Qualified Settlement Fund Administration: Myths vs. Reality

Qualified Settlement Funds (QSFs) are qualified tax entities established under the legal framework of 26 U.S.C. § 468B, regulated under 26 C.F.R. § 1.468B-1, and operate as statutory trusts. These Section 468B trusts are settlement funds created upon the approval of a “government authority.” The Qualified Settlement Fund Administrator and associated Administration are critical to a successful implementation, which streamlines the settlement process for efficient distribution to the involved parties. This consolidation simplifies the fund’s administration and introduces tax benefits designed to empower the plaintiffs financially.

This article will explore the common myths regarding Qualified Settlement Funds and Qualified Settlement Fund Administration.

Myth 1: QSFs Are Exclusively for Mass Tort and Class Action Settlements

One common misconception about Qualified Settlement Funds is that they are exclusively utilized for mass tort and class action settlements. However, the versatility and application of settlement accounts extend far beyond these areas.

Broad Application: They are designed to resolve and satisfy claims, including those made before the fund is established and funded. This broad application makes them suitable for most torts, breach of contract, and environmental liability cases.

Diverse Case Types: The use of settlement funds spans many cases. They are not only applicable in scenarios with large numbers of plaintiffs, such as product-liability cases, drug cases, and sexual abuse cases, but also in single claimant cases.

Ethics and Compliance: Particularly in cases with multiple plaintiffs, settlement trusts play a crucial role in ensuring compliance with ethics rules.

Uncooperative Defendants: They support structured settlement solutions even when a defendant or insurer is unwilling to enter directly. Moreover, they can effectively pay adverse parties with and without liens and address lien resolutions.

Myth 2: Only Plaintiffs Benefit from QSFs

The myth that only plaintiffs benefit overlooks the multiple advantages these funds offer to all parties involved in litigation. The following outlines the benefits for both plaintiffs and defendants, showcasing the unique utility of QSFs:

For Plaintiffs

Deferred Taxation: Plaintiffs benefit from deferring taxes on their settlement amounts until the funds are distributed, providing significant financial planning flexibility.

Flexibility: Plaintiffs gain financial planning and tax benefits by avoiding immediate access to income from the settlement and having ample time for negotiations to address liens and choose distribution methods.

Conflict Resolution: They facilitate the resolution of disputes among multiple plaintiffs and their attorneys, contributing to a more efficient and equitable settlement process.

Settlement Planning: Plaintiff attorneys can secure the settlement proceeds in a § 468B account, providing a safe space to work out a comprehensive settlement plan, address liens, and engage in probate proceedings without the pressure of immediate distribution.

For Defendants

Immediate Tax Deductions: Defendants can immediately claim tax deductions for their contributions to a § 468B trust, even if the funds have not yet been distributed among the plaintiffs. This benefit to the defendant is particularly significant because it allows for deductions when the settlement is paid into the fund rather than upon distribution to each plaintiff.

Litigation Closure: By transferring into a § 468B settlement trust, defendants can remove themselves from the ongoing settlement administration process, often receiving a permanent release upon their contribution. Thus, settlement funds simplify the settlement process and provide financial and legal closure.

Streamlined Process: Forming a qualified settlement account can bridge difficulties when plaintiffs and defendants cannot agree on tax language or reporting, ensuring that all tax, legal fee, and payout issues are managed strictly between plaintiffs and their lawyers outside the influence of defendants.

Myth 3: Establishing Is an Expensive Process

Contrary to the prevalent belief that establishing a Qualified Settlement Fund is costly, platforms like QSF 360 offer creation for a setup fee of only $500. This affordable process and the transparent costs associated with setting up and maintaining a QSF provide reassurance about the administration and financial aspects.

1. Initial Setup and Maintenance Costs

• Drafting of Trust Document: Essential for the legal establishment.
• Ancillary Services: These may include legal advice, fund management, and other services necessary for the operation.
• Government Filing Fees: Required for the legal establishment of the fund.
• Administration and Trustee Fees: For the day-to-day management and oversight.
• Tax Preparation Fees: Preparing tax returns is crucial for maintaining the fund’s compliance with state and federal laws.
• Technology and Support Services: Platforms like QSF 360 offer cost-effective solutions for creating and administration, bypassing traditional expenses and court delays.

2. Process of Establishment

• Petitioning Governmental Authority: Involves submitting the document and details of the underlying matter for approval, ensuring compliance with qualification requirements.
• Obtaining Federal Tax ID Number: A mandatory step for the fund’s operation.
• Approval: § 1.468B-1 provides that approval by a “governmental authority” is required - irrespective of whether the settlement or litigation is a federal or state matter, providing flexibility in the establishment.

3. Comprehensive Services at a Glance

• QSF 360: Offers a same-day* online solution that includes document preparation, disbursement of payments, UCC and bankruptcy lien management, and tax filings, among others, providing a holistic approach to QSF administration.
• Licensed Administrator Selection: The best outcomes typically result from using a specialized fiduciary or individual to ensure proper service.
• Creating a QSF: This can be as straightforward as spending only 15 minutes online, making the process simple and easy to manage, providing a sense of ease and comfort to the audience.

Myth 4: Qualified Settlement Fund Administration Is Overwhelmingly Complex

The myth surrounding the overwhelming complexity of Qualified Settlement Fund administration can deter parties from considering this efficient settlement solution. However, understanding the structured roles and responsibilities can demystify the process:

Role of the QSF Administrator

• Comprehensive Management and Coordination: Ensures the smooth operation and administration of the fund, including asset custody and oversight.
• Documentation Preparation: Involves drafting necessary legal and financial documents to maintain compliance and facilitate settlement.
• Disbursements Management: Handles disbursements to claimants, accurately managing gross payments to individual claimants and distributions on behalf of claimants.
• Post-Distribution Activities: Conducts audits, oversees funds, and oversees post-distribution tasks, ensuring the fund’s closure aligns with all legal requirements.

Expertise and Compliance

• Knowledge and Experience: A licensed fiduciary serving as the administrator brings a wealth of knowledge, ensuring compliance with regulations and guidelines.
• Tax Regulation Proficiency: Managing tax-related requirements outlined in the U.S. code is crucial, with administrators handling the fund’s EIN application and annual tax returns.
• Selection Criteria: When selecting a QSF Administrator, their experience in related tax regulations and management capabilities is paramount.

Qualified Settlement Fund Taxation

• Taxation and EIN: Settlement funds are taxed separately on the income they earn, with the need for their own EIN, simplifying tax reporting and compliance.

Myth 5: QSFs Offer Limited Tax Advantages

Dispelling the myth that Qualified Settlement Funds offer limited tax advantages requires an in-depth exploration of the taxation benefits they present for defendants and plaintiffs. Here is a concise breakdown:

Tax Benefits for Defendants and Plaintiffs

Immediate Tax Deduction for Defendants: Upon transferring into a QSF, defendants are eligible for an immediate tax deduction, even if the funds have yet to be distributed to the plaintiffs. The upfront deduction can significantly reduce the defendant’s taxable income in the fiscal year of the contribution.

Income Deferral for Plaintiffs: Plaintiffs can defer taxation on their settlement amounts until distribution. The benefit of deferral can offer substantial financial planning advantages, allowing plaintiffs to potentially lower their tax obligations by receiving funds in years when they may be in a lower bracket.

Structured Settlements and Legal Fees: Both structured settlements and structured legal fees are available post-defendant involvement, providing plaintiffs and their attorneys the flexibility to plan for future financial needs. Notably, structures, including the attorney fees portion of the claimant proceeds, can circumvent constructive receipt and economic benefit doctrines, taxing plaintiffs and their attorneys only upon receiving each payment.

Operational and Taxation Aspects

Separate Tax Entity Status: As a separate tax entity, they are subject to taxation on interest, capital gains, and dividend income at the applicable maximum corporate income tax rate. However, the fund benefits from deductions for administrative costs, incidental expenses, and losses sustained in property transactions.

Accrual Accounting and Corporate Treatment: QSFs must employ an accrual method of accounting and are treated as corporations for subtitle F of the Internal Revenue Code. This corporate treatment simplifies tax reporting and compliance, ensuring that the tax imposed on the fund’s modified gross income is treated consistently with corporate tax obligations.

Flexibility and Longevity

No Explicit Time Limit: The absence of a strict time limit for the existence provides flexibility in managing complex cases that may span several years. This enduring nature ensures that all controversies can be resolved without rushing the process, benefiting all parties involved.

Conclusion

The myths surrounding the Qualified Settlement Fund and its administration are unfounded. However, the QSF Administrator is critical to ensure a seamless operation.

Particularly noteworthy is the capacity of settlement funds to extend beyond limited use scenarios, provide benefits to plaintiffs and defendants, and offer significant tax advantages that can profoundly impact financial planning and legal strategy.

In navigating the complexities and ensuring optimal outcomes within the § 468B framework, engaging a skilled and experienced QSF Administrator is vital. Only a licensed fiduciary for settlement fund administration can ensure compliance, maximize tax benefits, and streamline the settlement process for all parties involved. This professional insight and management are pivotal in harnessing the full tax potential, transforming them from a misunderstood financial instrument into a robust dispute resolution and settlement planning solution.

Questions to ask Prospective Administrators:

• What specific criteria must be met for a government authority to approve the establishment of a Qualified Settlement Fund?
• Do you have any conflicts of interest in selling insurance or other financial products?
• How quickly can you produce final documents and secure the approval?
• What are your privacy and confidentiality protections?
• How do you handle the distribution process among multiple plaintiffs with varying claims?
• How quickly are distributions processed?
• Are you a licensed fiduciary?
• What base costs and additional costs might arise during the ongoing administration of a Qualified Settlement Fund beyond the initial setup fee?