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Qualified Settlement Funds (QSFs) are valuable statutory-based financial mechanisms that offer tax benefits and flexibility in managing settlements and the associated settlement administration across various disputes and litigation.

Established under 26 USC §468B and 26 CFR §1.468B-1 et seq., defendants can “transfer” settlement obligations, claim the associated tax deductions immediately, and facilitate the tax-efficient disbursement of funds to the claimant(s).

Here, we explore the proper naming conventions for a Qualified Settlement Fund name, highlighting the key considerations and appropriate naming conventions to support the fund’s integrity and purpose.

Pro Tip: For more information on QSFs, how to create, their benefits, and how they work, see the following links

• Establishing a QSF - Video
• QSF Articles

The Significance of a Proper Qualified Settlement Fund Name

The naming conventions in QSFs are not merely a formality but a necessity. It is important to note that, in addition to the statutory requirements for QSFs. Therefore, let’s do an overview of QSF naming guidelines and statutory requirements:

• Length and Allowable Characters
  ‍The 2024 IRS QSF EIN length requirement is that no Qualified Settlement Fund name may be longer than sixty-four (64) alphanumeric characters. Additionally, the IRS only allows three (3) special characters - a space, the ampersand (&), or a dash (-).
• Neither “QSF” nor “Qualified Settlement Fund” Need to Be Included in the Name
  ‍Neither §468B nor §§1.468B-1 et seq. require that the name of the QSF contain the term “Qualified Settlement Fund” or the abbreviation “QSF”.

Authorizing Governmental Authority Policy

A governmental authority must approve and exercise jurisdiction over a potential QSF for it to become a QSF. That authorizing governmental authority will have its own policies and requirements for QSF naming conventions. Among other things, these policies ensure that the name of a QSF is not intentionally (or unintentionally) misleading.

Misleading or Deceptive Naming

Generally, state and federal law prohibits any entity from being deceptively named. For example, you may not name a trust using the term “Inc.” in an attempt to misrepresent the trust as a corporation. Also, state statutes prohibit naming a sole proprietorship using the term “LLC” to imply it is a Limited Liability Company when it is not.

Moreover, it is crucial to note that a QSF is not an Interest on Lawyers Trust Account (“IOLTA”) nor an account owned by a law firm; thus, no QSF should be labeled to imply that it is. Severe ethical consequences could result. Therefore, it is prudent never to use a name for a QSF that would give the impression that the QSF is an IOLTA or a law firm’s corporate bank account.

Noted QSF commentator Robert Wood, in his article Qualified Settlement Funds Named Like Lawyer Trust Accounts, while discussing the flexibility available in naming a QSF also raises the concern of possible ethical or bad faith issues surrounding the use of a misleading or deceptive QSF name.

Examples

The following provides roadmap examples of QSF names that work and others that may likely cause issues:

• The Robinson Law Firm Trust Account (Bad Idea)
• Robinson Settlement Trust – FBO Sam Jones (Better)

• Jackson Law Firm, PLLC Fund (Bad Idea)
• Jones Matter Settlement Fund -– Case 1234567 (Better)

• Jones Law Firm IOLTA (Never!)
• Smith Family Settlement Trust (Better)

• Clay, Miller & Pitte Law Trust (Bad Idea)
• TJV (initials or Name of Plaintiff) QSF (Better)

• Thomas Firm Client Account (Bad Idea)
• The Roundup Trust (Better; this name references the general matter)

Naming Safe Harbors

Generally speaking, there are safe harbors when naming a QSF:

• Including the term - Qualified Settlement Fund
• Including the term - QSF
• Use an FBO designation within a QSF name
  (example, “FBO Sam Jones Fund”)
• Use the Case name or Plaintiff (or Plaintiff Family) name in the name of the QSF.
  (example, “The VDC-35456av-67 Case Fund”)
  (example, “The Sam Jones Settlement Fund Case VDC-35456av-67”)
  (example, “Jones Family Settlement Trust”)

Standardizing

If a law firm uses, or plans to use, several QSFs, then standardizing naming conventions allows more effective case management and quicker access to essential documents. A consistent naming convention also improves transparency and avoids confusion for audits, legal reviews, and timely and accurate distribution of funds.

Avoidance of Misleading QSF Names

Avoiding misleading or deceptive naming conventions when naming a QSF is crucial. The name should not misrepresent the nature of the fund or its ownership, as this could lead to confusion or legal and ethical challenges.

Pro Tip: See the related article regarding Who Owns a QSF.

Complexity in Name

Avoid overly complex or obtuse names for a QSF. Names that are difficult to understand or remember can hamper communication and operations or lead to mistakes. A straightforward and clear name ensures that all parties, including the defense, claimants, and the associated legal and financial professionals, can easily refer to the QSF without confusion or question.

Conclusion

When navigating QSFs, carefully selecting a compliant name is not merely a governmental requirement; it can also remove barriers and eliminate questions. Recognizing common pitfalls and adhering to IRS rules and nondeceptive guidelines in choosing a name can avoid potential ethical conflicts and ensure the fund’s smooth operation.

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Are Punitive Damages Taxable?

Punitive damages are always fully taxable. This unwelcome and often unknown fact is true when punitive damages are awarded in conjunction with a tax-free compensatory award (e.g., physical injuries or sickness) or a taxable claim (e.g., non-physical injuries, defamation, or another tort).

How Much Tax Is Paid on a Lawsuit Settlement

The taxes you will pay are likely much higher than you think. Under the current tax code, you must pay taxes on the portion of the punitive award you do not even receive – like the attorney’s fees and costs.

Double Taxation of Punitive Proceeds

Unfortunately, under our tax laws, a person as a plaintiff receiving punitive damages is fully taxed on the punitive portion and is thus treated more punitively than the defendant paying them. This harsh tax reality is because of the odd but real “plaintiff double tax.” ¹

The plaintiff’s double tax arises because the plaintiff is taxed on the entire taxable recovery – including the punitive damages – but cannot deduct the attorney fees and costs associated with the recovery. That is because such fees and costs are treated as “miscellaneous itemized deductions” (MIDs), which are not fully deductible.

Double Tax Example

Here is a realistic example: Joan, living in California, receives $2,000,000 in damages for a physical injury and an additional $10,000,000 in punitive damages. The $2,000,000 isn’t taxed, but the $10,000,000 punitive portion of the settlement is.

Out of the above, Joan owes her attorneys a 40% contingency fee on the punitive portion ($4,000,000). However, she cannot deduct the attorney’s fees for federal or state income tax purposes. Also, her combined Federal and State income tax rate is around 50% since she’s in the top tax bracket. As a result, her “net-net” (after-tax and attorney fees) proceeds on the punitive portion is around $1,000,000 - just 10 cents on the dollar of the total punitive proceeds, and could be even less!

WOW, poor Joan – Regretfully, there are other unpleasant realities Joan shall be surprised to learn:

• Not being able to deduct the attorney fees due to the plaintiff’s double tax costs Joan $2,000,000 in increased taxes, more than twice what Joan received! (50% tax of the $4,000,000 in attorney’s fees is an extra $2,000,000 in taxes).
• For any incurred case costs, Joan must reimburse her lawyer; she shall further reduce her “net-net” after-tax proceeds, meaning Joan shall likely receive far less than 10 cents on the dollar.
• Also, if Joan lives in a municipality with a city tax, her net-net proceeds would be even lower.

Talk about punitive! (Other epithets may come to mind.)

In certain limited case types, such as employment and civil rights discrimination, an “above the line” deduction is indeed allowable for attorney’s fees and costs, avoiding the plaintiff’s double tax. However, this deduction rarely applies since punitive damages are infrequently awarded in those cases.

Caution – PRO TIP: Various dubious suggestions haunt the internet and purport to circumvent the plaintiff’s paying taxes on the attorney portion of the taxable recovery. These suspect “tax tricks” are designed to misclassify a portion of the proceeds, including issuing separate Form 1099s for the plaintiff and the attorney or alleging a quasi-partnership arrangement between the plaintiff and the attorney. Thus, take caution; the Supreme Court precluded these approaches in the Commissioner v. Banks Supreme Court decision. Employing such tenuous schemes may open the door to significant tax underpayment penalties and possibly even more severe allegations and actions by the IRS. Also, the above-the-line deduction is plainly shown on the tax return and is a glaring audit signal to the IRS; the larger the deduction, the more likely the audit risk.

There is a Solution

Plaintiffs who may receive punitive damages may wish to consider a Plaintiff Recovery Trust (PRT) before the claim becomes final or fully settled. A PRT is a specially designed trust that could increase the after-tax recovery by 50% to 150%, and the PRT does not rely on the “above the line deduction.” However, timely action is necessary, and the PRT must be in place before the matter is finalized, including appeals, so the earlier in the case cycle, the better, and a failure to act promptly could result in unnecessary taxation.

How to Reduce Taxation on Your Settlement Proceeds

To learn more about PRTs, visit the PRT web page or call (855) 222-7513 to speak with a PRT Expert to see if your case qualifies.

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In the current digital and highly charged political age, the power of words has never been more salient. It has become an all-too-common place for words to be used as weapons for making untrue statements about a person or entity. A single untrue utterance can ripple through society, casting shadows of controversy and, sometimes, engendering significant legal implications. Untrue words (lies) have become an ugly weapon against adversaries in the public domain. This article ventures into defamation law, exploring the legal and ethical ramifications and the tax implications of an associated legal settlement.

Defamation: A Primer

Defamation is a tort comprised of the following elements: (i) a false statement of fact, (ii) that was published, and (iii) which publication causes harm to the reputation of the subject of the statement. The requisite standard of proof associated with the above-listed elements varies depending on the plaintiff’s status in society, as public figures are required to prove that the statements were made with actual malice. In ruling on a defamation suit, courts seek to balance the freedom of speech with protecting individual reputations.

Victims of defamation can pursue various civil causes of action aside from defamation claims, such as intentional infliction of emotional distress and loss of income. Some states have civil laws allowing defamation victims to seek compensatory and punitive damages.

Plaintiff Double Tax Imposed by Banks v. Commissioner

Unfortunately, because of the “plaintiff double tax,” defamation victims suffer twice – first by the defamation itself and second by how their litigation recovery is taxed. The defamation offense is obviously worse, but double taxation remains an unfair outcome.

What is the Plaintiff Double Tax?

Commissioner v. Banks, 543 U.S. 426 (2005), is a Supreme Court case that addressed the question of whether, for federal income tax purposes, the taxable components of a judgment or settlement paid to a taxpayer’s attorney under a contingent fee agreement is taxable income to the taxpayer. The Supreme Court ruled that one hundred percent (100%) of the gross taxable portion of the litigation/settlement recovery constitutes the taxpayer’s income and explicitly includes the portion paid to the attorney as a contingent fee. The Court viewed the attorney as merely the plaintiff’s “agent,” thus, the proceeds were wholly those of the plaintiff.

The plaintiff double tax applies to many litigation claims, including those involving no physical injuries – such as defamation and punitive damages. Thus, as has been noted, the entire award is taxable income in those cases, but the related attorney fees are not deductible on the victim’s Form 1040 tax return. Having to pay taxes on the total value of the award where the related attorney fee is not deductible is the plaintiff’s double tax.

For example, assume a defamation victim lives in NYC and recovers $1,500,000 in non-physical injury and emotional distress damages and an additional $1,500,000 in punitive damages. The entire $3,000,000 gross settlement proceeds are taxable to the plaintiff, but none of the attorney fees are deductible.

In NYC, the combined Federal/State/Local income tax rate on this award is likely 50% (or more), and the attorney has a forty-percent (40%) contingency rate, so the plaintiff ends up with a net of only $300,000. (netting $300,000 after tax is only 10 cents on the dollar!) Now, add the litigation costs associated with the action that the plaintiff also bears, and the net recovery could be zero ($0) or even produce a negative after-tax net settlement. We can all agree that 10 cents on the dollar (or less) is not fair compensation for a ruined reputation.  

A defamation victim seeking to avoid this unfortunate scenario created by Banks might consider a Plaintiff Recovery Trust (PRT), a specially designed trust that exists to hold the litigation claim. If there is a successful recovery, the PRT will significantly increase the net after-tax recovery, perhaps by 100% or more, depending on the recovery amount and where the defamation victim is domiciled.

To learn about PRTs, go to https://www.easternpointtrust.com/plaintiff-recovery-trust.

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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.

It’s a sick, sad world where revenge porn exists. Litigation provides (inadequate) recourse. Making things worse - if possible - is the abysmal way a revenge porn victim (RPV) is taxed on their recovery.

Revenge porn is nonconsensual pornography. It includes intimate images taken with consent and distributed without the victim’s consent and explicit images taken without the victim’s knowledge. In some states, unlawful dissemination can include sexual images, intimate images, explicit images, or engaging in sexual acts where there is a reasonable expectation of privacy, with the intent to cause financial, physical, or emotional harm. Revenge porn is not rare – it’s estimated that 1 in 8 social media users in the U.S. are revenge porn targets.  

RPVs can pursue various types of civil causes of action, including intentional infliction of emotional distress, invasion of privacy, and defamation. Some states have civil laws allowing RPVs to seek compensatory damages. Other states have specific laws allowing for a private cause of action against the person sharing the private images. For example, in Colorado, RPVs can seek monetary damages of $10,000 or the actual damages and attorney fees.

Revenge porn damages include reputational harm, emotional distress, pain and suffering, lost income, medical expenses, including mental health care, and punitive damages.

Unfortunately, because of the “plaintiff double tax”, an RPV suffers twice – first by the underlying violative action itself and second by how their litigation recovery is taxed. It’s obvious which is worse – but still.

The plaintiff double tax applies to many types of nonbusiness litigation cases, including those involving no physical injuries – such as defamation, non-physical injury, emotional distress, and punitive damages. The entire award is taxable income in those cases, but the related attorney fee cannot be deducted on the victim’s tax return. Having to pay taxes on the full value of the award where the related attorney fee is not deductible is the plaintiff's double tax.

To illustrate, assume an RPV living in NYC recovers $500,000 in non-physical injury/emotional distress damages and $1,500,000 in punitive damages. Her $2,000,000 settlement proceeds are taxable, but none of her attorney fees are tax deductible. By extension, if her combined Federal/State/Local income tax rate on this award is 50% and her attorney is owed the standard 40% contingency rate, she ends up with only $200,000 – 10 cents on the dollar! Now, add in the litigation costs borne by the RPV associated with the action, and the recovery could be as little as zero ($0) or even a negative net effect. We can all agree that it is not fair compensation for such a heinous act.

An RPV might consider a Plaintiff Recovery Trust (PRT), a specially designed trust that exists to hold the litigation claim. If there is a successful recovery, the PRT will significantly increase the RPV’s after-tax recovery, perhaps by 100% or more, depending on the recovery amount and where the RPV lives.

To learn about PRTs, go to https://www.easternpointtrust.com/plaintiff-recovery-trust.

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In today's dynamic business landscape, where environmental liabilities pose significant challenges, the Qualified Settlement Fund (QSF) emerges as a beacon of efficiency and reliability. Contrasting against traditional Environmental Remediation Trusts (ERT), Eastern Point’s QSF offers unparalleled advantages, revolutionizing the approach towards environmental liability management.

FOR IMMEDIATE RELEASE

[2/27/2024] — In today's dynamic business landscape, where environmental liabilities pose significant challenges, the Qualified Settlement Fund (QSF) emerges as a beacon of efficiency and reliability. Contrasting against traditional Environmental Remediation Trusts (ERT), Eastern Point’s QSF offers unparalleled advantages, revolutionizing the approach towards environmental liability management.

The Qualified Settlement Fund stands as a testament to expediency, with the capability to be established and funded within a mere business day, a stark contrast to the lengthy processes associated with ERTs. By swiftly assuming environmental liabilities from present and future claims under CERCLA, state, and local law, QSF ensures immediate action and resolution.

One of the most compelling aspects of QSF is its affordability, with establishment costs as low as $500. This cost-effectiveness, coupled with the tax advantages it provides over ERTs, makes QSF an attractive proposition for businesses seeking prudent financial solutions.

Flexibility is another hallmark of QSF, allowing for single-year or multi-year funding without any maximum duration constraints, ensuring adaptability to diverse business needs. Furthermore, the ability to hold real estate expands the horizons of asset management within the fund.

The benefits extend to tax optimization, with QSF accelerating the transferor's tax deduction for funds transferred to the current tax year, thereby enhancing financial planning and efficiency. Moreover, by shifting liability and associated funding transfers irrevocably to the QSF, businesses can streamline their balance sheets, mitigating risks and enhancing transparency.

In addition to these financial advantages, QSF facilitates seamless settlement agreements to capitate and resolve environmental liabilities, assuring regulators and interested parties of the irrevocable availability of funds for amelioration.

The transition to QSF not only eliminates future administrative burdens but also entrusts the fund's administration to a dedicated trustee, relieving businesses of operational complexities and enhancing focus on core activities.

In conclusion, the Qualified Settlement Fund stands as a beacon of innovation in environmental liability management, offering unmatched advantages over traditional Environmental Remediation Trusts. Its expediency, affordability, flexibility, and tax optimization capabilities redefine the landscape, empowering businesses to navigate environmental challenges with confidence and efficiency.

PRESS Contact
www.EasternPointTrust.com

info@easternpointtrust.com
Phone: 855-222-7513

Litigation settlements and awards are typically sent to the plaintiff attorneys’ IOLTA account, but that may not be the best option for you, the attorney, or your client. Funds received into your IOLTA expose you, as well as your clients, to financial disadvantages including immediate taxation on taxable elements, loss or reduction of government benefits, and loss of the ability to structure or assign the proceeds.

However, a Qualified Settlement Fund (also known as a QSF) solves these problems. Being IRS qualified, the QSF holds the settlement funds, tax deferred, while affording you and your clients time to plan. Unlike an IOLTA a QSF preserves your ability to structure or assign any portion of your fees. Additionally, a QSF preserves your client's ability to structure or fund a special needs or settlement protection trust.

Most importantly, a QSF does all this without triggering constructive receipt or loss of government benefits. Authorized by the IRS in 1993, QSFs have a 30-year track record of providing tax and financial advantages to clients and law firms alike. Whether a single event case with a single plaintiff or multi-claimant complex litigation, QSFs offer unmatched advantages and flexibilities.

Motivated by multiple advantages, large and small law firms nationwide are adopting QSFs at an ever-increasing rate.

Join the growing number of law firms using Qualified Settlement Funds. Reach out to us today. Discuss how the quick, easy, and affordable QSF 360 platform can benefit you, your firm and your clients.

Overview   

As you may know, E. Jean Carroll was recently awarded $83.3 million in her defamation case against former President Donald J. Trump. After the case, Ms. Carroll quipped to Rachel Maddow on MSNBC: “I have such great ideas for all the good I’m going to do with this money,” “First thing, Rachel, you and I are going to go shopping.” “We’re going to get completely new wardrobes, new shoes, motorcycle for Crowley, new fishing rod for Robbie. Rachel, what do you want, a penthouse?” She also said that “We’re going to do something good with it.” 

Unfortunately, because of the tax laws, particularly the “plaintiff double tax”, Ms. Carroll may need to limit where she shops to have any money left to do good. 

Double Tax Details

The plaintiff double tax applies to many types of nonbusiness litigation cases, including those involving no physical injuries – such as defamation - and punitive damages. In those cases, the entire award is taxable income (not just the net after attorney fees). Furthermore, the related attorney fees cannot be deducted on Ms. Carroll’s 1040. Having to pay taxes on an award where you cannot deduct the related attorney fee expense is the plaintiff’s double tax. 

The jurors awarded Ms. Carroll $7.3 million in compensatory damages for emotional harm, $11 million in compensatory damages for harm to her reputation, and $65 million in punitive damages. All of these amounts are taxable and subject to the plaintiff’s double tax. 

Assuming Ms. Carroll lives in New York City, her combined Federal/State/Local income tax rate on this award would be about 51%. Thus, if her attorney is owed the industry standard 40% contingency rate, then of Ms. Carroll’s $83.3 million award, she’d end up with only $7.5 million – just nine (9) cents on the dollar! That does not leave much for shopping or doing good, especially in NYC.

The same taxation applies if her award is reduced on appeal. Say she receives $20 million after appeals or a settlement. Due to the plaintiff's double tax, she’ll end up with about $2 million, or ten (10) cents on the dollar. (Don’t buy that NYC penthouse yet.) 

Mr. Trump has indicated that he will appeal, so the case is not final. This gives Ms. Carroll time to do some planning to reduce the taxes on any award she does ultimately receive.

It may be wise for Ms. Carroll to consider a technique known as the Plaintiff Recovery Trust (PRT). A PRT is a specially designed trust that could more than triple her after-tax recovery. For Ms. Carroll (and you) to learn more about PRTs, see our overview on the Plaintiff Recovery Trust.

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