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Qualified Settlement Fund (QSF) Creation - List of Key Points Lawyers Need to Know

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1. Court Approval is Not Mandatory

  • Court approval to create a Qualified Settlement Fund is NOT required.
  • IRC § 468B-1(c)(1) allows non-court “governmental authorities” to approve the creation.

2. Governmental Authority Approval

  • QSFs can be approved by various governmental entities, including federal, state, or local agencies.
  • The approving authority oversees QSF administration to ensure compliance with the judicial award terms and associated regulations.

3. IRS Involvement in Approval Process

  • The IRS plays a role in supervising QSFs through tax regulations, rules, and EIN issuance.
  • The QSF administrator must ensure compliance with IRS requirements for QSF establishment and administration.

4. Establishing

  • Parties must petition a governmental authority to create and approve establishment.
  • The authority reviews the proposed trust agreement for qualification requirement compliance.

5. Advantages Beyond Tax Benefits

  • QSFs provide tax benefits for both the plaintiff and defendant, provide timing flexibility, and reduce administrative burdens.
  • They also facilitate lien satisfaction and the resolution of any secondary disputes.

6. Streamlined Creation Options

  • Traditional court-established methods can be time-consuming and costly.
  • Platforms like QSF 360 offer quicker, more affordable solutions with experienced, qualified settlement fund administration.

7. IRS Filing Requirements

  • The qualified settlement fund administrator must file annually Form 1120-SF (U.S. Income Tax Return for Settlement Funds).
  • Form 1041 (U.S. Income Tax Return for Estates and Trusts) is not applicable.

8. Life Cycle

  • QSFs operate on a calendar year basis and begin life upon the governmental authority’s approval.
  • The fund administrator must ensure that the fund fulfills all IRS requirements regardless of whether the funding has occurred.

This listicle provides a summary overview. Always consult with experienced QSF administration professionals for specific guidance on Qualified Settlement Fund administration.

Rachel McCrocklin
Rachel McCrocklin
Author

Rachel McCrocklin

Ms. Rachel McCrocklin, MBA is a settlement industry and trust professional specializing in creating, operating, and administering 468B Qualified Settlement Funds (QSFs). Additionally, she provides insights on advanced settlement optimization solutions such as the Plaintiff Recovery Trust (PRT) while working with litigants, plaintiff counsel, and defendants to implement tax-efficient solutions and maximize settlement outcomes for all stakeholders.

Ms. McCrocklin oversees Eastern Point's QSF and PRT client services operations and communications while participating in developing new and innovative advantaged tax structures.

She is a prolific author of articles, including for the American Bar Association; she regularly presents at the Federal Bar Association, Practicing Law Institute, and settlement industry events and is frequently cited in financial industry publications such as USAToday, Finance Digest.

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