Qualified Settlement Funds (QSFs) are qualified tax entities established under the legal framework of 26 U.S.C. § 468B, regulated under 26 C.F.R. § 1.468B-1, and operate as statutory trusts. These QSFs or Section 468B trusts are settlement funds created upon the approval of a “government authority.” Critical to a successful QSF implementation is the Qualified Settlement Fund Administrator and associated QSF Administration, which streamlines the settlement process for efficient distribution to the involved parties. This consolidation simplifies the fund’s administration and introduces tax benefits designed to empower the plaintiffs financially.
In this article, we will explore the common myths regarding Qualified Settlement Funds and Qualified Settlement Fund Administration.
One common misconception about Qualified Settlement Funds is that they are exclusively utilized for mass tort and class action settlements. However, the versatility and application of QSFs extend far beyond these areas.
Broad Application: QSFs are designed to resolve and satisfy claims, including those made before the QSF is established and funded. This broad application makes them suitable for most types of torts, breach of contract, and environmental liability cases.
Diverse Case Types: The use of QSFs spans a wide range of cases. They are not only applicable in scenarios with large numbers of plaintiffs, such as product-liability cases, drug cases, and sexual abuse cases, but also in single claimant cases.
Ethics and Compliance: Particularly in cases with multiple plaintiffs, QSFs play a crucial role in ensuring compliance with ethics rules.
Uncooperative Defendants: QSFs support structured settlement solutions even when a defendant or insurer is unwilling to enter directly. Moreover, QSFs can effectively pay adverse parties with and without liens and address lien resolutions.
The myth that only plaintiffs benefit from QSFs overlooks the multiple advantages these funds offer to all parties involved in litigation. The following outlines the benefits for both plaintiffs and defendants, showcasing the unique utility of QSFs:
Deferred Taxation: Plaintiffs benefit from deferring taxes on their settlement amounts until the funds are distributed, providing significant financial planning flexibility.
Flexibility: Plaintiffs gain financial planning and tax benefits by avoiding immediate access to income from the settlement and having ample time for negotiations to address liens and choose distribution methods.
Conflict Resolution: QSFs facilitate the resolution of disputes among multiple plaintiffs and their attorneys, contributing to a more efficient and equitable settlement process.
Settlement Planning: Plaintiff attorneys can secure the settlement proceeds in a QSF, providing a safe space to work out a comprehensive settlement plan, address liens, and engage in probate proceedings without the pressure of immediate distribution.
Immediate Tax Deductions: Defendants can immediately claim tax deductions for their contributions to a QSF, even if the funds have not yet been distributed among the plaintiffs. This benefit to the defendant is particularly significant because it allows for deductions when the settlement is paid into the QSF rather than upon distribution to each plaintiff.
Litigation Closure: By contributing to a QSF, defendants can remove themselves from the ongoing settlement administration process, often receiving a permanent release upon their contribution. Thus, QSFs simplify the settlement process and provide financial and legal closure.
Streamlined Process: Forming a QSF can bridge difficulties when plaintiffs and defendants cannot agree on tax language or reporting, ensuring that all tax, legal fee, and payout issues are managed strictly between plaintiffs and their lawyers outside the influence of defendants.
Contrary to the prevalent belief that establishing a Qualified Settlement Fund (QSF) is a costly affair, platforms like QSF 360 offer the creation of a QSF for a setup fee of only $500. The process and costs associated with setting up and maintaining a QSF are as follows:
The myth surrounding the overwhelming complexity of Qualified Settlement Fund (QSF) administration can deter parties from considering this efficient settlement solution. However, understanding the structured roles and responsibilities can demystify the process:
Dispelling the myth that Qualified Settlement Funds (QSFs) offer limited tax advantages requires an in-depth exploration of the tax benefits they present for defendants and plaintiffs. Here is a concise breakdown:
Immediate Tax Deduction for Defendants: Upon contributing to a QSF, defendants are eligible for an immediate tax deduction, even if the funds have yet to be distributed to the plaintiffs. The upfront deduction can significantly reduce the defendant’s taxable income in the fiscal year of the contribution.
Income Deferral for Plaintiffs: Plaintiffs can defer taxation on their settlement amounts until distribution. The benefit of deferral can offer substantial financial planning advantages, allowing plaintiffs to potentially lower their tax obligations by receiving funds in years when they may be in a lower tax bracket.
Structured Settlements and Legal Fees: Both structured settlements and structured legal fees are available post-defendant involvement, providing plaintiffs and their attorneys the flexibility to plan for future financial needs. Notably, structures, including the attorney fees portion of the claimant proceeds, can circumvent constructive receipt and economic benefit doctrines, taxing plaintiffs and their attorneys only upon receiving each payment.
Separate Tax Entity Status: As a separate tax entity, QSFs are subject to taxation on interest and dividend income at the maximum rate of 39.6% (as of 2024). Despite the taxation, QSFs benefit from deductions for administrative costs, incidental expenses, and losses sustained in property transactions.
Accrual Accounting and Corporate Treatment: QSFs must employ an accrual method of accounting and are treated as corporations for subtitle F of the Internal Revenue Code. This corporate treatment simplifies tax reporting and compliance, ensuring that the tax imposed on the QSF’s modified gross income is treated consistently with corporate tax obligations.
No Explicit Time Limit: The absence of a strict time limit for the existence of a QSF provides flexibility in managing complex cases that may span several years. This enduring nature ensures that all controversies can be resolved without rushing the process, benefiting all parties involved.
The myths surrounding QSFs, QSF Administration, their applicability, costs, tax advantages, and administrative complexity are unfounded. Additionally, the critical element to ensure a seamless QSF is the QSF Administrator.
Particularly noteworthy is the capacity of QSFs to extend beyond limited use scenarios, provide benefits to plaintiffs and defendants, and offer significant tax advantages that can profoundly impact financial planning and legal strategy.
In navigating the complexities and ensuring optimal outcomes within the QSF framework, engaging a skilled and experienced administrator is vital. Use only a licensed fiduciary for QSF Administration to ensure compliance, maximize tax benefits, and streamline the settlement process for all parties involved. This professional insight and management are pivotal in harnessing the full potential of QSFs, transforming them from a misunderstood financial instrument into a powerful solution for dispute resolution and settlement planning.
* Same-day service is dependent on a variety of factors such as the time of day when the QSF creation request was received. This also excludes non-business days if said QSF creation request was received outside normal business days.
BP OIL SPILL/
DEEPWATER HORIZON
INDONESIA JETCRASH FLIGHT 152
AIR PHILIPPINES FLIGHT 531
VW GROUP OF AMERICA INC SETTLEMENT (DIESEL CASE)
3M
AMAZON
GENERAL MOTORS
MATCH
INTUIT MULTI-STATE SETTLEMENT
BERNARD MADOFF
PURDUE PHARMA
POLARIS INDUSTRIES
