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Never Establish a QSF in Massachusetts – The Unnecessary Taxation of a Qualified Settlement Fund

Angry man looking at income tax - Never Establish a QSF in Massachusetts

Massachusetts is known for Boston, Cape Cod, the Salem Witch Trials, and high taxes. It is no surprise that, when creating a Qualified Settlement Fund (“QSF”) in Massachusetts, the state imposes its aggressive tax policy on QSF income. Therefore, any QSFs used in Massachusetts or established by Massachusetts’ governmental authorities are subject to federal and Massachusetts taxation.

Massachusetts’ applicable income tax rate for the 2023 tax year is a flat five percent (5%) rate on the entirety of the QSFs’ taxable income. As of 2023, an additional 4% tax income over $1 million also applies. Thus, the Massachusetts Department of Revenue’s Letter Ruling 08-7 demonstrates that creating a QSF in Massachusetts is a costly mistake that will result in unnecessarily high taxation.

business people surrounding computer with QSF 360 on the screen

Background of Letter Ruling 08-7

In Letter Ruling 08-7, issued March 28, 2008, the Massachusetts Department of Revenue established Massachusetts’s position concerning the “Taxation of Qualified Settlement Fund.”

The Massachusetts Department of Revenue ruling outlined the following:

  • A QSF is subject to tax under the Massachusetts General Laws, Chapter 62.
  • The taxation applies if a Massachusetts governmental authority (including a “Massachusetts Court”) establishes a QSF.
  • In general, the ruling provides taxation on income derived from or attributable to sources within Massachusetts, including income from tangible or intangible property located or having a situs in Massachusetts and income from any activities carried on in Massachusetts.
  • The Massachusetts Department of Revenue asserts that the situs of trust within Massachusetts applies unless the property has formally acquired a situs elsewhere. This doctrine means a QSF (including a designated settlement fund) shall be presumed to be in Massachusetts if the court or the governmental authority that ordered or approved the establishment of the QSF is in Massachusetts or if trust assets or the situs was in Massachusetts for any part of the year.

Conclusion

diagram showing high tax rate in Massachusetts on qualified settlement funds

While a few states have higher taxes than Massachusetts’s top rate of nine percent (9%), many states have no taxation to a trust-based QSF. Thus, planners and attorneys should carefully consider in which jurisdiction you create a QSF and judge the advantages of QSF 360 to tax optimize and reduce your QSF tax liabilities.

Rachel McCrocklin
Rachel McCrocklin
Author

Rachel McCrocklin

Ms. Rachel McCrocklin, MBA is a settlement industry and trust professional specializing in creating, operating, and administering 468B Qualified Settlement Funds (QSFs). Additionally, she provides insights on advanced settlement optimization solutions such as the Plaintiff Recovery Trust (PRT) while working with litigants, plaintiff counsel, and defendants to implement tax-efficient solutions and maximize settlement outcomes for all stakeholders.

Ms. McCrocklin oversees Eastern Point's QSF and PRT client services operations and communications while participating in developing new and innovative advantaged tax structures.

She is a prolific author of articles, including for the American Bar Association; she regularly presents at the Federal Bar Association, Practicing Law Institute, and settlement industry events and is frequently cited in financial industry publications such as USAToday, Finance Digest.

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