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Earlier this month, we explained what a qualified settlement fund does and how it benefits plaintiffs, their attorneys, AND the defense counsel.

In case you missed it, a QSF is an escrow account that holds settlement proceeds in order to buy time for proper settlement planning. Defendants can make a payment to a QSF and get an immediate deduction for the payment, which takes the pressure off the plaintiff and his or her attorney to hurry up and plan for the incoming money.

Getting Started with a Qualified Settlement Fund

Qualified settlement funds work in a variety of case types, including tort, personal injury, breach of contract, and others. To get started, you’ll need:

  • An administrator,
  • An escrow agreement, and
  • A court order.

Setting up a qualified settlement fund is relatively simple. The law firm of record establishes an escrow or trust agreement with a professional fund administrator. The agreement sets the stage for the litigating parties to understand their respective roles. Most professional administrators will seek court approval as part of their engagement.

Typically, defendants will need to show that their payment as a transferor is qualified and therefore deductible and that they are fully released of all of the claims brought against them and any claim that may arise out of the creation of the QSF.

A note about the defendant’s role: The initial purpose of establishing the QSF option was to give defendants their deduction sooner. Therefore, sophisticated defense counsel should generally welcome payment to a QSF over any other method, as the regulations mandate that the order establishing the fund extinguishes their liability. When the QSF is established, the defendants pay the agreed-upon amount into the fund, and their involvement ends there.

Once the defendant’s money is in the account, an independent trustee or administrator can work with the plaintiff to determine what comprehensive settlement plan will work best. The trustee or administrator manages the funds and ongoing claim resolution.

26 CFR § 1.468B-1: Legal Requirements for a QSF

For those who would like to see the “legalese” involved in establishing a QSF, here are the requirements straight from 26 CFR § 1.468B-1:

A fund, account, or trust satisfies the requirements of this paragraph (c) if –

(1) It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;

(2) It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability

(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended,42 U.S.C. 9601et seq.; or

(ii) Arising out of a tort, breach of contract, or violation of law; or

(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and

(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).

For more information, see our previous posts about QSFs:

Qualified Settlement Funds Are a Useful Settlement Planning Tool (And Not Just for Plaintiffs)

What Is a Qualified Settlement Fund?


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