Qualified Settlement Funds - A Guide to Correctly Naming a QSF

Qualified Settlement Funds (QSFs) are valuable statutory-based financial mechanisms that offer tax benefits and flexibility in managing settlements and the associated settlement administration across various disputes and litigation.

Established under 26 USC §468B and 26 CFR §1.468B-1 et seq., defendants can “transfer” settlement obligations, claim the associated tax deductions immediately, and facilitate the tax-efficient disbursement of funds to the claimant(s).

Here, we explore the proper naming conventions for a Qualified Settlement Fund name, highlighting the key considerations and appropriate naming conventions to support the fund’s integrity and purpose.

Pro Tip: For more information on QSFs, how to create, their benefits, and how they work, see the following links

• Establishing a QSF - Video
• QSF Articles

The Significance of a Proper Qualified Settlement Fund Name

The naming conventions in QSFs are not merely a formality but a necessity. It is important to note that, in addition to the statutory requirements for QSFs. Therefore, let’s do an overview of QSF naming guidelines and statutory requirements:

• Length and Allowable Characters
  ‍The 2024 IRS QSF EIN length requirement is that no Qualified Settlement Fund name may be longer than sixty-four (64) alphanumeric characters. Additionally, the IRS only allows three (3) special characters - a space, the ampersand (&), or a dash (-).
• Neither “QSF” nor “Qualified Settlement Fund” Need to Be Included in the Name
  ‍Neither §468B nor §§1.468B-1 et seq. require that the name of the QSF contain the term “Qualified Settlement Fund” or the abbreviation “QSF”.

Authorizing Governmental Authority Policy

A governmental authority must approve and exercise jurisdiction over a potential QSF for it to become a QSF. That authorizing governmental authority will have its own policies and requirements for QSF naming conventions. Among other things, these policies ensure that the name of a QSF is not intentionally (or unintentionally) misleading.

Misleading or Deceptive Naming

Generally, state and federal law prohibits any entity from being deceptively named. For example, you may not name a trust using the term “Inc.” in an attempt to misrepresent the trust as a corporation. Also, state statutes prohibit naming a sole proprietorship using the term “LLC” to imply it is a Limited Liability Company when it is not.

Moreover, it is crucial to note that a QSF is not an Interest on Lawyers Trust Account (“IOLTA”) nor an account owned by a law firm; thus, no QSF should be labeled to imply that it is. Severe ethical consequences could result. Therefore, it is prudent never to use a name for a QSF that would give the impression that the QSF is an IOLTA or a law firm’s corporate bank account.

Noted QSF commentator Robert Wood, in his article Qualified Settlement Funds Named Like Lawyer Trust Accounts, while discussing the flexibility available in naming a QSF also raises the concern of possible ethical or bad faith issues surrounding the use of a misleading or deceptive QSF name.

Examples

The following provides roadmap examples of QSF names that work and others that may likely cause issues:

• The Robinson Law Firm Trust Account (Bad Idea)
• Robinson Settlement Trust – FBO Sam Jones (Better)

• Jackson Law Firm, PLLC Fund (Bad Idea)
• Jones Matter Settlement Fund -– Case 1234567 (Better)

• Jones Law Firm IOLTA (Never!)
• Smith Family Settlement Trust (Better)

• Clay, Miller & Pitte Law Trust (Bad Idea)
• TJV (initials or Name of Plaintiff) QSF (Better)

• Thomas Firm Client Account (Bad Idea)
• The Roundup Trust (Better; this name references the general matter and thus is not deceptive)

Naming Safe Harbors

Generally speaking, there are safe harbors when naming a QSF:

• Including the term - Qualified Settlement Fund
• Including the term - QSF
• Use an FBO designation within a QSF name
  (example, “FBO Sam Jones Fund”)
• Use the Case name or Plaintiff (or Plaintiff Family) name in the name of the QSF.
  (example, “The VDC-35456av-67 Case Fund”)
  (example, “The Sam Jones Settlement Fund Case VDC-35456av-67”)
  (example, “Jones Family Settlement Trust”)

Standardizing

If a law firm uses, or plans to use, several QSFs, then standardizing naming conventions allows more effective case management and quicker access to essential documents. A consistent naming convention also improves transparency and avoids confusion for audits, legal reviews, and timely and accurate distribution of funds.

Avoidance of Misleading QSF Names

Avoiding misleading or deceptive naming conventions when naming a QSF is crucial. The name should not misrepresent the nature of the fund or its ownership, as this could lead to confusion or legal and ethical challenges.

Pro Tip: See the related article regarding Who Owns a QSF.

Complexity in Name

Avoid overly complex or obtuse names for a QSF. Names that are difficult to understand or remember can hamper communication and operations or lead to mistakes. A straightforward and clear name ensures that all parties, including the defense, claimants, and the associated legal and financial professionals, can easily refer to the QSF without confusion or question.

Conclusion

When navigating QSFs, carefully selecting a compliant name is not merely a governmental requirement; it can also remove barriers and eliminate questions. Recognizing common pitfalls and adhering to IRS rules and nondeceptive guidelines in choosing a name can avoid potential ethical conflicts and ensure the fund’s smooth operation.

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