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The use of qualified settlement funds (QSFs) is mainstream practice across mass tort settlements, but it is still an emerging practice in single event and individual plaintiff lawsuits. Last week, we described four benefits of QSFs. Below is a breakdown of those points to illustrate the breadth of usefulness of this settlement planning tool.

Benefits for Defendants

When defendants make a payment to a QSF, they get an immediate deduction for the payment — as if they had paid the plaintiffs directly.

Although defense structured settlement brokers have alleged that tax issues arise with a payment to a QSF, truthfully, there are no issues. As long as the QSF is established pursuant to an order of a court of appropriate jurisdiction and the case meets claim type, the defendant receives the exact same release for payment for cash.

Benefits for Plaintiff Attorneys and Clients

In many cases, it takes time to properly organize and thoroughly address settlement issues, such as subrogation of health care liens, workers compensation subrogation, and life planning. With a QSF, plaintiffs and their attorneys have the benefit of more time to plan, the ability to negotiate liens, and the ability to deal with many of the complexities that may arise. Plaintiffs’ attorneys can also take their fees immediately (if their state ethics allow). Having more time to make major decisions for a plaintiff’s settlement — whether to create and fund a third-party special needs trust for the preservation of Medicaid, for example — is a good reason to utilize the benefits of this tool.

QSFs come with tax benefits, too. They uniquely preserve the ability for attorneys to create tax deferrals for themselves and their law firms. Likewise, plaintiffs can take the time to decide whether tax-free periodic payments are right for them, and if so, they can develop these plans on their own schedule.

Qualified Settlement Funds in Taxable Cases

QSFs are equally valuable in taxable cases, such as:

  • Qui tam,
  • Patent litigation,
  • Employment discrimination,
  • Intellectual property,
  • Business interruption claims like the BP OIL spill, and other types.

Establishing a QSF allows parties in these cases to consider whether they want to avail themselves of tax spreading, meaning taking the settlement over a number of tax years. This choice can make tremendous financial and tax sense, even for claims as small as $250,000.

Most businesses and taxpayers appreciate having multiple years to create losses to offset the taxable income from their settlement, rather than getting caught in a single taxable year where all of their individual deductions are likely phased out.

The Key to a Smooth Settlement Process

Having an experienced fiduciary as the QSF administrator is key to an efficient process and a great amount of professionalism for all parties. The days of having a plaintiff figure out how or why to do a structured settlement directly with a defendant over the course of a week  should be history.

If you’re an attorney interested in learning more about QSFs and how they may benefit you and your client, we welcome you to contact our comprehensive settlement planning firm, Milestone Consulting, for more information.

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