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What Is a Qualified Settlement Fund?

A gavel sitting on top of legal papers

Qualified Settlement Funds (QSFs), also known as 468B Trusts, provide an efficient and effective tool for resolving litigation involving a single claimant or multiple claimants. They offer a valuable option for defendants and claimants, allowing for time-sensitive resolution while maintaining financial and legal advantages. This article delves into the world of QSFs, discussing their benefits, applications, and the services related to their administration.

QSFs: An Overview

A QSF is an account or trust set up to settle one or more claims resulting from a tort, contract breach, or other violation of the law. The fund must be established pursuant to an order or approval from the United States, any state, state agency, or political subdivision, including courts of law, and must be subject to the continuing jurisdiction of the same. As a statutory trust created by a governmental authority, a QSF must also qualify as a trust under state law or keep its assets separate from the transferor's.

Unveiling the QSFs' Origin

The Qualified Settlement Fund originated from the Designated Settlement Fund concept introduced in 1986. This concept enabled defendants to deduct amounts paid to settle class action multi-plaintiff lawsuits before agreeing on how these amounts would be allocated individually. The §1.468B-1 et seq QSF was officially promulgated in 1993 to simplify the settlement and administration of settlements and judicial awards, and has since found popularity as a vehicle to settle cases involving multiple and single claimants.

The Role of QSFs in Legal Settlements

When established, a QSF assumes the liability from the defendant before the settlement is final, at which time the defendant is dismissed with prejudice. The QSF then stands in the shoes of the defendant with the plaintiff until all negotiations are final. This process may include negotiations with the plaintiff(s), healthcare providers with enforceable liens, and others, including government entities, with possible claims on the potential proceeds, and includes addressing legal (and other) experts' fees and costs.

Benefits for Defendants

There are several advantages of QSFs to the defendant's side:

  • Release of Liability: Upon funding the QSF, the defendant receives a full release of all claims, effectively closing the case for them with no tail liability.
  • Immediate Tax Deduction: The defendant can deduct the payment made into the QSF from their taxable income immediately.
  • End-of-Year Tax Planning: QSFs can be helpful in end-of-year financial planning, allowing the defendant to establish a paid loss if settlement negotiations stretch to past year's end.

Benefits for Claimants

On the other side, QSFs also present significant benefits to claimants:

  • Time for Consultation: Claimants gain time to receive a proper settlement consultation and to decide on their best settlement options.
  • Lien Resolution and Documentation: The added time allows for lien resolution and the preparation of required documentation without the time pressures of litigation.
  • Interest Accumulation: Claimants can benefit from the interest accumulation of funds within the QSF, particularly if the distributions are not immediate.
  • Risk Mitigation: Getting the settlement award early eliminates the risk of insolvency of the defendant or its insurer.
  • Flexibility: Plaintiffs have more flexibility in making appropriate choices for settlement distribution in cash, structured settlements, or special needs trusts to preserve Medicaid and Supplemental Security Income (SSI).

Services Associated With QSFs

Several services are associated with the administration of QSFs. These can include:

  • Preparation of all documents needed to establish and administer the fund.
  • Generation of client closing statements and provision of accounting for the fund.
  • Disbursement of all claimant payments.
  • Live call center assistance.
  • Attorney fee and expense disbursement.
  • Execution of qualified assignments.
  • Management of payment of finalized liens.
  • Provision of educational materials for claimants.
  • Bankruptcy and probate coordination.
  • Fraud protection.
  • Daily account reconciliation, monthly financial accounting, and reporting.
  • Treasury management of funds within the QSF.
  • Tax return filings and 1099 issuance.
  • Closure of the fund and interest reconciliation.

Platforms like QSF 360 offer low-cost turnkey solutions to establish a QSF in as little as one business day, including the integrated administration of the QSF.

Use Cases for QSFs

QSFs are helpful in various scenarios, including:

  • Single event and single plaintiff QSFs.
  • Mass tort and class action cases.
  • Mass arbitration cases.
  • Environmental (CERCLA) lawsuits.
  • Cases involving one or more claims or plaintiffs when there is a dispute over the allocation of the settlement or judicial award among the parties.

Precautions While Using QSFs

While QSFs offer numerous benefits, it is crucial to exercise caution:

  • Not all litigation qualifies for a QSF. It is essential to understand when it is appropriate to use them.
  • In some cases, using a single-claimant QSF might limit the choices for structured settlement annuity providers.
  • Partnering with an experienced, insured, independent QSF licensed trustee (fiduciary) ensures compliance with all formalities.
  • Unrelated cases co-mingled into a Firmwide QSF do not meet the requirements of 1.468B-1 et seq. (see Firmwide Qualified Settlement Funds - What Can Go Wrong? Part 1 and Part 2)

In conclusion, QSFs offer a valuable solution for resolving complex litigations. By understanding their benefits, applications, and associated services, you can utilize them effectively. Visit our Resource Library of articles related to various topics associated with Qualified Settlement Funds.

For more information about QSFs, contact us at (855) 979-0322.

Disclosure: This content is an overview. It is not a detailed analysis and offers no legal or tax opinion on which you should solely rely. Always seek the advice of competent legal and tax advisors to review your specific facts and circumstances before making any decisions or relying on the content herein.
Any opinions, views, findings, conclusions, or recommendations expressed in the content contained herein are those of the author(s) and do not necessarily reflect the view of the Eastern Point Trust Company, its Affiliates, or their clients. The mere appearance of content does not constitute an endorsement by Eastern Point Trust Company (“EPTC”) or its Affiliates. The author’s opinions are based upon information they consider reliable, but neither EPTC nor its Affiliates, nor the company with which such author(s) are affiliated, warrant completeness, accuracy or disclosure of opposing interpretations.

EPTC and its Affiliates disclaim all liability to any party for any direct, indirect, implied, special, incidental, or other consequential damages arising directly or indirectly from any use of the content herein, which is expressly provided as is, without warranties.
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