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CNBC highlighted the importance of settlement planning and use of Qualified Settlement Funds in interviews with Eastern Point's Chief Trust Officer (Rachel McCrocklin) and Tax Strategist (Jeremy Babener).

“The right settlement planning can double what plaintiffs keep, even with the defense paying less.”

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The co-designer of the Plaintiff Recovery Trust, Lawrence Eisenberg, a tax attorney and founder of Forward Giving, Inc., a 501(c)(3) charity, publishes in Tax Notes an article addressing the double taxation of settlements.

[7/16/2024] — In a thought-provoking article published in Tax Notes* Lawrence J. Eisenberg, an experienced tax attorney, describes the perplexing issues affecting individual plaintiffs in litigation recoveries and considers how those issues can be addressed, including by using a charitably-based trust-based solution. The article “The Individual Plaintiff Tax Trap — A Conundrum and a Solution” delves into the intricacies of the taxation of litigation recoveries and addresses methods to mitigate the adverse tax consequences some individual plaintiffs face.

Background

Eisenberg’s article highlights the strange and often inconsistent tax treatment of individual plaintiff litigation recoveries under the Internal Revenue Code. Despite the Supreme Court’s 2005 decision in “Commissioner v. Banks”, which held that plaintiffs must report the entire recovery as taxable income—including the portion payable to attorneys—many plaintiffs (and their attorneys and advisors) remain unaware of the potential tax pitfalls when such recoveries do not fall under tax-free categories, e.g., damages for physical injuries.

The Individual Plaintiff Tax Trap

The crux of the issue lies in the deductibility of attorney’s fees. Some recoveries are tax-free, so attorney fee deductibility is not relevant, or allow for an above-the-line deduction of these fees. Other recoveries can result a “double tax”, because in those situations, the attorney fee portion of the recovery is taxable, but the attorney fee itself is not deductible. This leads to significantly diminished net recoveries. Eisenberg’s article includes a detailed example demonstrating how a plaintiff’s net recovery can be less than 10% of the total amount, with the government and attorneys each receiving several times more than the plaintiff!

A Trust-Based Solution

To address this inequity, Eisenberg proposes that a plaintiff affected by the double tax create a Plaintiff Recovery Trust (PRT). A PRT allows plaintiffs to transfer their litigation claims to a specially designed split-interest charitable trust. By doing so, the litigation claim becomes an asset of the trust, and any recovery is received by the trust, which then pays the net recovery to the trust beneficiaries, including the plaintiff. The PRT uses ordinary trust law principles and aims to achieve fairer tax treatment by separating the ownership of the litigation claim from the individual plaintiff.

Key Benefits of the Plaintiff Recovery Trust

- Equitable Tax Treatment: By treating the litigation claim as a trust asset, a Plaintiff Recovery Trust results in the plaintiff not being taxed on the portion of the recovery paid to their attorneys.

- Structured recovery: The PRT trust structure allows for a more organized and potentially tax-efficient distribution of recoveries. (It also permits the use of structured settlements as part of the solution.)

- Charitable Component: The PRT includes a charitable beneficiary, adding a philanthropic dimension to the solution.

Conclusion

Eisenberg’s article is a call to action for tax professionals and litigation attorneys to recognize and address the unfair tax treatment many individual plaintiffs face. The PRT trust-based solution offers a way to alleviate the financial burden imposed by current tax law, so that plaintiffs retain a fair share of their recoveries.

See the full article on the taxation of settlement proceeds.

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www.EasternPointTrust.com

info@easternpointtrust.com
Phone: 855-222-7513

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A Second Look

Navigating the complexities of establishing a Qualified Settlement Fund (QSF), sometimes known as a 468B Trust, Qualified Settlement Trust, Qualified Settlement Account, QSF Trust or QSF Account, demands a deep understanding of legal and financial frameworks and meticulous attention to the nuances of its naming conventions. The naming of a QSF, often overlooked, plays a pivotal role in ensuring the fund’s operational effectiveness and compliance with regulatory requirements. This process, integral to the execution of settlement agreements, underscores the need for strategic naming. By ensuring that a QSF is appropriately named, stakeholders safeguard their interests and facilitate a smoother administration of the settlement funds.

This article takes a second look at the critical aspects of a Qualified Settlement Fund, and specifically clarifies the legal and tax implications of its naming. It offers a roadmap for legal practitioners, QSF administrators, and parties involved in a settlement agreement.

What is a Qualified Settlement Fund (QSF)?

A Qualified Settlement Fund (QSF), also known as a 468B Trust, is a tax-qualified vehicle designed to manage and distribute funds for settlements resulting from litigation. These funds are particularly advantageous as they provide a structured means to handle the distribution of settlement amounts among plaintiffs while managing tax implications effectively for all parties involved.

Established under the guidelines of Section 1.468B-1 of the Code of Federal Regulations, QSFs are utilized primarily to resolve disputes by allowing defendants to deposit funds into a trust, thereby obtaining a release from liability. This mechanism is crucial in cases involving multiple claimants, such as class action lawsuits or mass tort litigation, where the fund is a temporary holder of the settlement proceeds.

A set of specific legal requirements governs the operation and administration of a QSF. These funds must be established pursuant to a court order or approved by a governmental authority, ensuring compliance and oversight. Furthermore, they must be used exclusively to resolve or satisfy claims that have resulted from an event (or related series of events) that has given rise to legal liability.

QSFs provide several benefits beyond simple fund administration. They allow for the deferral of taxes for the plaintiffs until the distribution of the funds. Additionally, they enable the defendants to fully resolve their liabilities while potentially receiving tax deductions upon transferring funds into the QSF. For attorneys, these funds facilitate the management of settlements and help avoid potential conflicts of interest in the distribution process.

Establishing a Qualified Settlement Fund (Qualified Settlement Trust or QSF Account) offers a streamlined, compliant, and efficient method for handling the complexities associated with large-scale settlements, benefiting all parties involved by providing a clear, regulated pathway for fund allocation and distribution.

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Legal and Tax Implications of Naming a QSF

The legal and tax implications of naming a Qualified Settlement Fund (QSF) are significant, requiring careful consideration to avoid potential pitfalls. State and federal laws mandate that entities, including QSFs, must not be deceptively named. For instance, using terms like “Inc.” to suggest corporate status or “LLC” for a non-Limited Liability Company is strictly prohibited. Misrepresentation can lead to severe ethical and legal consequences.

Furthermore, it is critical to understand that a QSF is neither an Interest on Lawyers Trust Account (IOLTA) nor a law firm’s account. Naming a QSF in a way that implies such associations is misleading and can result in significant ethical issues.

Tax implications also play a crucial role in the administration of QSFs. As separate entities, QSFs must pay taxes on interest and dividend income at the maximum corporate tax rate. This tax is derived solely from the interest earned on the QSF, emphasizing the need for accurate financial management.

The economic performance rule allows defendants to receive an immediate tax deduction upon transferring funds into a QSF. At the same time, the constructive receipt doctrine ensures that the transfer does not constitute receipt by the claimant, thus no immediate tax liability is triggered.

Additionally, the economic benefit rule stipulates that transferring funds into a QSF does not provide an immediate economic benefit to the claimant, further supporting the tax-efficient nature of QSFs.

In summary, adhering to non-deceptive naming conventions and understanding the complex tax implications are essential for the smooth operation and compliance of a Qualified Settlement Fund.

Best Practices for Naming a QSF

When naming a Qualified Settlement Fund (QSF), adhering to established guidelines ensures compliance and avoids potential legal and ethical pitfalls. The IRS stipulates that QSF names should not exceed sixty-four (64) alphanumeric characters and may include only three (3) specific special characters: a space, an ampersand (&), or a dash (-). Importantly, neither § 468B of the Internal Revenue Code nor the subsequent sections mandate the inclusion of “Qualified Settlement Fund” or “QSF” in the fund’s name, offering flexibility in naming conventions.

Pro Tip: Using the terms 468B Trust, Qualified Settlement Trust, Qualified Settlement Account, QSF Trust or QSF Account in the name will qualify the account as a QSF.

Incorporating terms such as “Qualified Settlement Fund,” “Qualified Settlement Trust,” “QSF Account,” or “QSF” is advisable for practical and transparent operations. Using an FBO (For the Benefit Of) designation or including the case name or plaintiff’s name in the QSF title can enhance clarity. For example, “FBO Sam Jones Fund” or “The VDC-35456av-67 Case Fund” are informative and straightforward names that aid in the effective management and identification of the fund.

Law firms managing multiple QSFs may benefit from standardizing their naming conventions. This practice supports efficient case management and document retrieval and maintains consistency, which is crucial for audits, legal reviews, and timely distributions.

In summary, while flexibility exists in naming QSFs, choosing names that are clear, non-deceptive, and reflective of the fund’s purpose and legal status to prevent confusion and uphold the integrity of the fund’s operations is imperative.

Conclusion

We have navigated the complexities and critical considerations surrounding the naming of Qualified Settlement Funds, highlighting the significance in ensuring the fund’s effectiveness and adherence to regulatory compliance. From understanding the nature of QSFs, exploring their legal and tax implications, and adopting best practices for their naming, this article provides a comprehensive guide for legal professionals, financial administrators, and stakeholders involved in settlements. By emphasizing the importance of non-deceptive, clear, and strategic naming, we underscore its role in the seamless operation and management of these funds, reinforcing the foundational elements needed to maximize the benefits of QSFs for all parties involved.

Platforms like QSF 360 from Eastern Point Trust Company provide integrated naming convention support in a quick, easy, and low-cost online solution.

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Qualified Settlement Funds (QSFs), a 468B trust, are valuable and crucial in managing litigation settlements efficiently and effectively. "QSF", which stands for "Qualified Settlement Fund", is a fund established as a trust or account established to hold settlement proceeds from litigation. According to the definition under Treasury Regulations, it is an escrow account, trust, or fund established according to an order of or approved by a government authority to resolve or satisfy claims.

This comprehensive infographic guide explains the essential aspects of Qualified Settlement Funds:

• What is a Qualified Settlement Fund and its purpose
• Key benefits
• Eligibility requirements
• The approval process
• How to create a Qualified Settlement Fund
• Qualified Settlement Fund tax treatment and tax reporting
• Investment options
• QSF administration process
• Qualified Settlement Fund Administrator role and responsibilities
• Procedures for making distributions
• Compliance and regulatory matters
• Complex cases
• Minor's Settlements

The guide provides valuable insights, tips, and rules of thumb for legal professionals, claimants, and other stakeholders about how a QSF account benefits the settlement process. A QSF offers many advantages, including immediate tax deduction for defendants, tax deferral for claimants, and efficient management of settlement proceeds. QSFs are commonly used in class action lawsuits, mass tort litigation, and cases with multiple claimants, but can also provide benefits in single claimant cases.

Setting up a QSF involves petitioning a government authority and appointing a QSF Administrator to oversee the fund. The QSF Administrator, often a platform like QSF 360, is responsible for obtaining an EIN, handling tax reporting, overseeing QSF administration, and making distributions to claimants. Online QSF portals streamline the Qualified Settlement Fund administration process.

Partnering with an experienced QSF Administrator is essential. Services like QSF 360 from specialize in QSFs for both large and small cases and can help ensure compliance with IRC § 1.468B-1 and other regulations.

In summary, Qualified Settlement Funds are a powerful tool for managing settlement proceeds. With proper planning and administration, QSFs provide significant tax benefits, enable efficient distribution of litigation proceeds, and help bring litigation closure. Understanding what is QSF and how to leverage QSFs is invaluable for any legal professional involved in today's settlements.

When minors are part of settlements, it’s crucial to safeguard their well-being and manage settlement funds properly. A Qualified Settlement Fund (QSF), also referred to as a 468B trust, plays an important role in handling these settlements by ensuring the assets of any associated minor(s) are secure and managed in an organized manner while the courts and the guardian finalize the minor’s compromise and settlement.

This piece will dive into the usage of QSFs when used for minor compromise and settlement, and how they specifically facilitate the settlements. This article will also discuss the advantages of using QSFs, such as simplifying the settlement process, protecting the minor’s future, and adhering to regulations. Furthermore, real-life case studies will be shared to demonstrate how QSFs are successfully utilized for settlements involving minors.

Understanding Qualified Settlement Fund for Minor’s Settlements

A QSF is an account, managed by an independent trustee, established to hold proceeds from settlements or judgments. This fund allows involved parties to resolve disputes regarding how proceeds should be divided among said parties or their attorneys and address liens needing resolution.

In cases involving a minor, the initial settlement proceeds can be paid into the QSF, allowing the defendant to take an immediate tax deduction and walk away with a general release. By doing so, the defense is no longer involved in the processes associated with the court’s review and approval of the final disposition of the settlement proceeds for the minor.

The laws governing QSFs are in Section 468B of the Internal Revenue Code and the associated regulations found in § 1.468B-1, et seq., of the Code of Federal Regulations. To establish a QSF, the involved parties must petition to create a QSF, and then the approving government authority issues an approval approving the creation of the fund and maintaining jurisdiction over it.

The terms of a QSF are typically outlined in a trust agreement, although QSFs do not function as traditional trusts under state laws because they lack grantors.

Benefits of Utilizing QSFs in Settlements Involving Minors

QSFs offer several advantages when it comes to facilitating settlements that involve minors. QSFs ensure the minor’s well-being and provide flexibility in planning and finalizing the terms of the minor’s use of or access to the funds.

The settlement funds in a QSF are held in FDIC-insured money market accounts for minors until they are released to be deployed into the final plan per the court’s directive.

Pro Tip: QSFs are thus only short-term “tax-qualified” escrow accounts. They are not a permanent solution nor a replacement for an SNT, settlement protection trust, trust, or structured annuity.

The QSF has one job - temporarily holding the funds (tax-deferred) while preserving all available tax and financial planning solutions.

While the funds are held in the QSF, the court supervising the minor’s interest has unlimited time to work with the guardians, review and approve the details for proposed financial solutions and products for the minor’s benefits, and resolve any liens or other obligations such as attorney fees and expenses.

Structured settlements, commonly utilized in cases involving minors, can be funded through QSFs to provide an income stream until adulthood.

Thus, QSFs allow flexibility in creating a settlement strategy tailored to the child’s long-term requirements, such as establishing a needs trust or combining payments with structured settlements.

Approval by the Local Court

The rules on whether a local court must approve using a QSF to temporarily hold the funds on behalf of the minor vary from state to state and sometimes within the different courts within the same state.

Pro Tip: The local court supervising the minor’s settlement does not need to approve the QSF as a Qualified Settlement Fund under § 1.468B-1. Instead, the local court supervising the minor’s settlement may wish to be notified and amend the created  QSF to temporarily hold the minor’s assets. Check with your attorney for the applicable local rules.

As an Example:

A minor named Colin received a settlement of $1,225,000 paid into the QSF according to the settlement terms with the defendant. The local court did not require additional notice for the QSF to hold the funds temporarily. After the QSF paid the attorney fees, the local court approved the final plan strategy six months later: to allocate $500,000 for a special needs trust (SNT) immediately and place the remaining funds in a settlement annuity to support the SNT in the future. The following demonstrates how Qualified Settlement Funds (QSFs) can benefit the minor.

Practical Uses and Instances

QSFs provide an organized method for handling settlements involving minors, guaranteeing fund distribution, avoiding adverse impacts on government benefits, and securing their financial future. Below are uses and instances showcasing how QSFs improve settlements.

Instances Involving Serious Injuries

In situations where minors have sustained severe injuries leading to permanent disability or requiring lifelong medical attention, QSFs play a crucial role in safeguarding their financial well-being and preserving government benefits.

For example, in a case where an 11-year-old plaintiff suffered both brain injury and spinal cord injury, a QSF was employed to hold the $1,225,000 settlement. After settling the legal fee obligations, the local court approved a plan to allocate $1,000,000 in cash to establish a Special Needs Trust (SNT) while distributing the remaining funds into a settlement annuity for future funding of the SNT. This strategy guaranteed that ongoing medical requirements, including nursing care, therapy, and equipment, would be taken care of while maintaining the family’s eligibility for government benefits based on financial need.

Efficiently Managing Settlement Funds

QSFs can also be advantageous when a minor’s injuries do not lead to long term needs.

For example, in a case where a 9-year-old plaintiff obtained a $100,000 settlement following a dog bite, a QSF was used to manage and hold the funds until the guardians and the local court finalized the plan. The minor’s guardians chose settlements with biannual payments of $10,000 over four years starting at age 18 for educational expenses. These payments were followed by lump sum payments of $25,000 at age 23 and $33,600 at age 25.

When preparing a settlement plan, timing is often problematic for the defendant and obtaining local court approval. A QSF allows the defendant’s settlement payment to be received and removes the defendant and their possible objection(s) from the secondary planning process.

By using Qualified Settlement Funds, settlement planners can create plans tailored to meet each minor plaintiff’s specific needs, remove the defendant and the defendant’s broker from the process, and ensure the minor’s financial well-being and quality of life as they grow into adulthood.

Summary

Qualified Settlement Funds offer a secure method for handling settlements involving minors, thereby safeguarding the minor’s settlement proceeds until the local court approves the final distribution. By leveraging QSFs, settlement planners can craft plans that cater to each plaintiff’s unique requirements while considering aspects like current and future medical needs, existing government benefits, and the minor’s financial management abilities in the future.

Platforms like QSF 360 provide experience, quick, easy, and low-cost Qualified Settlement Fund creation and QSF administration solutions.

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Recognizing when and how to use qualified settlement funds can significantly enhance the resolution process in your practice. Often referred to as a QSF, a qualified settlement fund is a tax-qualified statutory trust, which allows the defendant a full release when a settlement is paid into an account that acts as a temporary trust account. Those settlement funds can then be paid in cash, fund a structured settlement, attorney fee structure or assignment, and settle liens or allocation issues between parties.

A QSF created under Section 468 B is flexible and allows for a wide array of case types from class action, mass tort, even single-event and single-plaintiff cases. Moreover, most plaintiff's attorney has encountered a defense representative or attorney making things more difficult than necessary. The solution is to have the settlement paid into the QSF, thus removing the defense from the post-settlement process.

With Eastern Point Trust Company's QSF 360 platform, submitting a QSF can be easily accomplished in 15 minutes online for as little as $500 typically established within a single business day. The QSF is then ready to accept assets from a transferer, defendant, or defense carrier and provide the transferer with a complete release of liability.

Recognizing when and how to utilize qualified settlement funds can grow your practice, reduce risks, and produce improved financial outcomes for you and your clients. Eastern Point's QSF 360 platform makes the process quick, easy, and turnkey providing everything from the necessary documents to the required governmental approval and IRS registration. Be sure to like this video and subscribe to our channel for the latest videos.

Qualified Settlement Funds (QSF) – Listicle of 12 Things to Know:

FOR IMMEDIATE RELEASE

[7/8/24] Joe Sharpe, ETPC President, explained, “QSFs are powerful financial tools to streamline and manage settlements, especially in complex cases. They provide tax benefits, flexibility, and efficient administration for all parties involved. With platforms like QSF 360™, creating and managing a QSF is quick, easy, and fully compliant. From establishing a QSF to understanding the roles of administrators, tax implications, and investment options, our comprehensive listicle covers all you need to know about these financial mechanisms.”

Learn the advantages of QSFs over other settlement structures, QSF regulatory oversight, and best practices for effective management. Make the most of your settlements with QSFs and ensure a smooth, compliant, and beneficial process.

Eastern Point Trust Company invites legal professionals, plaintiffs, and all interested parties to explore more and discover the transformative potential of QSFs in post-settlement dispute resolution. To read the complete listicle and learn more about the advantages of QSFs, visit https://www.easternpointtrust.com/articles/qualified-settlement-funds-listicle-of-12-things-to-know.

PRESS Contact
www.EasternPointTrust.com

info@easternpointtrust.com
Phone: 855-222-7513

A qualified settlement fund - or QSF - is a tax tool often used in legal settlements. But who owns the assets within a QSF? According to IRS section 468B, subsection B3C, "the fund shall be treated as the owner of the property in the fund (and any earnings thereon)." Thus, the assets of a QSF are segregated and not owned by any defendant, plaintiff, lien holders, or plaintiff attorney.

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A QSF is a statutory trust operated under Section 468B for the benefit of the plaintiffs and controlled by an independent administrator. To preserve tax compliance and qualification, the QSF must solely own the QSF's assets, which are under the control of the QSF administrator.

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To read more about qualified settlement funds, visit https://www.easternpointtrust.com/articles