualified Settlement Funds as Trusts According to §1.468B-1

Qualified Settlement Funds (QSFs) offer a practical solution for parties involved in litigation (and non-litigation disputes) to fulfill monetary settlements. Notably, their formation and operation as trusts falls under the scope of regulation §1.468B-1 in the U.S. federal tax code [1][2].

Under §1.468B-1, QSFs are treated as trusts for federal income tax purposes [1]. These entities are deemed to be owned by the transferor as dictated by section 671 and its subsequent regulations. This regulation holds, except for paragraph (b) of the section and §1.468B-4, which deal with different aspects of the fund.

Importantly, if a fund, account, or trust classified as a QSF aligns with the definition of a trust under §301.7701–4, it is classified as a QSF for all purposes of the Internal Revenue Code [2]. This classification provides additional legal and financial protection for the parties involved in the settlement.

The trust formed as a QSF constitutes a separate taxable entity per section 1.468B-1(c) of the Income Tax Regulations [3]. Being separate from the parties involved, the fund can independently manage the financial obligations associated with the settlement.

The IRS’s EIN system additionally classifies a QSF under the Trust Section of the online EIN system, notwithstanding that investment income is taxed at the corporate rate and a QSF files an IRS Form 1120-SF.

Note: The settlement payments transferred in a QSF are not taxable income to a QSF. Only investment income (interest) earned by the QSF is taxable.

Moreover, the QSF trust is taxed on its modified gross income, a term defined under section 1.468B-2(b) of the Income Tax Regulations [3]. This taxation is equivalent to the maximum corporate rate, underscoring the fund's distinctness as a taxable entity.

In summary, forming QSFs as trusts provides a structured method for handling settlement funds, aligns with federal tax obligations, and offers protection for all parties involved in the legal proceeding. Adhering to regulations such as §1.468B-1 allows for a consistent, statutorily established approach to managing and distributing funds arising from settlements.

[1] “However, this section (except for paragraph (b) of this section) and §1.468B-4 apply to the qualified settlement fund; (ii) The qualified settlement fund is treated, for Federal income tax purposes, as a trust all of which is treated as owned by the transferor under section 671 and the regulations thereunder;”
‍https://www.law.cornell.edu/cfr/text/26/1.468B-1

[2] “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.”
‍https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR53de09ff5f206e9/section-1.468B-1

[3] “(1) The Trust will constitute a qualified settlement fund under section 1.468B-1(c) of the Income Tax Regulations. The Trust will be treated as a separate taxable entity. (2) The Trust will be subject to tax on its modified gross income as defined in section 1.468B-2(b) of the Income Tax Regulations at a rate equal to the maximum rate in effect for that taxable year under section 1(e) of the Internal Revenue Code.”
‍https://www.irs.gov/pub/irs-wd/0149013.pdf
SHARE THIS ARTICLE

Disclosure: This paper is an overview. It is not a detailed analysis and offers no legal or tax opinion on which you should solely rely. Always seek the advice of competent legal and tax advisors to review your specific facts and circumstances before making any decisions or relying on the content herein.

Any opinions, views, findings, conclusions, or recommendations expressed in the articles contained herein are those of the author(s) and do not necessarily reflect the view of the Eastern Point Trust Company, its Affiliates, or their clients. The mere appearance of an article does not constitute an endorsement by Eastern Point Trust Company (“EPTC”) or its Affiliates. The author’s opinions are based upon information they consider reliable, but neither EPTC nor its Affiliates, nor the company with which such author(s) are affiliated, warrant completeness, accuracy or disclosure of opposing interpretations.


EPTC and its Affiliates disclaim all liability to any party for any direct, indirect, implied, special, incidental, or other consequential damages arising directly or indirectly from any use of the content herein, which is expressly provided as is, without warranties.

ARTICLE Archive

Get More Information

Your submission has been received.
A member of our team will be in touch with you soon.
Something went wrong while submitting the form.
Please see our Contact Us page for more options to connect with us.
SOLUTIONS
LEARN
ABOUT EPTC
Eastern Point Trust Company is a member of the American Bankers Association.


Copyright © 2006-2023 Eastern Point Trust Company
Eastern Point Trust Company offers a variety of escrow, ministerial services, trust administration services, self-help support software, attorney support software, and document management systems, some of which offer companion self-service, automated software solutions. Fiduciary and trustee services are only offered and performed by Eastern Point Trust Company in such jurisdictions in which Eastern Point Trust Company is licensed to provide such services and then pursuant solely to the terms of the associated governing documents. Eastern Point Trust Company may act in a ministerial non-fiduciary capacity as escrow agent when applicable. As required by federal law related to “domestic trusts,” fiduciary services related to "substantial decisions" shall be required to be independently performed by one or more co-trustees or affiliated or non-affiliated parties who are “United States persons.” Fees charged are solely for ministerial services, trustee services, or licensing fees to access the self-help system, and fees are not drafting or document preparation fees. The content herein is provided as, and limited to, information and descriptions of the features and benefits of Eastern Point Trust Company’s services, products, and requirements when applicable. This website is for informational purposes only and is not an offer to sell, a solicitation, or an offer to buy any security. Nor is the content here an offer to provide legal, fiduciary, or trust services. The information herein is not intended to be legal or investment advisory advice and should not be constructed as legal or investment advisory advice. Eastern Point Trust Company and its affiliated parties are not law firms, are not a lawyer referral service, and do not act as your attorney or investment advisor. Eastern Point Trust Company is not a substitute for the advice of an attorney or an investment advisor; as such, Eastern Point Trust Company does not provide any advice, explanation, opinion, or recommendation about possible legal rights, express any legal guidance on the matters contained herein, nor provide investment advice or management. As appropriate, seek the advice of an attorney if you have questions concerning legal questions, remedies, defenses, or options; or seek the advice of a licensed investment advisor related to trust holding(s) or investments. Eastern Point Trust Company and its affiliated companies are not broker-dealers and only forward your instructions to executing custodians/broker-dealers. Your accessing and utilizing this website constitutes your agreement to the Terms and Conditions shown herein. Please review the Terms and Conditions carefully, as they contain important information and disclosures and are legally binding. The terms of the applicable agreement, and the Terms and Conditions on the www.easternpointtrust.com website shall supersede and have precedent over any information provided for herein. You are solely responsible for protecting the privacy and security of your electronic communications (sent or received). Additionally, it is your duty to secure your systems, networks, devices, browsers, and communications systems and devices with anti-virus and malware protection and anti-breach security software. Any loss resulting from a breach of your systems, networks, devices, browsers, or communications systems and devices is solely your liability.
Back to top