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What is a QSF “Claimant”?

What is a QSF “Claimant”?

When settling high-stakes legal disputes, the complexities surrounding litigation settlements and judicial awards cannot be underestimated. The Qualified Settlement Fund (QSF) is a tool that has become increasingly popular due to its flexibility and tax benefits. Established under §1.468B-1 of the Code of Federal Regulations, QSFs are a powerful tool for resolving complex legal disputes, offering defendants and Claimants unique tax benefits and flexibility in facilitating settlements.

Before we analyze who is a “Claimant” in a QSF, let us briefly review QSFs.

Introduction to Qualified Settlement Fund

A QSF is designed to hold funds associated with a legal dispute resolution involving one or more Claimant(s). A key feature of a QSF is that it allows the defendant(s) in a legal dispute to deposit funds into a QSF trust, thereby receiving a full release of liability and an immediate tax deduction. It is important to know that the assignment of liability by the defendant(s) into the QSF is not a transfer of ownership to the Claimant(s). The titled ownership of the QSF remains with the Trustee of the QSF—for a more thorough understanding of QSF ownership, read through our “Who is the Owner of a Qualified Settlement Fund” article. Neither does the transfer of funds into the QSF trigger the constructive receipt or economic benefit doctrines. For more information on QSFs, visit our in-depth analysis of QSFs article.

Understanding the Benefits of QSFs

Qualified Settlement Funds offer various benefits to quarreling parties, making QSFs a desirable option for settling legal disputes.

Benefits for the Defendant

  • Release from Litigation: Once a defendant deposits the agreed settlement amount into the QSF, they are released from the case. This feature allows defendants to conclude their involvement in the litigation promptly.
  • Immediate Tax Deduction: A defendant or their insurer can obtain an immediate tax deduction for the amount deposited into the QSF. This advantage is significant, especially in high-value disputes.

Benefits for the Claimant

  • No Ownership, Constructive Receipt, or Economic Benefit: A QSF receives a transfer of funds from the defendant and acts as the alter ego of the defendant. As such, the Trustee is the titled owner of the QSF assets, not the Claimant. The Trustee has the sole authority to vest the benefits and make a distribution; until such occurs, the Claimant only has a contingent future beneficial expectation.
  • Time for Decision Making: Because the Claimants do not own or control the QSF or its assets, a QSF affords a Claimant the luxury of time to decide on their best financial planning options. The additional time afforded can be used to consult with financial advisors, review competitive financial products, negotiate and satisfy liens, and handle other ancillary issues related to the settlement without triggering ownership, constructive receipt, economic benefit, or the associated taxation.
  • Immediate Income Generation: The funds in the QSF generate investment (interest) income immediately, which is accrued to the fund and ultimately benefits the Claimant(s) by lowering the net cost of the QSF.
  • Allocation Flexibility: The QSF allows the QSF administrator to allocate the settlement among parties with contingent or residual interests, which is particularly useful in cases involving liens, secondary competing claims, multiple Claimants, or contesting family members.

Note: The QSF is not just an escrow account but a powerful tax tool providing strategic financial and tax advantages to defendants and Claimants alike.

The Role of the QSF Administrator/Trustee

The administrator/trustee of a QSF plays a pivotal role in managing the fund. The Plaintiff’s attorney typically selects the QSF administrator responsible for administering the QSF and facilitating the payment of funds to the Claimant(s), plaintiff attorney(s), and various lien holders. The QSF administrator also manages the QSF’s tax obligations and ensures compliance with all other legal and regulatory requirements.

Now to the Question: What (or Who) is a QSF “Claimant”?

The IRS has never defined the term Claimant. Still, we can infer from the name itself that the IRS intended to include anyone claiming a beneficial interest as a Plaintiff. It is also important to note that the IRS did not define the term otherwise but instead utilized the term Claimants in its common law meaning.

Likewise, from Black’s Law Dictionary, we can also take the guidance that a person asserting a claim (“A legal assertion; a legal demand; Taken by a person wanting compensation, payment, or reimbursement for a loss under a contract, or an injury due to negligence”) would be a Claimant.

But who can assert a claim? Once again, we look to the essence of what a QSF is – a QSF is the alter ego of the defendant. Thus, the defendant has no obligations to anyone but the Plaintiffs.

For instance, the following are examples of QSF provisions defining parties who are not Claimants, and specifically addressing the fact that an attorney representing a Plaintiff does not have standing as a Claimant against a QSF and definitively has no ownership of any QSF assets:

Attorneys’ Fees and Costs. The fees and expenses of attorneys representing the Claimants who receive payment from the QSF will be borne exclusively and personally by such Claimants based on individual engagement arrangements made between such Claimants and their respective attorneys. The QSF Trust, the Trustee, the Settlement Administrator, nor any other party shall have any liability for any such fees and expenses, and any Claims for such fees and expenses shall be disallowed as a claim against the QSF.

Or…

Plaintiff Attorneys’ Not a Claimant. The fees and expenses of attorneys representing Claimants (plaintiffs)  who receive payment from the Trust will be borne exclusively and personally by each Claimant based on the applicable individual engagement arrangements made between such Claimants and their respective attorneys. Neither the QSF, the Trustee, the Settlement Administrator, nor any other party shall have any liability for any such fees and expenses, and any Claims for such fees and expenses shall be denied as without standing. However, the QSF Administrator, pursuant to its current policies and procedures, may, for the administrative convenience of the Claimants, allow the payment from the vested portion of a Claimant’s settlement proceeds to third parties to satisfy the individual obligations of the Claimant.

Finally, we only need to look to the Uniform Trust Code (UTC) to confirm our answer for any QSF created under the applicable trust creation portion of the state trust code.

SECTION 103. DEFINITIONS of the UTC stipulate that a Beneficiary is a person that:

(A) has a present or future beneficial interest in a trust, vested or contingent;

As we can see, any plaintiff (including an entity) holding a beneficial interest or claim (vested or contingent) is a Beneficiary and would thus be a Claimant.

Moreover, SECTION 103. DEFINITIONS of the UTC additionally stipulate the meaning of a “Qualified Beneficiary” (in some state’s trust codes, “Current Beneficiary”) as follows:

a beneficiary who, on the date, the Beneficiary’s qualification is determined:
(A) is a distributee or permissible distributee of trust income or principal;
(B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subparagraph (A) terminated on that date without causing the Trust to terminate; or
(C) would be a distributee or permissible distributee of trust income or principal if the Trust terminated on that date.

Accordingly, the UTC informs that a Beneficiary (Claimant) is a person who may have a present or future beneficial interest in a trust, vested or contingent right to funds, but has no vested right. The Beneficiary becomes a distributee only upon the QSF trustee vesting a distribution right.

However, someone who holds a separate right by contract against a Claimant is not themselves a Claimant by extension. Such a right would exist solely as a separate contractual right against the Claimant but not against the QSF.

A Qualified Beneficiary would have a vested right as a “distributee,” but only after the Trustee exercises its powers to vest a right and confer the status of Qualified Beneficiary (distributee).

Note: Some state’s trust codes also reinforce the provisions of the Qualified Beneficiary definition with an additional clarifying definition of Current Beneficiary as follows:

"Current Beneficiary” means a beneficiary that, on the date the beneficiary’s qualification is determined is a distributee or permissible distributee of trust income or principal.

Administrative Convenience Payments Do Not Establish Claimant Status

Payments made to lien holders who holds a lien against a Plaintiff Claimant does not convey “Claimant Status” merely based on the fact that the QSF made an administrative payment on behalf of the Plaintiff Claimant to the holder of a lien against the Plaintiff Claimant. To further illustrate, when settlement proceeds are taxable the payment to a line holder retains the taxable income of the Plaintiff Claimant.

Conclusion

While not defined by the IRS, the term Claimant is established by case law and other statutory and regulatory precedents such as the UTC and the terms of the QSF itself. Simple application of facts would then determine whether a Plaintiff is Claimant for purposes of §1.468B-1 et seq.

An attorney holding a general lien against a Claimant individually for contingency attorney fees is not a Claimant and accordingly has no Claimant rights under a QSF.

Platforms like QSF 360 provide definitions consistent with the applicable code and properly classify Claimants as Plaintiffs who may have a present or future beneficial interest in a trust, vested or contingent right to funds, but have no ownership or vested right.

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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