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What is a qualified settlement fund?

Qualified Settlement Fund, or QSF, is a fund, account, or trust created in accordance with state law to hold settlement proceeds. A QSF is a settlement escrow account that provides settlement planning, lien negotiation and can insure client counseling occurs during and after settlement.

A creature of the tax code or treasury regulations, 1.468B was created because defendants wanted tax relief.  These defendants were often stuck in situations where they reached a settlement with plaintiffs, but for many recurring extenuating circumstances could not effectuate payment directly to each plaintiff.  Think environmental cases or mass torts.  Large multi national corporate defendants lobbied for the creation of 1.468B so that making a payment to an escrow account could achieve “economic performance” under 461H of the IRC,  allowing for current year tax deduction for the payment.

Now a tool of the trial bar, QSF’s are incredibly useful in wrongful death cases involving competing interests between parties, mass tort cases, other complex litigation and even your “single plaintiff” personal injury tort.

In the early 2000’s, the defense brokers who primarily worked for property and casualty insurance companies had a vested interest in promulgating “fake news” about single claimant qualified settlement funds because it cut them out.  It prohibited insurance companies settling big lawsuits from referring new business to an affiliate life insurance company.  Those days are mostly over.  Qualified settlement funds are a common day practice management tool that lawyers realize benefits them directly(for management of their own cash flow), and relieves the timing pressure plaintiffs experience with resolving a significant case.  Plaintiffs almost always want to take more time to decide what to do that their lawyer business partner does.

By establishing a QSF for your firm, or for any inventory of cases, a prudent lawyer heads off at the pass the time challenges inherent in settlement, and puts a professional framework around the WORK that is always required to get cases finalized.

Qualified settlement fund administration has come of age.   Trustees and administrators can petition their local courts, and need not even be approved in the state where the litigation is indexed.

Requirements. 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).

Structured Attorney Fees can be created from qualified settlement funds, removing the distasteful and practically challenged practice of getting a defendant and their attorneys(who just lost and paid a significant amount of money for resolution) to cooperate and create tax opportunities for plaintiffs attorneys.

As a qualified settlement fund administrator, we offer professional litigation distribution services, settlement planning, structured settlements, lien negotiation and a host of other valuable services lawyers often do not specialize in.  Many attorneys do not want to take the risk of making representations to their clients in many of these areas.

Many of our clients ask about timing.  See our previous post here.  It is always a good idea to get your QSF set up prior to resolution of the litigation.   Tax id, court orders and basic processes can take up to a few weeks to a month in any given circumstance.  Bring your Administrator or settlement expert in early, or download our plaintiff guide to Qualified settlement funds.

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