Qualified settlement funds (QSFs) are often thought of as vehicles created for specifically the mass tort space. However, you do not need to be settling a billion-dollar case to take advantage of the tax and distribution tools utilized by the top attorneys in the country. Some of the greatest benefits of qualified settlement funds serve younger attorneys who have recently started their own practice or are still building their practice. By knowing how to use the toys the big kids use, all contingency fee attorneys can reap the benefits for themselves, their clients, and their practices.
QSFs are 468(b) trusts and have been used in the mass tort space for decades. To quote the statute, a 468(b) trust is broadly interpreted and can accept a settlement fund “… arising out of a tort, breach of contract, or violation of law.” When funds are placed and held within a QSF, there is no constructive receipt of funds until they are released.
Receipt is a simple yet significant tax concept. The IRS taxes income and revenue. Income and/or revenue is defined as money that is received. If funds are not received, they are yet to be taxed. Therefore, while funds remain within a qualified settlement fund, they are not taxable income or revenue.
From a QSF, both attorneys and their clients can structure their payments out over a period of years if they so choose. For clients, this results in tax exempt growth. For attorneys, their arrangement results in a fee deferral. This structure can be backed by an investment account that would grow either tax exempt (for personal injury plaintiffs) or tax deferred (for their attorneys and for plaintiffs with taxable settlements). Attorneys can pool multiple fees within a QSF and place those multiple fees into a deferral arrangement.
If you’re a young attorney earning contingency fees and you do not know about qualified settlement funds and fee deferrals, now is the time to become educated about these topics. You want to be prepared and well positioned before you bring in that big win.
This content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Milestone Consulting, LLC, is not engaged in the practice of law or accounting.