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Never Establish a QSF in Massachusetts – The Unnecessary Taxation of a Qualified Settlement Fund

By 
 (Guest Author)
Published 
5/2/2024
Angry man looking at income tax - Never Establish a QSF in Massachusetts

Massachusetts is known for Boston, Cape Cod, the Salem Witch Trials, and high taxes. It is no surprise that, when creating a Qualified Settlement Fund (“QSF”) in Massachusetts, the state imposes its aggressive tax policy on QSF income. Therefore, any QSFs used in Massachusetts or established by Massachusetts’ governmental authorities are subject to federal and Massachusetts taxation.

Massachusetts’ applicable income tax rate for the 2023 tax year is a flat five percent (5%) rate on the entirety of the QSFs’ taxable income. As of 2023, an additional 4% tax income over $1 million also applies. Thus, the Massachusetts Department of Revenue’s Letter Ruling 08-7 demonstrates that creating a QSF in Massachusetts is a costly mistake that will result in unnecessarily high taxation.

Happy business people - Never Establish a QSF in Massachusetts

Background of Letter Ruling 08-7

In Letter Ruling 08-7, issued March 28, 2008, the Massachusetts Department of Revenue established Massachusetts’s position concerning the “Taxation of Qualified Settlement Fund.”

The Massachusetts Department of Revenue ruling outlined the following:

  • A QSF is subject to tax under the Massachusetts General Laws, Chapter 62.
  • The taxation applies if a Massachusetts governmental authority (including a “Massachusetts Court”) establishes a QSF.
  • In general, the ruling provides taxation on income derived from or attributable to sources within Massachusetts, including income from tangible or intangible property located or having a situs in Massachusetts and income from any activities carried on in Massachusetts.
  • The Massachusetts Department of Revenue asserts that the situs of trust within Massachusetts applies unless the property has formally acquired a situs elsewhere. This doctrine means a QSF (including a designated settlement fund) shall be presumed to be in Massachusetts if the court or the governmental authority that ordered or approved the establishment of the QSF is in Massachusetts or if trust assets or the situs was in Massachusetts for any part of the year.

Conclusion

MA State Income Tax 9% - Never Establish a QSF in Massachusetts

While a few states have higher taxes than Massachusetts’s top rate of nine percent (9%), many states have no taxation to a trust-based QSF. Thus, planners and attorneys should carefully consider in which jurisdiction you create a QSF and judge the advantages of QSF 360 to tax optimize and reduce your QSF tax liabilities.

Disclosure: This content is an overview. It is not a detailed analysis and offers no legal or tax opinion on which you should solely rely. Always seek the advice of competent legal and tax advisors to review your specific facts and circumstances before making any decisions or relying on the content herein.
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Any opinions, views, findings, conclusions, or recommendations expressed in the content contained herein are those of the author(s) and do not necessarily reflect the view of the Eastern Point Trust Company, its Affiliates, or their clients. The mere appearance of content does not constitute an endorsement by Eastern Point Trust Company (“EPTC”) or its Affiliates. The author’s opinions are based upon information they consider reliable, but neither EPTC nor its Affiliates, nor the company with which such author(s) are affiliated, warrant completeness, accuracy or disclosure of opposing interpretations.


EPTC and its Affiliates disclaim all liability to any party for any direct, indirect, implied, special, incidental, or other consequential damages arising directly or indirectly from any use of the content herein, which is expressly provided as is, without warranties.
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