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Qualified Settlement Fund (QSF) Creation - List of Key Points Lawyers Need to Know

May 20, 2025

Create and manage Qualified Settlement Funds with QSF 360. Fast QSF creation, tax benefits, and expert administration. Start now!

1. Court Approval is Not Mandatory

Court approval to establish a Qualified Settlement Fund is NOT required.
IRC § 468B-1(c)(1) allows non-court “governmental authorities” to approve its creation.

2. Governmental Authority Approval

QSFs can be approved by various government entities, including federal, state, or local agencies.
The approving authority oversees QSF administration to ensure compliance with the terms of the judicial award and associated regulations.

3. IRS Involvement in Approval Process

The IRS plays a role in supervising QSFs through tax regulations, rules, and EIN issuance.
The QSF administrator must ensure compliance with IRS requirements for QSF establishment and administration.

4. Establishing

Parties must petition a governmental authority to create and approve establishment.
The authority reviews the proposed trust agreement for qualification requirement compliance.

5. Advantages Beyond Tax Benefits

QSFs provide tax benefits for both the plaintiff and defendant, offer timing flexibility, and reduce administrative costs and burdens.
They also facilitate the satisfaction of liens and the resolution of any secondary issues or disputes.

6. Streamlined Creation Options

Establishment methods via courts can be time-consuming and costly.
Platforms such as QSF 360 offer faster, more cost-effective solutions, along with skilled and qualified settlement fund administration.

7. IRS Filing Requirements

The QSF administrator must file annually Form 1120-SF (U.S. Income Tax Return for Settlement Funds).
Form 1041 (U.S. Income Tax Return for Estates and Trusts) is not applicable in this case.

8. Life Cycle

§468B funds operate on a calendar-year basis and come into existence upon approval by the governmental authority.
The fund administrator must ensure that the fund meets all IRS requirements, regardless of whether the funding has been made.

This listicle offers a summary overview. Always consult with experienced QSF administration professionals for specific guidance on Qualified Settlement Funds administration.

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For a comprehensive overview of tax minimization strategies, see our guide on minimizing tax liability on lawsuit settlements.

Learn how the Plaintiff Recovery Trust addresses the attorney fee double tax created by Commissioner v. Banks.

Frequently Asked Questions

Under IRC § 61, all income from whatever source derived is taxable unless a specific exclusion applies. Lawsuit settlements are included in gross income by default. The key exceptions are physical injury and physical sickness recoveries under IRC § 104(a)(2), which are excluded from gross income when received as compensation for a physical injury or physical sickness claim.

IRC § 104(a)(2) excludes from gross income damages received on account of personal physical injuries or physical sickness. The exclusion applies to compensatory damages only. The injury or sickness must be physical — emotional distress damages, employment discrimination recoveries, breach of contract proceeds, and punitive damages do not qualify for the exclusion and are taxable.

Yes. Punitive damages are taxable as ordinary income regardless of whether the underlying claim involves a physical injury. IRC § 104(a)(2) does not exclude punitive damages. Even in a physical injury case where compensatory damages are excluded, any punitive damages awarded are included in the plaintiff's gross income and subject to federal income tax.

For most plaintiffs, no. The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions under IRC § 67(g) for tax years 2018 through 2025, eliminating the attorney fee deduction for most civil litigation recoveries. IRC § 62(a)(20) provides an above-the-line deduction only for qualifying discrimination and whistleblower cases. Plaintiffs in personal injury, breach of contract, and most tort cases cannot deduct attorney fees under current law.

A Qualified Settlement Fund (QSF) under IRC § 468B separates the timing of the defendant's payment from the plaintiff's taxable receipt of funds. The defendant transfers proceeds to the QSF and takes an immediate tax deduction. The plaintiff does not recognize taxable income until distribution from the QSF, preserving a planning window to implement structured settlements, Plaintiff Recovery Trusts, Special Needs Trusts, or other tax-minimization strategies before receiving taxable income.

A Plaintiff Recovery Trust (PRT), administered by Eastern Point Trust Company, addresses the attorney fee double tax created by Commissioner v. Banks, 543 U.S. 426 (2005), and worsened by TCJA 2017. The PRT separates the attorney fee portion of the settlement from the plaintiff's taxable recovery, allowing each party to recognize income only on their respective portion. Eastern Point Trust Company has saved plaintiffs $30 million or more through PRT structures. The PRT is implemented during the QSF administration window before taxable distributions occur.

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Qualified Settlement Fund

Plaintiff Recovery Trust