Qualified Settlement Fund Experts

What is a qualified settlement fund?

A qualified settlement fund, or QSF, is a Section 468B trust that extends the time available for plaintiffs and their attorneys to plan past the end of litigation. It allows for more simplified and organized administration of a settlement. The defendants pay the agreed-upon settlement amount into the QSF in exchange for a general release, thus removing them and their insurers from the litigation and post-settlement decisions. Plaintiffs can take the time they need to consider their settlement planning options and how to maintain eligibility for government benefits if applicable. Meanwhile, trial lawyers can take the time they need to consider their own personal wealth management options. They can receive their fees immediately – and by doing so can improve cash flow of fees by 30 to 180 days, depending on court approval or other challenging issues. Or they can defer their fees through a program of periodic payments, which provides tax advantages, long-term wealth accumulation, and better personal and professional financial planning.

Qualified settlement funds are becoming the new industry standard. They are specifically sanctioned by Section 468B of the Internal Revenue Code, Treasury Regulations and have been supported by case law and in practice across the country since their inception in 1993.

As litigation grows increasingly complex, so too has collecting and distributing settlements once litigation has ended. Our qualified settlement fund administrators can help with the establishment of the QSF and/or its management once it is established. Contact us to learn more.

Establishing a qualified settlement fund

Qualified settlement funds are established with three requirements:

  1. The fund must be established pursuant to a court order and is subject to continuing jurisdiction of the court (26 CFR § 1.468B(c)),
  2. It must be established to resolve one or more contested claims arising out of a tort, breach of contract, or violation of law, and
  3. The fund must be a trust under applicable state law.

Milestone routinely petitions and establishes qualified settlement funds for trial lawyers and their clients in all 50 states.

The setup process

To set up a QSF, you will need an administrator, an escrow agreement, and a court order. Most professional administrators will seek court approval as part of their engagement. 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.

Typically, defendants will need a representation that their payment as a transferor is qualified and therefore deductible, and that they are fully released of all the claims brought against them, in addition to any claim that may arise out of the creation of the QSF. Then, once the QSF is established, the defendants pay the agreed-upon amount into the fund and their involvement ends there. An independent trustee or administrator then works with the plaintiffs to develop a comprehensive settlement plan. Moving forward, the trustee or administrator manages the funds and ongoing claim resolution.

A QSF is a solution that benefits plaintiffs, trial lawyers, and defense counsel. They work for case types including tort, personal injury, breach of contract, and many others. In cases of class action or mass tort litigation, this tool is handy because it helps organize money owed to multiple plaintiffs.

The legislative history and initial purpose of QSFs was to give defendants their deduction. So, sophisticated general counsel and litigation counsel should welcome payment to a QSF over any other method, as regulations mandate that the order establishing the fund extinguishes their liability.

Types of qualified settlement funds

There are three types of QSFs:

  1. An individually ordered QSF. This allows payment for a settlement to trigger a defendant’s release, thus expediting administration of funds for that case. Individually ordered QSFs can come in the form of a single-claimant QSF or a multiple-claimant QSF.
  2. A firm QSF. A law firm can have its own qualified settlement fund established by a single court order. The entire firm can use the fund for all, or some, of its cases. This option is ideal when a firm would like a privately branded fund to use throughout the year.
  3. A national master QSF. Seventh Amendment Holdings has a national master qualified settlement fund, which trial lawyers may join without an additional court order. This option is attractive when confidentiality and discretion are advantageous or when time is of the essence.

Our team at Milestone can work with trial lawyers and their clients to establish and/or administer a QSF. Our professional qualified settlement fund administrators ensure all appropriate parties receive their due funds, that the money is disbursed safely and in a timely manner, and that all necessary documentation is in order.

Benefits of a qualified settlement fund

Establishing a QSF offers a variety of benefits besides timing:

  • Control over recognition of income,
  • Tax planning at year end for both plaintiffs and attorneys,
  • Attorneys’ ability to spread taxable income over many years through fee deferral,
  • Potential for tax deferred growth, and
  • Ability to earn pre-tax income, or tax-exempt earnings.

In addition, a professional qualified settlement fund administrator helps the whole settlement process run smoothly by managing the funds and ongoing claim resolution, sourcing lien negotiators, and assisting in the evaluation and necessity of government benefits compliance. More specifically, an administrator will be well-versed in all aspects of the QSF, including:

  • Full accounting of the fund,
  • Attorney fees and attorney tax deferral options,
  • Claimant payouts (including special needs trusts and structured settlements when needed),
  • Lien negotiations, and
  • Settlement planning.

When defendants make a payment to the fund, the monies are essentially “parked” in the trust temporarily, allowing the administrator to plan disbursement in an organized manner.

If you have a lengthy court approval process due to a wrongful death or multiple plaintiff litigation, the consolidation of the cases in a single jurisdiction can be invaluable. After months or even years of litigation – including in mass torts and class actions with their added complexities – any process that can help streamline and improve the disbursement of funds should be strongly considered. Utilizing Milestone’s services is a strong solution for all parties involved.

Plaintiffs

For many plaintiffs, their settlement is the first large sum of money they’ve ever received. It can be difficult for anybody to know, without consulting with an expert, how to handle that amount over the course of a lifetime. Having extra time to plan after settlement allows a plaintiff to explore his or her options for long-term planning, such as with an investment-backed structure. He or she can work with a settlement planner to maintain eligibility for government benefits, whether through a special needs trust, Medicare set aside, or another tool. With a QSF, there is no pressure to make these important decisions before settlement.

Trial Lawyers

When using a QSF, plaintiffs’ attorneys can be paid quicker, which is important after lengthy and expensive litigation. Attorneys can take their fees almost immediately upon the defendant’s payment to the fund, which could speed up payment by 30 to 180 days. Or, they can choose to defer their fees and reap the tax benefits that come with spreading the income over time.

In addition, allowing for an administrator’s aid with the daunting number of responsibilities involved in settlement can help take pressure off attorneys. The lawyers involved do not need to be fluent in the process. An administrator also provides clients with expert-guided planning.

Defendants

A QSF also alleviates a defendant’s participation in the post-settlement disbursement process. Not involving defendants in Medicare, SSI, or Medicaid compliance saves time and reduces confusion. Seasoned defense attorneys appreciate how the laws regulating QSFs terminate their client’s liability and provide a current-year tax deduction. Moreover, because the litigation process ceases for the defendant once payment is made into the QSF, litigation costs decrease, and time and resources can be allocated elsewhere.

Qualified settlement funds can provide enormous advantages during the settlement process. Finding the proper administrator is pivotal. Be sure to work with one who has the breadth of experience needed to address all sides of the settlement process and to be the partner you need.

QSFs in sexual assault cases

When working with sexual assault survivors, qualified settlement funds are important. Not only do they provide survivors the time and space to confront complicated tax questions, but they also allow time and space to make constructive decisions. For example, we worked with a survivor plaintiff living in a temporary housing arrangement. She was not in the best place – mentally, physically, or financially – to handle hundreds of thousands of dollars in cash that she would be receiving as a settlement. Over a period of months, we were able to guide her through the many different financial options available to her. She is now in stable housing, has enrolled in a higher education program, and will use her remaining settlement to achieve other goals. Some of her funds were placed into a tax-free settlement design, while some funds were used for housing, healthcare, debt, and more. By placing her funds within a qualified settlement fund, she was able to take her time, plan carefully, and see the most from her settlement now and in the future.

QSFs in Multidistrict Litigation

A multidistrict litigation (MDL) can involve hundreds, often thousands, of plaintiffs as well as a large group of trial lawyers. A QSF is the emerging standard of care for MDLs, as it provides better organization for all the moving parts while supporting each of the many plaintiffs’ unique long-term planning needs and their attorneys’ business interests.

Frequently asked questions

Below are answers to some frequent questions about qualified settlement funds.

Where did qualified settlement funds come from?

Qualified settlement funds were born out of necessity. As structured settlements became popular in the late 1970s and 1980s, insurance companies funding structured settlements became concerned that payments made to an entity rather than the claimant would not be tax deductible – as they would be if they were paid directly to an individual. Defendants and their insurance carriers wanted to make sure that they could deduct payments in the year in which they were paid, rather than when the money was distributed to claimants. Congress enacted Section 468B of the Internal Revenue Code in 1986 to address such concerns.

Thereby, the qualified settlement fund grew out of IRC Section 468B. IRC Section 468B was added to the Code by Congress as part of the Tax Reform Act of 1986 and set up these designated settlement funds. A designated settlement fund can be funded by one or more defendants to make settlement payments to claimants. Designated settlement funds were fairly limited in the way they could be used, and in 1993 the IRC passed regulations creating the qualified settlement fund. There are fewer requirements to create a QSF than there are to create a designated settlement fund, and qualified settlement funds can address a broader range of legal claims with increased flexibility.

How can a personal injury attorney establish a firm QSF?

Below are the requirements of a QSF as outlined in 26 CFR 1.468B-1.

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

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.

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

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).

A firm-wide qualified settlement fund is advisable for most personal injury firms. Any personal injury practice can have a “John Doe Firm Settlement Account” into which an attorney can settle an unlimited number of cases. Once funds are settled into the firm QSF, attorneys have 100% income recognition, can choose how much of their fees they wish to accept as an up-front cash disbursement, and decide how much and for how long they wish to defer. Clients are given their own time and space to thoughtfully plan their finances, healthcare, and other necessities.

Can a single claimant QSF be used to set up a structured settlement?

Yes. After establishing a qualified settlement fund, the trustee or professional administrator can design a settlement plan for the plaintiff. Whether a structured settlement, trust account, or different planning solution is best, the plaintiff and trial lawyer have more time to assess all available options.

What are the QSF services that Milestone offers?

As qualified settlement fund administrator, Milestone can:

  • Provide a QSF petition, order, and escrow agreement for review and approval,
  • File the petition for court approval,
  • Custody assets and provide an accounting of assets on request,
  • Prepare quarterly tax payments and annual tax returns,
  • Issue 1099 forms for attorney disbursements,
  • Perform ongoing settlement fund accounting and reconciliation, and
  • Distribute firm fees and expenses and plaintiff settlement funds.

Milestone brings the brightest minds in the legal and financial fields together to provide guidance and support to plaintiffs and trial lawyers before, during, and after litigation. Our expertise allows us to approach every case with a full understanding of the specific goals and circumstances of each trial lawyer and client. Our commitment to providing the best financial solutions along the litigation journey moves you and your clients forward. Contact Milestone to learn more about implementing a qualified settlement fund for your own practice.