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Qualified Settlement Funds (QSF) – Listicle of 12 Things to Know

A Lawyer Reading Qsf Listicle

Qualified Settlement Funds (QSFs) are powerful financial tools to administer settlements, especially in complex matters. Parties involved in disputes contemplated under § 1.468B-1 et seq. can effectively manage and benefit from Qualified Settlement Funds’ tax and financial advantages.

Here are 12 details on QSFs and their operational features you should know.

1. Definition and Purpose of a Qualified Settlement Fund

What is a QSF? A Qualified Settlement Fund (QSF), also known as a 468B Trust, is a statutory mechanism that simplifies the handling and distribution of settlement funds. QSFs enable plaintiffs to postpone tax payments and ensure an organized settlement procedure.

Purpose: QSFs aid in streamlining settlement processes by consolidating payments into a fund allocated to claimants.

2. Eligibility Requirements for Establishing a QSF

Eligibility: Any party involved in one or more contested or uncontested claim(s) asserting liability that has resulted or may result from an event or related series of events can establish a QSF provided it satisfies the conditions specified in IRC § 468B and its regulations, including obtaining approval from a “governmental authority.”

Approval Process: To ensure compliance with § 468B, creating a QSF requires approval from a governmental authority.

Creation: Platforms like QSF 360™ provide a quick, easy, and fully compliant solution for creating and administering a QSF.

3. Key Benefits of Using a QSF for Settlement Funds

Immediate Tax Deduction: Defendants can avail themselves of an immediate tax deduction for the payment made into the QSF.

Tax Deferral for Plaintiffs: Plaintiffs benefit from additional time to plan. Funds held in a QSF are tax-deferred until disbursed.

Flexibility: QSFs provide more flexible tax and financial options for the attorneys and claimants.

4. Taxation and Reporting Requirements for a QSF

Tax Treatment: Each QSF has its own Employer Identification Number (EIN) and is taxed only on its modified gross income (excluding the settlement fund transferred into the QSF). The QSF pays taxes only on its investment income – not the settlement proceeds.

Reporting: The QSF administrator is responsible for the tax returns for the QSF and, when applicable, issuing 1099 forms to claimants.

5. Investment Options and Considerations for QSF Assets

Asset Management: QSF assets are best and typically held in FDIC-insured money market accounts. The resulting interest covers administrative costs or increases the fund’s value for the claimants.

Treasury Management: Treasury management, daily account reconciliation, and transparent reporting are essential.

6. Roles and Responsibilities of the QSF Administrator

Administrator’s Duties: The QSF administrator oversees the fund’s operations, including recordkeeping, reporting, compliance with regulations, and distribution to claimants or lien holders on the claimant’s behalf.

Critical Role: The QSF administrator supervises and facilitates making timely distributions and resolving liens.

7. Procedures for Making Distributions From a QSF

Distribution Process: The QSF administrator oversees payments to the claimants, lien satisfaction, and the funding of trusts, assignments, and structured settlements.

Documentation: Proper documentation and releases are necessary for each distribution.

8. Advantages of a QSF Over Other Settlement Structures

Streamlined Process: QSFs consolidate payments into a single point of contact for all parties involved.

Flexibility: By allowing time for personalized financial planning, plaintiffs have greater flexibility over when and how they receive their portion of the settlement proceeds.

9. Situations Where a QSF May Be Particularly Useful

Complex Cases: QSFs are especially beneficial in cases involving post-settlement disputes.

Lien and Secondary-Dispute Resolution: Delays can occur when liens and other outstanding disputes exist. A QSF allows unaffected claimants or lien holders to receive their funds while the impacted parties resolve their issues.

10. Compliance and Regulatory Oversight of QSFs

Regulatory Compliance: The QSF administrator must ensure adherence to § 1.468B-1 et seq.

Jurisdiction: All QSFs are subject to the continuing jurisdiction of the approving governmental authority.

11. Considerations for Winding Down or Closing a QSF

Closing the QSF: A final IRS form 1120-SF tax return is filed when all distributions and liens are final and the fund is exhausted.

Reconciliation: The QSF administrator must reconcile and satisfy all the QSF’s tax obligations before closing the fund.

12. Best Practices and Tips for Effectively Managing a QSF

Experienced Professionals: To ensure compliance and maximize QSF benefits, using an experienced QSF administrator like Eastern Point Trust Company is essential.

Ongoing Oversight: Regular monitoring and compliance oversight are necessary to maintain the fund’s integrity and ensure accurate reporting.

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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