Qualified Settlement Trusts vs. Qualified Settlement Funds (QSF)

Shakespeare wrote, ‘What’s in a name?’ In the realm of qualified settlement administration, maybe quite a lot – or nothing at all.

It is essential for legal, settlement, and financial experts to grasp the nuances of Qualified Settlement Funds (QSF). A QSF, also called a 468B fund, serves as a mechanism for parties to settle disputes while reaping tax advantages and benefiting from extra planning time and deferred taxation.

Understanding the principles and uses of QSFs can significantly influence the outcome of settlement talks and the contentment of all parties involved.

This paper explores the realm of Qualified Settlement Funds and their namesake “Qualified Settlement Trusts.” This paper delves into their definitions, practical scenarios, implementation procedures, and real-world implications.

Whether a financial consultant or an involved party, this paper equips you with the knowledge needed to maximize QSF benefits in a settlement agreement.

Is a Qualified Settlement Trust a Qualified Settlement Fund (QSF)?

The answer is - Well, maybe.

When established by a government authority, a Qualified Settlement Fund must meet all the requirements of 26 USC § 468B, et seq., and 26 CFR § 1.468B-1, et seq. It also enables defendants to deposit payments into the QSF trust in exchange for a release of liability.

So, while some may informally call a QSF a Qualified Settlement Trust, the only test that matters is whether the Trust (whatever its name) meets the requirements of 26 USC § 468B, et seq., and § 1.468B-1, et seq. If it does, it is a QSF, no matter what informal label or name is applied to it.

Key Characteristics

For a Qualified Settlement Trust to be a QSF, it must:

• Have the approval of a governmental authority and continue under the approving governmental authority’s jurisdiction;
• Settle one or more disputed or undisputed claims arising from an event (or a related series of events) connected to torts, contract breaches, or other legal violations provided for in § 1.468B-1, et seq.; and
• Separate the assets from the transferor through a separate trust created under state law or through physically segregating the funds.

When Is It Beneficial to Use a Qualified Settlement Trust?

Qualified Settlement Trusts constructed as QSFs prove valuable in resolving legal conflicts.

Some common situations may include:

• Cases involving personal injury, product liability, drugs, and sexual abuse;
• Wrongful death cases where there are disagreements among heirs or issues with distributing assets;
• Cases that involve future claimants when unknown lien holders, especially when the timing and amounts of future claims are uncertain;
• Post-settlement, when secondary disputes exist, and
• When additional time is needed to execute financial planning properly.

In these scenarios, QSFs offer advantages such as preventing conflicts of interest for lawyers, allowing plaintiffs to earn interest while disputes are resolved, and freeing defendants from battles while addressing liens and other matters.

Requirements to Implement a Qualified Settlement Fund

Create a trust agreement outlining the QSF rules, detailing how distributions should operate, and setting out the trustee’s duties.

Government approval is required to establish the QSF. The governmental authority that approves the QSF will appoint a trustee to manage it. This approval should clearly define the purpose of the QSF. A proper QSF should also specify the types of claims it aims to resolve.

Once approved, obtaining an Employer Identification Number (EIN) from the Internal Revenue Service for the QSF is imperative.

Real World Examples

• Eastern Point Trust Company’s online platform—QSF 360—played a role in resolving the Volkswagen “Dieselgate” scandal through a QSF created to compensate vehicle owners.
• Additionally, the same QSF 360 platform played a vital role in California’s wildfire settlement administration.
• A multi-million-dollar wrongful death case with multiple surviving minors also benefited from QSF 360 by allowing additional time to work with the family and courts to plan for their financial future.

These practical instances and tens of thousands of other uses highlight how versatile and successful are QSFs are in managing settlements regardless of the number of parties or type of industry.

Conclusion

The inception and application of Qualified Settlement Trusts (properly designed and approved as a Qualified Settlement Fund) can transformed how large and small legal conflicts are settled. By offering a tax-efficient method for handling settlement funds, QSFs streamline distribution processes. The real-world examples underscore QSFs’ role in resolving simple and complex legal battles across diverse sectors.

With the legal environment constantly changing, the significance of Qualified Settlement Trusts as a QSF in resolving disputes is ever-expanding.

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