Qualified Settlement Funds (QSFs) are very unique vehicles that can facilitate the settlement of lawsuits. QSFs facilitate settlements because they benefit everyone, both defendants and plaintiffs alike. Defendants benefit because they are released from all liability and can take an immediate tax deduction upon transferring the settlement proceeds to the QSF. While paying settlement proceeds normally results in plaintiffs receiving the proceeds, paying proceeds to a QSF does not cause plaintiffs to have actual or constructive receipt of the funds. In turn, this gives plaintiffs the necessary time they need to evaluate final settlement options without the pressure normally associated with litigation and continued interaction with the defendant. QSFs are also beneficial for plaintiff attorneys because attorney fees can be paid as soon as the defendant transfers the proceeds to the QSF.
QSFs ensure that plaintiff attorneys can provide proper client counseling and resolve any outstanding issues post-settlement instead of pre-settlement while the defendant is still involved in the case. As plaintiff attorneys know all too well, these post-settlement issues can include the need to: allocate settlement proceeds among claimants; verify and negotiate liens and/or subrogation claims; evaluate whether government programs such as Medicaid and Supplemental Security Income should be preserved; evaluate whether additional vehicles such as special needs trusts or Medicare Set-Asides are necessary; and, determine whether structured settlement annuities are necessary and appropriate. When clients decide to accept a structured settlement, the QSF can make the qualified assignment for the purchase of the annuity so that the client receives all of the tax benefits normally associated with using a structured settlement.
QSFs are specifically authorized in Section 469B of the Internal Revenue Code and related Treasury Regulations, which is where the requirements for establishing them are found. The essential requirements for establishing a QSF are not difficult to meet, but an experienced professional should be consulted. The meet these requirements, the QSF must: 1) be established by a court and be subject to its jurisdiction; 2) be established to resolve one or more claims giving rise to a claim of liability; and, 3) be a trust under state law or otherwise have its assets segregated from the assets of the defendant. Once the QSF is established, the administrator will obtain a Taxpayer Identification Number and file the necessary tax returns. Personal injury settlement proceeds will retain their tax exemption while they are in the QSF and when they are paid out, but any earnings on the proceeds are taxable to the QSF. However, all of the administrative and professional fees associated with establishing the QSF are deductible expenses, which in many cases make a QSF cost-neutral for plaintiffs.