Qualified Settlement Fund Approval – Listicle of Legal Requirements

Qualified Settlement Funds (QSFs), also referred to as a §468B Trust or Settlement Fund, are a legal mechanism established under Section 468B of the Internal Revenue Code. This mechanism 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. Here, we examine 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 of a Qualified Settlement Fund 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 not confer the associated tax benefits.

Establishing Before Appeals

It is possible to establish and obtain governmental approval before the appeals process related to the underlying lawsuit is resolved. However, disputes among the claimants may continue after the establishment of the QSF post-settlement.

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 extensive experience, a proven track record, and avoid escrow-based QSF arrangements, which often lack operational qualifications.

Jurisdiction Retention

The approving 468B Governmental Authority must retain jurisdiction over the fund. However, when applicable, the court approving the settlement terms or issuing the judicial award retains jurisdiction over the settlement and judicial order terms.

Resolving Claims Against Defendants

§ 1.468B-1(c)(3) requires that the QSF 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 the requirements of IRC § 468B and the 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 withstands legal scrutiny.

For more details, refer to the comprehensive article on QSF approval requirements.