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Qualified Settlement Fund Approval – Listicle of Legal Requirements

Qualified Settlement Fund Approval - Government Building

Qualified Settlement Funds (QSFs) are a legal mechanism established under Section 468B of the Internal Revenue Code, designed to hold settlement proceeds in trust for plaintiffs in a lawsuit. It allows for the efficient management and distribution of funds in complex litigation, particularly in cases involving multiple claimants.

The primary benefits of a QSF include deferring taxation for plaintiffs until they receive their settlement funds, providing flexibility in distributing the settlement proceeds, and allowing time to address lien resolution, claims administration, or other post-settlement issues. Additionally, defendants benefit by obtaining an immediate release from liability upon transferring the settlement funds into the QSF.

Approval Process

Navigating the world of QSFs can be complex, but understanding the approval process is crucial. We examine here the primary legal requirements and misconceptions surrounding the approval process:

Establishment by Court Order

§ 1.468B-1(c)(1) requires that a QSF obtain the approval of a “Governmental Authority,” which establishes the fund’s legitimacy. There is no requirement that the approval MUST come from a court; such suggestions demonstrate a lack of applicable experience and knowledge of IRC § 468B. Without such authorization, the fund is not “qualified” and will confer the associated tax benefits.

Establishing Before Appeals

Establishing and obtaining governmental approval before the appeals process related to the underlying lawsuit is resolved is possible. However, post-settlement disputes amongst the claimants may continue after establishing the QSF.

Extinguishment of Defendant’s Liability

The 468B settlement fund and the associated settlement agreement of judicial order should completely extinguish the defendant’s liability – resulting in no tail liability.

Qualified Settlement Fund Administrator Appointment

A QSF administrator must be appointed, which is critical in managing the Qualified Settlement Fund administration. Always look for a licensed fiduciary with vast experience and demonstrated knowledge.

Jurisdiction Retention

The approving 468B Governmental Authority must retain jurisdiction over the fund. This ongoing oversight ensures proper management and distribution. However, when applicable, the court approving the settlement terms or issuing the judicial award retains jurisdiction over the settlement/judicial order terms.

Resolving Claims Against Defendants

§ 1.468B-1(c)(3) requires The QSF must be 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.” So-called “Firmwide QSFs” which comingle unrelated claims do not meet the requirements of § 1.468B-1(c)(3)

Meeting IRC § 468B Requirements

The fund must meet IRC § 468B requirements and related Treasury Regulations (1.468B-1 et seq.).

Each of the preceding requirements is crucial. Failing to meet even one could jeopardize the entire process. And the associated tax treatment. As legal and settlement professionals, we must ensure compliance.

Don’t let the complexities of QSFs intimidate you. With this knowledge, you’re better equipped to navigate the court approval process successfully. Stay informed, stay compliant, and ensure your Qualified Settlement Fund stands up to legal scrutiny!

To learn more details, see the detailed article on QSF approval requirements.

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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