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You’re about to settle a case and your adviser suggests establishing a qualified settlement fund. You’ve heard of these funds or trusts being used in mass tort litigation, but perhaps you are unsure of the benefits in individual litigation. You might be thinking about deferring your fee, or you may be trying to buy some time for the family you represent. Bottom line: qualified settlement funds are a great tool in litigation to “park” money or create a tax free way station.

What is a Qualified Settlement Fund?

A qualified settlement fund is a court-ordered settlement account or trust created in accordance with state law to hold settlement proceeds in escrow after a case concludes. Defendants should prefer making payment to a qualified settlement fund, as it guarantees a full and final release with no contingent liability on Medicare or having to deal with setting up a structured settlement. The defendant then gets an immediate deduction for the payment — as if they had paid the plaintiffs directly.

In an article for Bloomberg, Robert W. Wood of Wood & Porter explains that:

“Today [qualified settlement funds] buy time to iron out final allocations among plaintiffs, determine final attorneys’ costs, and facilitate time for plaintiffs to consider structured settlement alternatives. While QSFs are often employed in cases involving many plaintiffs, they are also used where there are just a few plaintiffs.”

The greatest appeal of qualified settlement funds is getting more time to decide what to do with the settlement — whether to structure, set up a special needs trust, and so on. Attorneys benefit because they can use the extra time to discuss their own wealth planning. Structured attorney fees can be created from a qualified settlement fund, for example, without the defendant participating or being involved. When qualified settlement funds are combined with fee deferral discussions, practicing attorneys experience the greatest level of tax planning and management for their law firms.

Note: The fund should be set up prior to the end of litigation. So, when a qualified settlement fund would be helpful to buy some extra planning time, acting immediately is important. The entire process can take a few weeks to a month.  A comprehensive settlement planner can assist in establishing the fund, getting you and your client the extra time you need to make smart decisions about settlement.

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