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Establishing a Section 468B Qualified Settlement Fund (QSF) is not just a move but a strategic maneuver that benefits both defendants and claimants. It allows defendants to swiftly resolve claims and claim tax benefits, bypassing the usual delay in settlement payments. For claimants, it opens up avenues for settlement planning and independent identification of tax deferral opportunities. This adaptability and the tax-deferred handling of settlement funds serve both parties' interests, underscoring the importance of understanding how these funds operate.

The effective management of these tax tools, such as a QSF, hinges on the expertise of the fund administrator. This role is pivotal for maintaining the integrity and efficiency of the fund. The administrator's duties, which include fund recordkeeping and settlement administration tasks and oversight, are crucial for ensuring compliance with the requirements outlined in section 1.468B 1 of the Internal Revenue Code. This underscores the importance of the administrator's role and expertise with these types of funds.

Moreover, the expertise in settlement strategies that a proficient and knowledgeable fund administrator brings is not just essential, it's a cornerstone of confidence. Their integral role in ensuring the proper functioning of the fund, coupled with their skills and guidance, instills confidence in their abilities and provides a timely settlement process for all parties involved.

Understanding the Basics - What is a QSF? This knowledge is not just useful, it's crucial for anyone involved in settlements. It's the foundation on which the entire process is built.

Qualified Settlement Funds, or 468B trusts, are tax entities governed by a detailed legal structure crucial for resolving disputes and claims more economically. These trusts are established through a process outlined in 26 CFR § 1.468B 1(c) involving approval from a body, adherence to specific laws, and obtaining a federal tax ID number.

Key Features

• Established as Statutory Trusts: Under Section 1.468B-1 et seq., the approving “Governmental Authority” (often a court or a regulatory body) plays a crucial role in overseeing the establishment and operation of the Qualified Settlement Fund. They ensure that the fund operates under trust agreements subject to their continuing jurisdiction, which is essential for compliance and transparency.
• Streamlined Settlement Process: They simplify settlements by consolidating payments into the fund administered for distribution to parties. This approach streamlines the distribution process.
• Tax Advantages: § 468B offers a range of tax options that can significantly benefit plaintiffs financially.

Why Use an Administrator

When dealing with a settlement fund, it's crucial to rely on the expertise of a settlement fund administrator (QSF Administrator). These professionals specialize in managing the processes and requirements linked to settlement funds. Engaging their services can benefit individuals and organizations involved in settlement agreements.

One key reason for engaging an administrator is their knowledge and experience overseeing settlement funds. They are well acquainted with the rules and regulations governing funds, ensuring adherence to all tax obligations. Their expertise enables them to navigate the complexities of the settlement process, including distributing funds to plaintiffs and resolving any disputes. Accuracy and compliance will be accomplished by entrusting your settlement fund to an administrator.

Another benefit of utilizing an administrator is the ability to streamline the administration process. The process includes establishing the fund, supervising the fund holdings, and disbursing funds to plaintiffs. A proficient administrator can efficiently handle these responsibilities, thus saving time and effort and relieving you of administrative burdens.

The administrator has the tools and systems to effectively handle funds, ensure operations, and reduce delays or mistakes. With their help, you can focus on other tasks while being reassured that the Qualified Settlement Fund is administered efficiently, providing security and peace of mind.

Moreover, the administrator can offer guidance, assistance, and support throughout the structured settlement process, and their expertise can improve tax and financial outcomes for everyone involved. Additionally, they can advise on tax implications to assist you in making informed decisions about the settlement fund.

Additionally, the fund administrator oversees the fund’s tax filings and payments, ensuring strict compliance with Section 468B. Adherence to this regulation is paramount for ensuring operations conform to the applicable tax laws.

Settlement funds also facilitate claims resolution by providing transparency and tax-deferred benefits to all involved parties. Thus, the administrator plays a crucial role in the settlement administration process, ensuring compliance, financial oversight, and the equitable distribution of funds.

The Responsibilities of a QSF Administrator

A fund administrator carries out various tasks when administering a settlement fund. These professional administrators are integral to the settlement process by fulfilling tax, financial, and administrative duties with transparency and thoroughness. Key elements include:

• Comprehensive ministerial administration and coordination;
• Preparation of documents;
• Securing a tax identification number;
• Placing funds in segregated FDIC-insured bank accounts to ensure safety from a bank failure;
• Ensuring smooth operation and administration by coordinating with all parties, including the claimants, law firms, and potentially the court overseeing the settlement;
• Conducting audits, maintaining comprehensive financial records, and handling tax filings;
• Supervision of disbursements to claimants through systems by verifying eligibility, determining individual settlement amounts, addressing tax considerations, and providing support via live call centers and educational resources, helping reduce administrative complexities. The Administrator is responsible for ensuring eligible claimants receive their settlement funds on time while addressing tax implications.
• Investing in options like FDIC-insured money market funds, which can enhance fund security for settlement funds; and
• Post-distribution activities include but are not limited to closing the fund, reconciling the interest earned, and fulfilling all settlement obligations.

QSF Administrators Reduce Law Firm Burdens

The administrator relieves law firms of IOLTA responsibilities, facilitates tax-preferred choices, and ensures prompt and equitable payouts to claimants. This alleviates the administrative burden on law firms, providing reassurance and reducing stress. Selecting the proper administrator involves weighing several factors to ensure proficient and compliant settlement funds. It is essential to consider the expertise and capacity of an administrator.

Advantages of a Licensed Fiduciary as the Administrator

There are key advantages to having a licensed fiduciary as the administrator. A licensed fiduciary brings knowledge and experience, safeguarding compliance with all regulations and guidelines. Additionally, leveraging a fiduciary with an online portal can simplify tasks, ensuring secure and efficient fund administration and distributions. Furthermore, having a licensed fiduciary in charge instills confidence in stakeholders regarding the fund's assets, adherence, duties, and the protection of sensitive information.

On the other hand, entrusting settlement funds to an unlicensed administrator can pose real risks.

Without licensing and oversight, there is an increased risk of mishandling funds, not following regulations, and failing to protect information. Recent incidents involving trust administrators losing over $100 million in client funds are a stark reminder of the risks associated with unlicensed providers. This information is crucial for the audience to be cautious and aware.

Unlicensed providers often lack the expertise, controls, oversight, safeguards, and resources to accomplish complex administrative tasks effectively. These deficiencies can lead to delays, mistakes, and potential legal problems. Opting for an unlicensed administrator instead of a licensed fiduciary can expose the settlement and its stakeholders to unnecessary risks.

What to Look for When Selecting a Qualified Settlement Fund Administrator

When selecting an administrator, consider their experience and expertise. Look for professionals with a proven administration track record tailored to your settlement needs. Ensure they understand the related tax regulations and are proficient in managing the requirements outlined in the U.S. Tax Code. Key considerations include:

• Looking into how an administrator manages its operations and allocates funds, including whether such an Administrator has a plan for audits and tax preparations as part of the services they offer for QSF administration.
• Checking an administrator’s technology capabilities to ensure it can securely custody funds, which may also serve to demonstrate their expertise and professionalism as administrators.
• Ensure the administrator provides the full scope of administrative support services, such as a call center and helpful educational resources.
• Evaluate the QSF administrator’s commitment to transparency and consistent communication with everyone involved in the settlement process, which are key indicators of practical administration.

Conclusion

We have highlighted the significance of having an administrator manage Qualified Settlement Fund administration tasks. With the best platforms, the administrator is responsible for creating the QSF, ensuring compliance with regulations, and overseeing the accurate distribution of funds. Their expertise is vital in maintaining settlement rights and ensuring tax compliance. Additionally, administrators work to preserve the fund's tax status, streamline settlement procedures, and expedite resolutions.

In conclusion, appointing a qualified administrator is essential, as they play a crucial role in ensuring a cost-effective, efficient, and compliant administration process.

Learn how a turnkey QSF platform like QSF 360 can provide an end-to-end QSF administration solution.

FAQs

What is the purpose of utilizing a Qualified Settlement Fund? It administers the settlement and assists in resolving secondary disputes and liens. The QSF, a cornerstone in tax and financial planning, is managed by an independent third-party administrator, ensuring impartiality and fairness.

What are the key advantages of using a Qualified Settlement Fund? Employing a settlement fund offers several benefits, including providing swift resolution for defendants, enhanced financial safeguards, tax deferral benefits, and flexible structure options for attorney fees and claimants.

Can you explain what a Qualified Settlement Fund is? A Section 468B Qualified Settlement Fund is a statutory tax and purpose trust enabling plaintiffs to benefit from tax deferral options. Regardless of size, QSFs are beneficial in most lawsuits.

How are Qualified Settlement Funds taxed? The taxation is governed by Section 468B and its associated regulations. Each fund is assigned its own Employer Identification Number (EIN) by the IRS, and its tax treatment is based on its modified gross income, which excludes the initial deposit of funds, with taxes levied at a maximum rate of 35% only on its investment income (interest). In the world of disputes, Qualified Settlement Funds have emerged as a vital tool for handling litigation and simplifying the process of resolving claims.

In the current digital and highly charged political age, the power of words has never been more salient. It has become an all-too-common place for words to be used as weapons for making untrue statements about a person or entity. A single untrue utterance can ripple through society, casting shadows of controversy and, sometimes, engendering significant legal implications. Untrue words (lies) have become an ugly weapon against adversaries in the public domain. This article ventures into defamation law, exploring the legal and ethical ramifications and the tax implications of an associated legal settlement.

Defamation: A Primer

Defamation is a tort comprised of the following elements: (i) a false statement of fact, (ii) that was published, and (iii) which publication causes harm to the reputation of the subject of the statement. The requisite standard of proof associated with the above-listed elements varies depending on the plaintiff’s status in society, as public figures are required to prove that the statements were made with actual malice. In ruling on a defamation suit, courts seek to balance the freedom of speech with protecting individual reputations.

Victims of defamation can pursue various civil causes of action aside from defamation claims, such as intentional infliction of emotional distress and loss of income. Some states have civil laws allowing defamation victims to seek compensatory and punitive damages.

Plaintiff Double Tax Imposed by Banks v. Commissioner

Unfortunately, because of the “plaintiff double tax,” defamation victims suffer twice – first by the defamation itself and second by how their litigation recovery is taxed. The defamation offense is obviously worse, but double taxation remains an unfair outcome.

What is the Plaintiff Double Tax?

Commissioner v. Banks, 543 U.S. 426 (2005), is a Supreme Court case that addressed the question of whether, for federal income tax purposes, the taxable components of a judgment or settlement paid to a taxpayer’s attorney under a contingent fee agreement is taxable income to the taxpayer. The Supreme Court ruled that one hundred percent (100%) of the gross taxable portion of the litigation/settlement recovery constitutes the taxpayer’s income and explicitly includes the portion paid to the attorney as a contingent fee. The Court viewed the attorney as merely the plaintiff’s “agent,” thus, the proceeds were wholly those of the plaintiff.

The plaintiff double tax applies to many litigation claims, including those involving no physical injuries – such as defamation and punitive damages. Thus, as has been noted, the entire award is taxable income in those cases, but the related attorney fees are not deductible on the victim’s Form 1040 tax return. Having to pay taxes on the total value of the award where the related attorney fee is not deductible is the plaintiff’s double tax.

For example, assume a defamation victim lives in NYC and recovers $1,500,000 in non-physical injury and emotional distress damages and an additional $1,500,000 in punitive damages. The entire $3,000,000 gross settlement proceeds are taxable to the plaintiff, but none of the attorney fees are deductible.

In NYC, the combined Federal/State/Local income tax rate on this award is likely 50% (or more), and the attorney has a forty-percent (40%) contingency rate, so the plaintiff ends up with a net of only $300,000. (netting $300,000 after tax is only 10 cents on the dollar!) Now, add the litigation costs associated with the action that the plaintiff also bears, and the net recovery could be zero ($0) or even produce a negative after-tax net settlement. We can all agree that 10 cents on the dollar (or less) is not fair compensation for a ruined reputation.  

A defamation victim seeking to avoid this unfortunate scenario created by Banks might consider a Plaintiff Recovery Trust (PRT), a specially designed trust that exists to hold the litigation claim. If there is a successful recovery, the PRT will significantly increase the net after-tax recovery, perhaps by 100% or more, depending on the recovery amount and where the defamation victim is domiciled.

To learn about PRTs, go to https://www.easternpointtrust.com/plaintiff-recovery-trust.

It’s a sick, sad world where revenge porn exists. Litigation provides (inadequate) recourse. Making things worse - if possible - is the abysmal way a revenge porn victim (RPV) is taxed on their recovery.

Revenge porn is nonconsensual pornography. It includes intimate images taken with consent and distributed without the victim’s consent and explicit images taken without the victim’s knowledge. In some states, unlawful dissemination can include sexual images, intimate images, explicit images, or engaging in sexual acts where there is a reasonable expectation of privacy, with the intent to cause financial, physical, or emotional harm. Revenge porn is not rare – it’s estimated that 1 in 8 social media users in the U.S. are revenge porn targets.  

RPVs can pursue various types of civil causes of action, including intentional infliction of emotional distress, invasion of privacy, and defamation. Some states have civil laws allowing RPVs to seek compensatory damages. Other states have specific laws allowing for a private cause of action against the person sharing the private images. For example, in Colorado, RPVs can seek monetary damages of $10,000 or the actual damages and attorney fees.

Revenge porn damages include reputational harm, emotional distress, pain and suffering, lost income, medical expenses, including mental health care, and punitive damages.

Unfortunately, because of the “plaintiff double tax”, an RPV suffers twice – first by the underlying violative action itself and second by how their litigation recovery is taxed. It’s obvious which is worse – but still.

The plaintiff double tax applies to many types of nonbusiness litigation cases, including those involving no physical injuries – such as defamation, non-physical injury, emotional distress, and punitive damages. The entire award is taxable income in those cases, but the related attorney fee cannot be deducted on the victim’s tax return. Having to pay taxes on the full value of the award where the related attorney fee is not deductible is the plaintiff's double tax.

To illustrate, assume an RPV living in NYC recovers $500,000 in non-physical injury/emotional distress damages and $1,500,000 in punitive damages. Her $2,000,000 settlement proceeds are taxable, but none of her attorney fees are tax deductible. By extension, if her combined Federal/State/Local income tax rate on this award is 50% and her attorney is owed the standard 40% contingency rate, she ends up with only $200,000 – 10 cents on the dollar! Now, add in the litigation costs borne by the RPV associated with the action, and the recovery could be as little as zero ($0) or even a negative net effect. We can all agree that it is not fair compensation for such a heinous act.

An RPV might consider a Plaintiff Recovery Trust (PRT), a specially designed trust that exists to hold the litigation claim. If there is a successful recovery, the PRT will significantly increase the RPV’s after-tax recovery, perhaps by 100% or more, depending on the recovery amount and where the RPV lives.

To learn about PRTs, go to https://www.easternpointtrust.com/plaintiff-recovery-trust.

Overview   

As you may know, E. Jean Carroll was recently awarded $83.3 million in her defamation case against former President Donald J. Trump. After the case, Ms. Carroll quipped to Rachel Maddow on MSNBC: “I have such great ideas for all the good I’m going to do with this money,” “First thing, Rachel, you and I are going to go shopping.” “We’re going to get completely new wardrobes, new shoes, motorcycle for Crowley, new fishing rod for Robbie. Rachel, what do you want, a penthouse?” She also said that “We’re going to do something good with it.” 

Unfortunately, because of the tax laws, particularly the “plaintiff double tax”, Ms. Carroll may need to limit where she shops to have any money left to do good. 

Double Tax Details

The plaintiff double tax applies to many types of nonbusiness litigation cases, including those involving no physical injuries – such as defamation - and punitive damages. In those cases, the entire award is taxable income (not just the net after attorney fees). Furthermore, the related attorney fees cannot be deducted on Ms. Carroll’s 1040. Having to pay taxes on an award where you cannot deduct the related attorney fee expense is the plaintiff’s double tax. 

The jurors awarded Ms. Carroll $7.3 million in compensatory damages for emotional harm, $11 million in compensatory damages for harm to her reputation, and $65 million in punitive damages. All of these amounts are taxable and subject to the plaintiff’s double tax. 

Assuming Ms. Carroll lives in New York City, her combined Federal/State/Local income tax rate on this award would be about 51%. Thus, if her attorney is owed the industry standard 40% contingency rate, then of Ms. Carroll’s $83.3 million award, she’d end up with only $7.5 million – just nine (9) cents on the dollar! That does not leave much for shopping or doing good, especially in NYC.

The same taxation applies if her award is reduced on appeal. Say she receives $20 million after appeals or a settlement. Due to the plaintiff's double tax, she’ll end up with about $2 million, or ten (10) cents on the dollar. (Don’t buy that NYC penthouse yet.) 

Mr. Trump has indicated that he will appeal, so the case is not final. This gives Ms. Carroll time to do some planning to reduce the taxes on any award she does ultimately receive.

It may be wise for Ms. Carroll to consider a technique known as the Plaintiff Recovery Trust (PRT). A PRT is a specially designed trust that could more than triple her after-tax recovery. For Ms. Carroll (and you) to learn more about PRTs, see our overview on the Plaintiff Recovery Trust.

As numerous professional commentators have noted, the Rudy Giuliani defamation case has unique and complicated tax implications for Mr. Giuliani and the plaintiffs. 

The Problem of Double Taxation

A Georgia jury awarded former Georgia election workers Ruby Freeman and Shaye Moss a judgment of nearly $150 million in damages against Mr. Giuliani. The verdict is large by any measurement: for defamation, Ms. Freeman and Ms. Moss were awarded $16.171 million and $16.998 million, respectively, $20 million for emotional distress, and $75 million total in punitive damages.

Albeit a large sum, there is a glimmer of hope for Mr. Giuliani as it relates to the tax consequences of his newfound liability. Because Mr. Giuliani was likely engaged in his business as a lawyer for former President Trump (or another similar business pursuit), he may have a good chance of treating the nearly $150 million payment as a business expense and thus deducting it from his tax liability. Conversely, for Ms. Freeman and Ms. Moss, these large verdicts will come with equally large tax consequences. Under the Internal Revenue Code (IRC), punitive damages and certain other damages are taxable as ordinary income, even for death or severe injury. To make matters worse, in most cases, the tax on litigation settlements has no corresponding deduction for legal fees, and the recovering plaintiff is taxed on the full amount of the settlement—including monies corresponding to the plaintiff’s attorneys under a contingent fee agreement. The taxation of plaintiff litigation recoveries can be haphazard, crazy, and often punitive and unfair; there are even cases where a plaintiff’s taxes can exceed the recovery amount itself!

Many criticize this arrangement because it leads to double taxation—the plaintiff pays taxes on the full recovery amount (again, including the contingent legal fees owed to the plaintiff’s attorneys), and the attorneys are also taxed on the same funds. However, plaintiffs like Ms. Freeman and Ms. Moss would do well to remember that plaintiffs have planning options. When elected promptly (meaning before the final verdict or settlement is issued), the Plaintiff Recovery Trust (“PRT”) is well-suited to make the best of a bad tax situation.

The Banks Case

The Supreme Court of the United States addressed the issue of contingent fee double taxation in Commissioner v. Banks. There, the Court held that a plaintiff would be taxed on the full amount of his recovery (including money owed to his attorneys under a contingent-fee agreement) because the plaintiff had “complete dominion over the income in question.”¹ In addressing the question of what constitutes “dominion” over income, the Court ruled that the person who “owns or controls the source of the income also controls the disposition of that which he could have received himself and diverts the payment from himself to others...”² The Court elaborated on this, specifically putting these concepts in the context of litigation, holding that the income-generating asset is “the cause of action that derives from the plaintiff’s legal injury.”³ So long as the plaintiff maintains dominion over the income-generating asset (the lawsuit), such a plaintiff will be considered the taxpayer and double taxation will ensue.

Conclusion

This is where a PRT’s usefulness and tax benefits are proven. By using a PRT, plaintiffs and their attorneys avoid double taxation and benefit from several other perks afforded by a PRT. In essence, a plaintiff assigns their right and interest in the litigation, thereby giving up dominion of the income-generating asset. To learn more about PRTs, read through our article discussing PRTs in more depth.

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A Qualified Settlement Fund (“QSF”) is a distinctive financial tool that plays a crucial role in litigation or non-litigation dispute settlements. A QSF is a tax-efficient financial mechanism that allows the parties settling a dispute to manage their funds effectively and securely.

This white paper focuses on the question of ownership of the QSF and its property. Specifically, this white paper deals with who owns a QSF and who owns the property within the Qualified Settlement Fund.

An extensive list of case law dealing with the topics is included at the end of this document.

1. What is a QSF?

A Qualified Settlement Fund is a statutorily authorized “fund, account, or trust…”¹ that allows a defendant in a dispute to assign its associated financial liability to the QSF. Although not required to be trusts, QSFs are typically created under an irrevocable trust structure rather than as a non-trust-based fund or account. A QSF may not be established or operated as a revocable (grantor) trust – unless the single defendant establishes the trust pursuant to § 1.468B-1(K). Because of this, traditional trust rules and laws apply—including provisions addressing trust asset ownership and asset title. QSFs are a valuable tool available to quarreling parties in the dispute settlement process. Qualified Settlement Funds afford beneficial tax consequences to the parties, serve as a controlled distribution mechanism, allow for fairness and transparency, and allow flexibility in the complex world of modern-day dispute resolution.

2. Establishment and Approval of a QSF

A QSF trust must be created as a “statutory trust” and approved by a “Governmental Authority” as defined by § 1.468B-1(c) and, as mentioned above, established under state trust law. The regulations in § 1.468B-1 cover aspects such as transfers to the fund, income earned by the Qualified Settlement Fund, and distributions made by the fund. Although not required to settle a dispute, the parties to the dispute may choose to use a QSF, or the Court having jurisdiction over the matter itself may order a QSF. When a QSF is established for settlement purposes, the defendant or their insurer transfers the agreed settlement or judicial award amount into the Qualified Settlement Fund.

Pro Tip:

A court is not required to approve the trust. Any “governmental authority defined by 1.468B-1(c)(1) may authorize the creation."

3. What Constitutes Qualified Settlement Fund Trust Property?

Qualified Settlement Fund trust property consists of the assets the defendant (or their insurance carriers) transferred into the settlement trust to resolve one or more claims arising from an event or a related series of events against the defendant. QSF trust property can include cash, real estate, or tangible or intangible property such as bank accounts or business interests. A QSF trust can hold any property transferred into it. It is important to note that while a settling party (or their insurance carrier) may have transferred settlement funds into the QSF trust, the funding of the QSF trust does not create an ownership interest in the plaintiffs (claimants), their attorneys, agents, or any other third party.

4. Legal Title and Ownership of the Property in a QSF Trust

Like any other trust, a QSF trust has the following characteristics:

• The QSF trust’s assets constitute separate property and are not owned by the grantor, defendants, beneficiaries, claimants (plaintiffs), or any other third party with a contract with the claimant.
• Assets held in a QSF trust are titled in the trustee’s name; thus, the trustee is the title owner to act on behalf of the QSF trust.
• The trustee still has agency and fiduciary duties subject to applicable law, the QSF trust terms, and any associated administrative agreements.

Once assets are transferred to the Qualified Settlement Fund trust and titled as the legal property of the trustee, such assets are held in trust for the future beneficial expectations of claimants once allocated and vested by the trustee.

Pro Tip:

26 U.S. Code § 468B(b)(3)(C) plainly states that “the fund shall be treated as the owner of the property in the fund (and any earnings thereon).” There can be no question of ownership based on the black-letter law established by Congress. Building on the statute, numerous court cases have upheld and expanded this portion of the law. You now have the silver bullet answer, but you can keep reading for additional reasons that reinforce the statutory provision and why the ownership of a QSF is not held by the claimants or their attorneys.

North Carolina Dept. of Revenue v. Kimberley Rice Kaestner

It is important to note that in a properly constructed QSF, the mere potential of a future benefit from a trust does not confer ownership. In North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, the Supreme Court of the United States held that when a trustee maintains control of the trust, the mere expectation of a benefit from the trust does not imbue the beneficiaries of a trust with the right to “control, possess, or enjoy the trust assets.”² It is hornbook law that the ability to request via a petition that the trustee considers an action does not constitute control, possession, or enjoyment of trust assets.

Additionally, note that well-drafted QSF trust documents are vital in ensuring trust ownership. Well-drafted sample language regarding ownership might read something like:

For the purpose of clarity and the avoidance of confusion; (i) the sole ownership of the Assets of the Trust resides with the trust, and (ii) the trustee has the sole authority, control, and absolute discretion over the funds held within the trust, their disposition and the application of the Claw Back (Reversion) provision, and (iii) the trustee has the sole authority, control and absolute discretion over the operation of the Trust subject to the continuing jurisdiction of the Governing Authority.

5. Vesting of Rights in QSF Trust Assets

Understanding the difference between a vested interest and a contingent interest is central to the question of ownership. When a person or entity has only a contingent interest in the property (such as in a QSF), they lack absolute and unconditional ownership rights. In the case of a QSF, the trustee must vest the right to such property by such action —to create absolute and unconditional ownership rights to the property.

Third parties (such as a law firm’s contingent fee interest or a hospital medical lien) asserting a claim to property in the QSF trust do not have a vested interest in such property – they only have a claim against the underlying client. In a properly constructed Qualified Settlement Fund, the trustee is the only authorized party who may vest a benefit and qualify a claimant as a “distributee,” as defined by the state trust code. A law firm, on behalf of a claimant or other party, may petition the trustee to consider vesting a right in trust assets and distributing them. However, the trustee, in their discretion, may approve or deny the request based on various factors such as unresolved liens, ongoing litigation, other claims, or other uncertainty or factors. Only when the trustee approves the petition for distribution is the party making the petition vested in that property.

It is helpful to note that well-drafted Qualified Settlement Fund trust documents are crucial. Well-drafted sample language regarding ownership might read something like:

“Vested Right” – Means: that the trustee may, in its sole authority and absolute discretion, elect to vest a right to a portion of the Trust Assets for a Distribution to a Claimant. Prior to the trustee vesting a right to any portion of the Trust Assets, no Claimant has a Vested Right to any Trust Assets. All Trust Assets are Unvested Rights and only constitute a mere future expectancy until the trustee grants the benefit as a Vested Right in its sole authority and absolute discretion. Upon a Claimant obtaining a Vested Right, they become a Distributee, as defined herein, only to the extent of that specific Vested Right and Distribution, and such claimant shall remain an unqualified Claimant relative to any other potential future benefit expectancy. Only the trustee may confer a Vested Right, and no provision of this Trust Administration Agreement and the Trust Agreement shall confer any absolute Vested Right. The Vested Right provision is a Material Purpose of the Trust.

AND

Trustee may from time to time, in its sole authority and absolute discretion, after granting a Vested Right, thereby qualifying the claimant as a Distributee as defined herein, disburse to a Claimant a vested interest in the trust as follows:

(a) Distribute directly to the claimant; and/or

(b) Distribute to the IOLTA account of the Law firm or Attorney representing the Claimant; and/or

(c) Distribute to the Claimant’s Guardian, Conservator, Parent, Family member or another person who has assumed responsibility for the care of such claimant, for his or her suitable support, maintenance, welfare, education or other appropriate needs; and/or

(d) Hold in a Trust and distribute by direct application in such amounts for the benefit of the claimant; and/or

(e) Assign into a “first party” Special Needs Trust to preserve the government benefits of the claimant; and/or

(f) Distribute or assign in such manner as the trustee, in its sole authority and absolute discretion, deems appropriate or necessary.

6. No Attorney (or other Agent) Ownership Claims

There is often the question of whether attorneys (or other such agents) have an ownership right in the Qualified Settlement Fund trust or the assets held in such trust. The answer is a resounding NO.

The United States Supreme Court addressed this question in Commissioner v. Banks. There, the Court held that a “lawyer is not a joint owner of his client’s claim in the legal sense any more than the commission salesman is a joint owner of his employer’s accounts receivable.”³ The reasoning for this holding was based on the basic premise of agency law that, even when the agent is acting independently and without the consultation of the principal, the agent is still obligated “to act solely on behalf of, and for the exclusive benefit of, the client-principal, rather than for the benefit of the attorney or any other party.”⁴ The Court specifically stated that attorneys (or other such agents) who may have contingent-fee agreements (or other payment agreements) with the plaintiffs might be entitled to secondary claims against the claimants by contract with the claimants), but they are certainly not entitled to claim ownership rights over those assets.⁵

In sum, attorneys and other plaintiffs’ agents do not have ownership rights in assets held in a QSF trust. Still, they may claim a security interest in such assets. It is helpful to think of a security interest like a lien levied against someone else’s property—you do not own the property in question, but you can assert a claim against it at the appropriate time and through the proper mechanisms.

7. QSF Management and Disbursement Can Impact Ownership

To avoid imputed ownership by triggering the constructive receipt or economic benefit doctrines, noted tax commentators have suggested that funds held in a QSF should be disbursed within twelve (12) calendar months of resolving all associated secondary matters. This recommendation is to avoid using a Qualified Settlement Fund as a mere tax deferral scheme. Platforms like QSF 360 provide integrated management of the associated QSF duration.

8. Decanting Does Not Affect QSF Ownership

Decanting is creating a new trust or sub-trust and transferring the trust property and terms into a segregated version of the original trust. Decanting is not a distribution; it does not vest ownership or a distribution to any beneficiary and usually does not trigger constructive receipt or economic benefit doctrines. In the case of a QSF trust, decanting is the transfer (as a look-through, secondary transfer) of the defendant’s liability and the associated assets into a new QSF trust or a Sub-QSF trust. The act of decanting related to a Qualified Settlement Fund often results in multiple ongoing funding events as various recoveries from carriers or defendants are received over time. Remember, when a trust is decanted (whether into a new trust or sub-trusts), the same terms and conditions of the original trust apply to new or sub-trusts.

In general, all states allow for trust decanting, but the definitions and requirements differ by state, as the below examples indicate.

In Virginia, “decanting power” is defined as the power of an authorized fiduciary to distribute property from one trust to another or modify the first trust’s terms.⁶ Additionally, § 64.2-779.12 of the Virginia code sets out some limitations on decanting power, such as limiting the fiduciary’s ability to exercise its decanting power if the first-trust instrument expressly prohibits it.

In Michigan, “trust decanting” is defined as the process of transferring property from one trust to another.⁷ The statute also sets out two conditions that must be met for the transfer to be valid. First, the terms of the second trust must not materially change the beneficial interests of the beneficiaries of the first trust. Second, the governing instrument of the subsequent trust must not be inconsistent with the tax planning that informed the first trust.

In Florida, the term “decanting” is not specifically defined, but the statute allows for a trustee with absolute power to distribute trust property to distribute some or all of the property to a second trust.⁸ The statute has additional requirements, such as requiring the trustee to notify all qualified beneficiaries in advance of such distribution and requiring that the beneficiaries of the second trust must include only beneficiaries of the first trust.⁹

Thus, decanting is not an act by the trustee to vest any benefit, nor is it a determination of an unqualified right as a distributee. It is merely the transfer of all or a part of a trust which continues the original intent of the original trust into one or more subsequent trusts. In the case of a Qualified Settlement Fund trust, the trustee may decant a portion of the settlement to facilitate a more rapid administration of the QSF.

Well-drafted sample language regarding decanting might read something like:

“Decant” (a.k.a. Decanting) - Means: the distribution of part or all of the Assets of the Trust or a subsequent Trust into a recipient trust pursuant to the terms of this Trust Administration Agreement and the Trust Agreement as an exercise of the trustee’s sole authority and absolute discretion. Specifically, the trustee may invade the principal of the trust to create another Trust for the claimant’s best interests, welfare, comfort or happiness which for the purpose of the trust constitutes an “absolute power” under the laws of the Principal Place of Administration.

9. Notational Accounting is not Ownership

Qualified Settlement Fund trusts may have multiple claimants and other third parties with adverse interests who assert claims against the QSF trust. During the administration, the trustee and/or the trust administrator (as applicable) may use notational workpapers to administer the Qualified Settlement Fund and maintain records of claims asserted against the QSF trust. These notational workpapers or related documents do not vest any benefits nor change the ownership status of the QSF trust or its assets. Many trusts include within their terms and conditions a stipulation that administrative notational utility records or worksheets do not constitute a record of a vested right.

As noted previously, it is only when the trustee, in their sole authority and absolute discretion, (i) vests a claimant to a right in QSF trust assets; (ii) qualifies a claimant as a beneficiary-distributee; and (iii) the trustee does, in fact, disburse the funds to the vested and qualified claimant-beneficiary that a claimant becomes an owner of the funds.

Accordingly, notational allocation worksheets do not constitute a trustee’s affirmative action to vest a right.

Well-drafted sample language regarding notational accounting might read something like:

For the purpose of clarity and the avoidance of doubt, it is conclusively stipulated that interim worksheets, interim allocations, interim calculations, interim working papers and interim ministerial sub-accounts of the trust are solely for the administrative and ministerial convenience of the Trustee and Trust Administrator, are only notational and do not convey or establish any Vested Right, constructive receipt or economic benefit to or on any respective Claimant. Further, interim notional allocations may change from time to time at the discretion of the trustee.

10. No Power of Appointment

A Power of Appointment is a type of power that the grantor of a trust confers to another person (the “Power Holder”). A Power of Appointment allows the Power Holder to direct the distribution of property to any person or entity subject to the terms and conditions specified in the trust’s documents. The Power of Appointment can be general or limited, but we will not delve into the differences in this paper as the distinction does not affect ownership of QSF trust assets.

In a well-constructed Qualified Settlement Fund, only the trustee will have a Power of Appointment, thereby allowing the trustee, in its sole authority and absolute discretion, to vest beneficial rights in claimants to trust assets.

QSF trust language here again provides clarity:

The trustee shall solely possess a general power of appointment to allocate, resolve and settle all claims and obligations of this Trust and the associated Settlement Agreement which the trustee may exercise from time to time, in its sole authority and absolute discretion. For the purpose of clarity and avoidance of confusion; no Claimant holds any general or specific power of appointment nor may they exercise such within the meaning of § 2041 and § 2514 of the Internal Revenue Code.

11. No Constructive Receipt or Economic Benefit

The constructive receipt and economic benefit doctrines help determine whether a taxpayer has taxable income in a given year and under certain circumstances. We address these concepts in this paper because they can indicate whether a taxpayer has “income” or access to income from a given source, thereby triggering an ownership claim.

As noted by Robert Wood, a distinguished tax attorney and the foremost authority on Qualified Settlement Funds:

“The benefits of a QSF are enormous and provide a firewall to the fundamental tax concepts of constructive receipt and economic benefit. QSFs promote dispute resolution and are specifically authorized by section 468B and the regulations. The constructive receipt and economic benefit rules are non-IRC tax doctrines borne in the case law. Constructive receipt broadly stands for the proposition that a taxpayer with a legal right to receive money who simply chooses not to receive it is still taxed because he could have received it. The economic benefit doctrine is similar. It stands for the concept that when money is irrevocably set aside for someone and will inure to his benefit, he should be taxed on it, even if he cannot receive it immediately. If waiting is the only impediment, the IRS can tax it. QSFs bypass both these rules, but they do so for valuable policy reasons: dispute resolution.”¹⁰

The doctrine of constructive receipt states that if funds are set aside for a taxpayer, credited to the taxpayer’s account, or “otherwise made available so that [the taxpayer] may draw upon it at any time…” even though the taxpayer may not have possession of those funds, such funds will be considered constructively received by the taxpayer and thus taxable.¹¹ However, the federal regulations clearly state that “income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.”¹² In essence, if funds have been set aside for a taxpayer, such as a plaintiff via a QSF trust, but the taxpayer’s access to or control of those funds is subject to substantial limitations or restrictions, there is no constructive receipt, no taxable income, and thus no ownership claim. In the instance of a QSF trust, a defendant (or their insurance carriers) will assign their liabilities to the QSF trust and fund it with settlement funds. However, as has been repeatedly stated, there are a multitude of persons and entities that can make a claim (or petition for distribution) on QSF trust assets, but it is ultimately the trustee—subject to various terms and conditions, secondary claims, and various other contingencies—that has the power to vest a claimant and make distributions of QSF assets. Because of this, claimants’ control of receipt of funds is subject to substantial limitations or restrictions.

The economic benefit doctrine was established in case law, with Sproull c. Comm’r. of Internal Revenue being the seminal case for this doctrine. In Sproull, the Court held that a taxpayer received an economic benefit when his employer placed a bonus in trust for the taxpayer’s sole benefit.¹³ The tax court reasoned that since the taxpayer had nothing to do but assert his claim against the trust, the trustee’s only duties were to hold the monies in favor of the taxpayer, and “the trust agreement contained no restriction whatever on [taxpayer’s] right to assign or otherwise dispose…” of the trust’s assets, the taxpayer had an economic benefit.¹⁴ Out of this case came the Sproull elements—when all of the following three are present, there is an economic benefit.

“(1) There must be some fund in which money or property has been placed;

(2) The fund must be irrevocable and beyond the reach of the creditors of the party who transferred the funds to the escrow or trust; and

(3) The beneficiary must have vested rights to the money, with receipt conditioned only on the passage of time.”¹⁵

In the case of a Qualified Settlement Fund, the first two elements are easily found to be present. However, the third element is not present in a properly structured QSF trust. As has been discussed, the rights of a beneficiary (plaintiff) of a QSF trust and any other party claiming assets in the QSF trust are not vested, and the receipt of funds is not conditioned only on the passage of time; it is in the trustee’s sole and absolute discretion and authority—based on several conditions—to determine when and if to vest beneficiaries and make disbursements of funds.

Thus, in a properly constructed QSF, there is no constructive receipt or economic benefit, and, as such, there is no receipt or ownership of funds.

12. The Ability to Structure and Assign Implicitly Demonstrates the Lack of Ownership

The ability to structure or assign from a Qualified Settlement Fund is well-established and widely implemented. A structure requires that the QSF trust assign the defendant’s original settlement obligation (which was transferred to the QSF), its liability, and associated assets to a third party (an insurance carrier or assignment company). If a claimant or attorney had ownership or control over the Qualified Settlement Fund assets, there would be actual receipt of funds and thus no ability to structure or assign. Because of this, no insurance carrier or assignment company would agree to any such assignments. Accepting this proposition would render decades of court precedent, tax precedent, IRS precedent, and business structures null and void—a ludicrous proposition.

13. Lack of IRS Action

If it were correct that the claimants owned funds in a QSF, then “Actual Receipt” would occur upon the funding of the QSF, triggering immediate taxation and eliminating the ability to structure or assign the settlement proceeds. Pattern and practice demonstrate that this is not the case. In the multiple decades of the history of QSFs, the IRS has never found nor asserted ownership (actual receipt) of funds held in an adequately constructed QSF. The IRS’ past Private Letter approvals and audits of QSFs show no corresponding enforcement action by the IRS. Accordingly, the notion of ownership of the Qualified Settlement Fund funds by the claimants is unsupported by fact, history, and legal doctrine. The IRS’ consistent actions demonstrate beyond any possible argument the falsity of claimants asserting ownership of the Qualified Settlement Fund or its property.

14. Congressional Intent

Regarding QSF ownership, Congress has expressed its intent in § 468B, so the IRS’ determination will be controlling. The IRS has issued a regulation stating that “if a fund, account, or trust that is a qualified settlement fund could be classified as a trust within the meaning of § 301.7701–4 [of the CFR], it is classified as a qualified settlement fund for all purposes of the Internal Revenue Code...”¹⁶ Section 301.7701–4 of the CFR says that a “‘trust’ as used in the Internal Revenue Code refers to an arrangement created…by an inter vivos declaration whereby trustees take title to property …”¹⁷

Pursuant to the plain language of the statutes and regulations, and with the over three decades of IRS precedent clearly showing the IRS’ interpretation of “ownership” for QSF purposes, the matter of ownership of the QSF and its assets is fully settled and establishes that the claimants are NOT the owners of the QSF or its assets. No reasonable court would find that the trustee of a QSF Trust is not the owner of the QSF Trust’s assets.

15. Conclusion on Qualified Settlement Fund Ownership

Qualified Settlement Funds are a valuable and common-place settlement tool, but it is essential to understand these trusts’ ownership structure. Assets held in a QSF trust are statutorily established to be owned by the QSF, not the claimants nor their attorney agents. Said QSF assets are “legally titled” in the name of the trustee. Further, a QSF trustee is solely empowered to vest rights to Qualified Settlement Funds assets in beneficiaries in the trustee’s sole and absolute discretion. Additionally, because the sole act of funding a QSF does not vest any party with rights to such assets, the constructive receipt and economic benefit doctrines are not triggered. Finally, a QSF’s duration under § 1.468B-1 is defined by the time taken to fulfill its intended purpose and resolve all related secondary matters such as liens, secondary litigation, appeals, and other conditional matters. This flexible duration, combined with the safeguards of a QSF, offers a comprehensive solution for managing settlement funds. A Qualified Settlement Fund enjoys the status and protection of a trust and does not convey ownership to the claimants until the trustee has resolved applicable secondary claims and allocated and vested a right to a distribution.

When settling high-stakes legal disputes, the complexities surrounding litigation settlements and judicial awards cannot be underestimated. The Qualified Settlement Fund (QSF) is a tool that has become increasingly popular due to its flexibility and tax benefits. Established under §1.468B-1 of the Code of Federal Regulations, QSFs are a powerful tool for resolving complex legal disputes, offering defendants and Claimants unique tax benefits and flexibility in facilitating settlements.

Before we analyze who is a “Claimant” in a QSF, let us briefly review QSFs.

Introduction to Qualified Settlement Fund

A QSF is designed to hold funds associated with a legal dispute resolution involving one or more Claimant(s). A key feature of a QSF is that it allows the defendant(s) in a legal dispute to deposit funds into a QSF trust, thereby receiving a full release of liability and an immediate tax deduction. It is important to know that the assignment of liability by the defendant(s) into the QSF is not a transfer of ownership to the Claimant(s). The titled ownership of the QSF remains with the Trustee of the QSF—for a more thorough understanding of QSF ownership, read through our “Who is the Owner of a Qualified Settlement Fund” article. Neither does the transfer of funds into the QSF trigger the constructive receipt or economic benefit doctrines. For more information on QSFs, visit our in-depth analysis of QSFs article.

Understanding the Benefits of QSFs

Qualified Settlement Funds offer various benefits to quarreling parties, making QSFs a desirable option for settling legal disputes.

Benefits for the Defendant

• Release from Litigation: Once a defendant deposits the agreed settlement amount into the QSF, they are released from the case. This feature allows defendants to conclude their involvement in the litigation promptly.
  

• Immediate Tax Deduction: A defendant or their insurer can obtain an immediate tax deduction for the amount deposited into the QSF. This advantage is significant, especially in high-value disputes.
  

Benefits for the Claimant‍

• No Ownership, Constructive Receipt, or Economic Benefit: A QSF receives a transfer of funds from the defendant and acts as the alter ego of the defendant. As such, the Trustee is the titled owner of the QSF assets, not the Claimant. The Trustee has the sole authority to vest the benefits and make a distribution; until such occurs, the Claimant only has a contingent future beneficial expectation.
  

• Time for Decision Making: Because the Claimants do not own or control the QSF or its assets, a QSF affords a Claimant the luxury of time to decide on their best financial planning options. The additional time afforded can be used to consult with financial advisors, review competitive financial products, negotiate and satisfy liens, and handle other ancillary issues related to the settlement without triggering ownership, constructive receipt, economic benefit, or the associated taxation.
  

• Immediate Income Generation: The funds in the QSF generate investment (interest) income immediately, which is accrued to the fund and ultimately benefits the Claimant(s) by lowering the net cost of the QSF.‍

• Allocation Flexibility: The QSF allows the QSF administrator to allocate the settlement among parties with contingent or residual interests, which is particularly useful in cases involving liens, secondary competing claims, multiple Claimants, or contesting family members.
  

Note: The QSF is not just an escrow account but a powerful tax tool providing strategic financial and tax advantages to defendants and Claimants alike.

The Role of the QSF Administrator/Trustee

The administrator/trustee of a QSF plays a pivotal role in managing the fund. The Plaintiff’s attorney typically selects the QSF administrator responsible for administering the QSF and facilitating the payment of funds to the Claimant(s), plaintiff attorney(s), and various lien holders. The QSF administrator also manages the QSF’s tax obligations and ensures compliance with all other legal and regulatory requirements.

Now to the Question: What (or Who) is a QSF “Claimant”?

The IRS has never defined the term Claimant. Still, we can infer from the name itself that the IRS intended to include anyone claiming a beneficial interest as a Plaintiff. It is also important to note that the IRS did not define the term otherwise but instead utilized the term Claimants in its common law meaning.

Likewise, from Black’s Law Dictionary, we can also take the guidance that a person asserting a claim (“A legal assertion; a legal demand; Taken by a person wanting compensation, payment, or reimbursement for a loss under a contract, or an injury due to negligence”) would be a Claimant.

But who can assert a claim? Once again, we look to the essence of what a QSF is – a QSF is the alter ego of the defendant. Thus, the defendant has no obligations to anyone but the Plaintiffs.

For instance, the following are examples of QSF provisions defining parties who are not Claimants, and specifically addressing the fact that an attorney representing a Plaintiff does not have standing as a Claimant against a QSF and definitively has no ownership of any QSF assets:

Attorneys’ Fees and Costs. The fees and expenses of attorneys representing the Claimants who receive payment from the QSF will be borne exclusively and personally by such Claimants based on individual engagement arrangements made between such Claimants and their respective attorneys. The QSF Trust, the Trustee, the Settlement Administrator, nor any other party shall have any liability for any such fees and expenses, and any Claims for such fees and expenses shall be disallowed as a claim against the QSF.

Or…

Plaintiff Attorneys’ Not a Claimant. The fees and expenses of attorneys representing Claimants (plaintiffs)  who receive payment from the Trust will be borne exclusively and personally by each Claimant based on the applicable individual engagement arrangements made between such Claimants and their respective attorneys. Neither the QSF, the Trustee, the Settlement Administrator, nor any other party shall have any liability for any such fees and expenses, and any Claims for such fees and expenses shall be denied as without standing. However, the QSF Administrator, pursuant to its current policies and procedures, may, for the administrative convenience of the Claimants, allow the payment from the vested portion of a Claimant’s settlement proceeds to third parties to satisfy the individual obligations of the Claimant.

Finally, we only need to look to the Uniform Trust Code (UTC) to confirm our answer for any QSF created under the applicable trust creation portion of the state trust code.

SECTION 103. DEFINITIONS of the UTC stipulate that a Beneficiary is a person that:

(A) has a present or future beneficial interest in a trust, vested or contingent;

As we can see, any plaintiff (including an entity) holding a beneficial interest or claim (vested or contingent) is a Beneficiary and would thus be a Claimant.

Moreover, SECTION 103. DEFINITIONS of the UTC additionally stipulate the meaning of a “Qualified Beneficiary” (in some state’s trust codes, “Current Beneficiary”) as follows:

a beneficiary who, on the date, the Beneficiary’s qualification is determined:

(A) is a distributee or permissible distributee of trust income or principal;

(B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subparagraph (A) terminated on that date without causing the Trust to terminate; or

(C) would be a distributee or permissible distributee of trust income or principal if the Trust terminated on that date.

Accordingly, the UTC informs that a Beneficiary (Claimant) is a person who may have a present or future beneficial interest in a trust, vested or contingent right to funds, but has no vested right. The Beneficiary becomes a distributee only upon the QSF trustee vesting a distribution right.

However, someone who holds a separate right by contract against a Claimant is not themselves a Claimant by extension. Such a right would exist solely as a separate contractual right against the Claimant but not against the QSF.

A Qualified Beneficiary would have a vested right as a “distributee,” but only after the Trustee exercises its powers to vest a right and confer the status of Qualified Beneficiary (distributee).

Note: Some state’s trust codes also reinforce the provisions of the Qualified Beneficiary definition with an additional clarifying definition of Current Beneficiary as follows:

"Current Beneficiary” means a beneficiary that, on the date the beneficiary’s qualification is determined is a distributee or permissible distributee of trust income or principal.

Administrative Convenience Payments Do Not Establish Claimant Status

Payments made to lien holders who holds a lien against a Plaintiff Claimant does not convey “Claimant Status” merely based on the fact that the QSF made an administrative payment on behalf of the Plaintiff Claimant to the holder of a lien against the Plaintiff Claimant. To further illustrate, when settlement proceeds are taxable the payment to a line holder retains the taxable income of the Plaintiff Claimant.

Conclusion

While not defined by the IRS, the term Claimant is established by case law and other statutory and regulatory precedents such as the UTC and the terms of the QSF itself. Simple application of facts would then determine whether a Plaintiff is Claimant for purposes of §1.468B-1 et seq.

An attorney holding a general lien against a Claimant individually for contingency attorney fees is not a Claimant and accordingly has no Claimant rights under a QSF.

Platforms like QSF 360 provide definitions consistent with the applicable code and properly classify Claimants as Plaintiffs who may have a present or future beneficial interest in a trust, vested or contingent right to funds, but have no ownership or vested right.

California is known for many things; great beaches, vivid scenery, award-winning wines, and high taxes. Often overlooked when creating a Qualified Settlement Fund (“QSF”) is that California applies its confiscatory tax policy and rates to QSFs operating in California or established by a governmental authority residing therein.

California’s maximum marginal corporate income tax rate of 8.840% is the 9th highest in the United States. Thus, Legal Ruling 1993-4 makes establishing a QSF in California an expensive mistake that can result in high taxation.

Background of Legal Ruling 1993-4

In its Legal Ruling 1993-4 issued November 15, 1993, the State of California Franchise Tax Board’s - Legal Division established California’s position regarding the “Taxation of a Qualified Settlement Fund”.

The Franchise Tax Board (“FTB”) ruling outlined the following:

• A QSF is subject to tax under the Revenue and Taxation Code (“RTC”) §24693.
  
• The taxation applies if a “California Court” establishes a QSF.
  
• RTC §24693 n1 incorporates IRC §468B by reference and AMENDS the 1.468B-1 et seq. definition of Modified Gross Income with modifications to provide that a tax shall be imposed upon the Gross Income of the fund at a rate equal to the rate in effect under RTC §23501.
  
• In general, RTC §23040 provides that - income derived from or attributable to sources within California includes income from tangible or intangible property located or having a situs in California and income from any activities carried on in California, regardless of whether carried on in intrastate, interstate, or foreign commerce.
  
• Under RTC §23040, income received by such a QSF is taxable under RTC §24693. The FTB takes the position that the situs of intangible property for California tax purposes is the commercial domicile of the QSF unless the intangible property has acquired a business situs elsewhere. This means, the default commercial domicile of a QSF (including a designated settlement fund) shall be presumed by the FTB to be at the court or the governmental authority which ordered or approved the establishment of the QSF and which exercises continuing jurisdiction over the QSF.
  

The final holding of the FTB is as follows:

“FUND [sic QSF] income (other than interest on obligations of the United States) from California sources is taxable under RTC §24693. Income from intangible property (other than interest on obligations of the United States) received by a QSF which was established or approved by, and subject to the continuing jurisdiction of, a court or government agency located in California is attributable to California sources and taxable under RTC §24693, unless the QSF has established a commercial domicile elsewhere or the intangible property has acquired a business situs elsewhere.”

Conclusion

While some states have higher taxes than California, many have lower taxes or apply trust or no taxation to a trust-based QSF. Carefully consider in which jurisdiction you create a QSF and consider QSF 360 to manage your QSF tax liabilities.

Massachusetts Taxes on QSFs: What You Need to Know

Massachusetts is renowned for its rich history, but it also has a reputation for high taxes—something that directly impacts qualified settlement funds (QSFs). For the 2023 tax year, Massachusetts imposes a flat 5% tax on all QSF taxable income. For funds generating over $1 million, an additional 4% tax applies, significantly increasing the financial burden. These aggressive tax policies make Massachusetts one of the more costly states for establishing a QSF.

The Massachusetts Department of Revenue’s letter ruling 087 underscores these challenges. It clarifies that QSFs are taxed under Chapter 62 if they are established by a Massachusetts court or governmental authority, or if their assets were held within the state at any time during the tax year. The ruling’s broad interpretation means that even temporary ties to the state could result in tax obligations.

Compared to Massachusetts, many states offer more favorable tax environments for QSFs, with some imposing no taxes at all on trust-based funds. Careful jurisdiction selection can lead to substantial tax savings and better financial outcomes for claimants and trustees alike.

Establishing a QSF is a strategic decision that requires thoughtful planning, particularly when navigating state-specific tax laws. For QSFs in Massachusetts, understanding these tax implications and exploring alternative jurisdictions could mean the difference between a costly burden and a streamlined settlement process. Eastern Point Trust Company’s expertise in QSF management ensures clients can navigate these complexities and achieve optimal results.

Imagine a legal shield that not only consolidates multiple claims but also fiercely guards your privacy. Qualified settlement funds (QSFs), created under Section 468b of the Internal Revenue Code, are specialized tools designed for settling single-event, mass tort, and class action lawsuits. These tax-qualified entities allow related claims to be consolidated into a single, secure fund while ensuring the highest levels of privacy and security.

Privacy is not just a convenience—it's a cornerstone of a well-structured QSF. By existing as separate legal entities, QSFs protect sensitive information from prying eyes. This setup helps prevent adverse parties from inflating claims based on the knowledge of the fund's assets. Properly drafted QSFs also impose discovery limitations, reducing the scope of potential legal inquiries.

One of the most powerful features of QSFs is the ability to maintain confidentiality. The identities of claimants and details of the fund remain sealed, ensuring that transactions are not publicly accessible. Even in rare instances where fund existence is uncovered, a vigilant trustee can take decisive action to block discovery efforts, safeguarding the fund’s integrity.

An experienced QSF trustee is essential for maintaining privacy and protecting against discovery demands. Trustees can implement robust privacy policies, challenge discovery requests, and employ advanced legal strategies, such as decanting or jurisdictional tactics, to block unwarranted access. Their role is indispensable in ensuring the QSF remains a secure and confidential resource for claimants.

Qualified settlement funds are not just financial instruments; they are legal fortresses designed to protect claimants' interests. With robust privacy provisions and a dedicated trustee, QSFs minimize legal exposure and preserve confidentiality. Eastern Point Trust Company’s QSF 360 platform leads the industry in offering innovative solutions to safeguard privacy and defend against discovery demands.

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Imagine securing your client's financial future while reducing your own risks. Sounds too good to be true? Keep watching to discover how qualified settlement funds can transform your legal practice.

1. Qualified settlement funds or QSFs offer significant tax advantages, allowing defendants to take a current year tax deduction and plaintiffs to defer income recognition.

2. Unlike IOLTA accounts, QSFs earn interest for your clients, maximizing their financial benefits from the settlement.

3. A QSF provides clients valuable time to make informed financial decisions, such as opting for structured settlement annuities or setting up special needs trusts.

4. QSFs allow time to resolve liens, bankruptcy, and probate issues, ensuring clients receive their settlement funds free from potential disruptions and financial penalties.

5. By using a QSF, attorneys can avoid the constructive receipt of funds which can have tax implications for plaintiffs.

6. QSFs also help avoid triggering the economic benefit of funds, preventing unnecessary taxation for plaintiffgifts.

7. A QSF protects plaintiffs from the risk of defendant insolvency by securing settlement funds in advance, ensuring clients receive due compensation regardless of the defendant's financial status.

8. QSFs offer a flexible framework for distributing settlement proceeds, accommodating various client needs and preferences for financial planning.

9. By utilizing a QSF, attorneys can ensure compliance with legal and ethical standards, particularly with significant settlement amounts, which helps to safeguard client interests.

10. QSFs streamline the settlement process by allowing for the efficient allocation and management of funds, reducing administrative burdens on attorneys and ensuring a smoother experience for clients.

11. With online solutions like QSF 360, setting up a QSF is quick, easy, and low cost, providing accessible solutions in as little as one day.

Qualified settlement funds provide numerous benefits that can significantly enhance the settlement management process for attorneys and their clients, even in cases involving smaller settlements. Leverage the power of QSFs for better financial outcomes and peace of mind.

Fox Business reported on the growth of settlement planning, structured settlements, and Qualified Settlement Funds, interviewing Eastern Point's Chief Trust Officer (Rachel McCrocklin) and Tax Strategist (Jeremy Babener).

"Settling is first about the amount, but plaintiffs gain a lot by planning ahead."

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ESPN discussed the regularity of personal injury lawsuit settlements and related financial consequences, interviewing Eastern Point's Chief Trust Officer (Rachel McCrocklin) and Tax Strategist (Jeremy Babener).

"The tax and investment benefits of structuring greatly increase your settlement value."

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Bloomberg covered the increased use of structured settlements in personal injury cases, interviewing Eastern Point's Chief Trust Officer (Rachel McCrocklin) and Tax Strategist (Jeremy Babener).

"Structured settlements are typically part of a larger settlement plan. In most cases, you can save tax, invest, and protect public benefits, but you have to make those decisions before signing."

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Create a Qualified Settlement Fund without the hassle of court approval. Keep watching to discover how. Did you know that various governmental entities, not just courts, can approve QSFs? This includes federal, state, and local agencies.

The IRS plays a crucial role in supervising QSFs, ensuring compliance through tax regulations and rules. To establish a QSF, parties must petition a governmental authority which then reviews the proposed trust agreement for compliance.

Beyond tax benefits, QSFs reduce administrative burdens, help resolve secondary disputes, and create flexibility.

Traditional court-established methods can be time consuming and costly, but platforms like QSF 360 offer quicker, more affordable solutions. The QSF administrator must file Form 1120 SF annually, ensuring all IRS requirements are met.

Qualified settlement funds operate on a calendar-year basis and begin life upon governmental authority approval regardless of funding status. From tax benefits to streamlined creation options, QSFs offer numerous advantages for both plaintiffs and defendants. Always consult with experienced QSF administration professionals for specific guidance.

Ready to simplify your settlement process? Let's get started.

What legal settlements are taxable and how to minimize taxation of settlement awards. Receiving a settlement from a lawsuit can provide financial relief, but can raise taxability questions. Understanding the tax implications of lawsuit settlements is crucial to maximize compensation, minimize tax impact, and avoid potential pitfalls with the Internal Revenue Service (IRS).

Generally, the primary law regarding the taxability of amounts received from lawsuit awards and settlements is Section 61 of the Internal Revenue Code (IRC). Section 104 excludes taxable income settlements and awards resulting from physical injuries. However, the relevant IRS guidance states that one should consider "the facts and circumstances surrounding each settlement payment" to determine the settlement proceeds' purpose accurately, as "not all amounts received from a judicial award or settlement are exempt from taxes."

Judicial awards and settlements can be divided into two groups to determine whether the associated payments are taxable or non-taxable. Once funds have been classified into one of these two groups, a further subdivision is made. Proceeds from personal physical injuries or sickness are generally excludable from gross income, but emotional distress recoveries are only excludable if they stem from physical injuries.

Strategies to minimize tax liability include allocating damages to non-taxable categories like physical injuries and medical expenses, and using qualified settlement funds (QSFs) to provide short-term tax deferral and flexibility.

Navigating the complex tax implications of lawsuit settlements requires guidance. Consulting with a settlement tax expert before finalizing a settlement agreement can provide valuable insights and help negotiate more favorable tax outcomes.

Qualified settlement funds are IRS qualified tax entities, and operate as statutory trusts. Critical to a successful QSF implementation is the administrator and associated administration, which streamlines the settlement process.

One common misconception about qualified settlement funds is that they are exclusively utilized for mass tort and class action settlements. QSFs are designed to resolve and satisfy claims, including those made before the fund is established, making them suitable for most types of torts, breach of contract, and environmental liability cases.

The second myth is that only plaintiffs benefit from qualified settlement funds, which overlooks the multiple advantages. Plaintiff attorneys can secure the settlement proceeds in a QSF, providing a safe space to work out a comprehensive settlement plan without pressure.

Contrary to the third myth that establishing a qualified settlement fund is a costly affair, QSF 360 offers the creation with a setup fee of only $500. The fourth myth surrounds the complexity of creating and administering QSFs and often deters parties from considering this as an efficient settlement solution.

Qualified administrators ensure the smooth operation and administration, including asset custody and oversight. Dispelling the fifth myth that qualified settlement funds offer limited tax advantages requires exploration of the tax benefits they present for defendants and plaintiffs. Upon contributing to a QSF, defendants are eligible for an immediate tax deduction, even if the funds have yet to be distributed to the 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. Don't let the myths surrounding qualified settlement funds prevent you from utilizing this valuable tool. Be sure to like this video and subscribe to our channel for the latest.

Revenge porn litigation, bad behavior, abysmal tax treatment, and possible zero net recovery.

Revenge porn is not rare. It's estimated that one in eight social media users in the US are revenge porn targets. Revenge porn victims (RPVs) can pursue various types of civil causes of action, including intentional infliction of emotional distress, invasion of privacy, and defamation. Some states have civil laws allowing RPVs to seek compensatory damages.

Other states have specific laws allowing for a private cause of action against the person sharing the private images. Revenge porn damages include reputational harm, emotional distress, pain and suffering, lost income, medical expenses (including mental health care) and punitive damages. Unfortunately, because of the plaintiff double tax, and RPV suffers twice: first by the underlying violative action itself, and second by how their litigation recovery is taxed.

The double tax applies to many types of non-business litigation cases, including those involving no physical injuries, such as defamation, emotional distress, and punitive damages. The entire award is taxable income in those cases, but the related attorney fee cannot be deducted on the victim's tax return. An RPV might consider a plaintiff recovery trust, a specially designed trust that exists to hold the litigation claim.

If there is a successful recovery, the plaintiff recovery trust will significantly increase the RPV after tax recovery, perhaps by 100% or more depending on the recovery amount and where the RPV resides.

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.”

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.

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‍Qualified Settlement Funds are valuable financial mechanisms that offer tax benefits and flexibility in managing settlements across various disputes and litigation. 

Let's explore the proper naming conventions for a Qualified Settlement Fund. Appropriate naming conventions support the fund’s integrity and purpose. The 2024 IRS naming requirement states no QSF name may be longer than 64 alphanumeric characters. A governmental authority must approve and exercise jurisdiction over a potential QSF. That authority will have its own policies and requirements to ensure the name is not misleading. 

It is crucial to note that a QSF is not an interest on lawyer's trust account, nor an account owned by a law firm. No QSF should be labeled to imply that it is. However, including the term Qualified Settlement Fund, including the term QSF or using an FBO designation, or using the case name, plaintiff name, or plaintiff family name are safe harbors when naming a QSF. 

If a law firm uses or plans to use numerous Qualified Settlement Funds, standardizing naming conventions allows for more effective case management and quicker access to essential documents. A consistent naming convention improves transparency, avoids confusion during audits and legal reviews, and allows for the timely and accurate distribution of funds. When navigating QSFs, carefully selecting a compliant name is not merely a governmental requirement. It can remove barriers and eliminate questions. 

The need for Qualified Settlement Funds (QSFs) emerged in the 1980s. Insurance companies grew anxious that settlements made with an entity (or directly to an individual) would not qualify for immediate tax deductions. They lobbied Congress for the ability to deduct payments in the year of the settlement, instead of when the payments were distributed. Congress acted in 1986 by enacting Section 468B of the Internal Revenue Code, a Qualified Settlement Fund and 468B allows the defendant to receive an immediate tax deduction. 

With a QSF a defendant can transfer settlement funds, receive a current-year tax deduction, and obtain a release of claims. Also, plaintiffs may finalize the settlement terms without tax implications until the funds from the Qualified Settlement Fund are dispersed. This framework allows the QSF administrator to determine the allocation among the claimants. 

While Section 468B initially focused on designated settlement funds, it was later amended by Congress to grant the Treasury powers to develop regulations. Qualified Settlement Fund accounts were thus born by regulation. 

It is worth noting that in the past some insurance companies and large self-insured businesses have opposed the implementation of QSFs. However, numerous recent favorable court cases stipulating using QSFs have made such objections moot. 

To qualify a QSF must be established pursuant to an order from, or approval by, a governmental authority. Additionally, it must settle one or more disputed or undisputed claims, asserting at least one liability. All claims must stem from an event or a related series of events. Unrelated events are not allowed. Finally, the QSF must be created as a trust under state laws or the assets are segregated from those of the transfer and related parties. 

QSFs have provided many tax and other financial advantages for the defendant and the plaintiff for decades. To access more educational content on QSFs and various other trust products, visit EasternPointTrust.com/articles

Escrow accounts hold investor funds until the satisfaction of the offering, ensuring regulatory compliance to safeguard investor funds. These accounts hold funds raised from investors until the satisfaction of specific offering terms, ensuring compliance with regulatory requirements and safeguarding investor interests.

Opting for a trust company over a traditional bank account introduces the advantage of active independent oversight and FDIC insurance coverage up to $150 million per account. Using an escrow agent underscores the commitment to the prudent management of funds in private offerings.

Selecting an escrow agent to establish an account can typically take one to two weeks. Platforms like Eastern Point Trust Company can take as little as one business day. The escrow process also involves waiting for the investors transmittal of funds, either directly into the escrow or through a broker dealer, which is critical to proceed with breaking escrow. Once the terms of the offering have been satisfied, the offeror may request to break escrow and begin receiving funds.

The advantages of using a licensed vendor such as a trust company over a traditional bank account are measurable. Active independent oversight by a trust company adds a significant layer of security and integrity to these financial transactions, ensuring compliance with SEC and FINRA rules, directly contributing to investor confidence.

In the aftermath of winning or settling a lawsuit, it is essential to understand the potential federal and state income tax implications and the strategies you can employ to minimize your tax liability. In this comprehensive guide, we’ll explore various factors that affect the taxability of lawsuit settlements and provide actionable tips to help you navigate the complex world of taxes on settlement money.

Not all amounts received from a settlement are exempt from federal and state income taxes. In determining the taxability of a settlement, it’s crucial to consider the purpose for which the settlement or award was received. Settlements related to physical injuries or illnesses where there is observable bodily harm are generally not considered taxable by the IRS. While settlements for physical injuries or illnesses are tax exempt, emotional distress awards are typically subject to taxes. Settlements designated explicitly for medical expenses are generally not taxable. However, punitive damages, awarded to punish the defendant for their wrongdoing, are almost always taxable. The tax treatment of legal fees depends on the nature of the settlement.

Now, let’s explore some practical strategies to minimize your settlement tax liability.

1. Allocate damages appropriately.

2. Spread payments over time.

3. Consider Qualified Settlement Funds.

4. Take advantage of capital gains treatment.

5. Seek professional tax advice.

and

6. Eliminate the taxation of the attorney fee portion.

There is, however, an effective solution for eliminating double taxation on the attorney fee portion: the Plaintiff Recovery Trust (PRT). Keep in mind the PRT must be in place before the settlement or judicial award is finalized. Winning or settling a lawsuit is a significant achievement, but it’s crucial to understand the potential tax implications of your settlement. For the full guide or to learn more about Qualified Settlement Funds and the Plaintiff Recovery Trust, please visit easternpointtrust.com.

Overview

In the current digital and highly charged political age, the power of words has never been more salient.

It has become all too commonplace for words to be used as weapons for making untrue statements about a person or entity. A single untrue utterance can ripple through society casting shadows of controversy and sometimes engendering significant legal implications. Unfortunately, because of the plaintiff double tax, defamation victims suffered twice: first by the defamation itself and second by how their litigation recovery is taxed.

What is the Plaintiff Double Tax?

Commissioner v. Banks is a Supreme Court case that addressed the question of whether, for federal income tax purposes, the taxable components of a judgment or settlement paid to a taxpayer's attorney under a contingent fee agreement is taxable income to the taxpayer. Having to pay taxes on the total value of the award where the related attorney fee is not deductible is the plaintiff's double tax.

Assume a defamation victim lives in New York City and recovers $1,500,000 in non-physical injury and emotional distress damages and an additional $1,500,000 In punitive damages. The entire $3 million of gross settlement proceeds are taxable to the plaintiff, but none of the attorney fees are deductible. Worst yet, with New York city taxes, the plaintiff ends up with a net of only $300,000. After tax, that is only 10 cents on the dollar.

A defamation victim seeking to avoid this unfortunate scenario created by Banks might consider a plaintiff recovery trust (PRT), a specially designed trust that exists to hold the litigation claim. If there is a successful recovery, the PRT will significantly increase the net after-tax recovery, perhaps by 100% or more, depending on the recovery amount and where the defamation victim is domiciled.

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After the plaintiff double tax reduces her settlement, E. Jean Carroll may find herself shopping at Walmart.

As you may know, E. Jean Carroll was recently awarded $83 million in her defamation case against former President Donald J. Trump. After the case Ms. Carroll quipped to Rachel Maddow on MSNBC, “I have such great ideas for all the good I'm going to do with this money”.

“First thing Rachel, you and I are going to go shopping at Bergdorf’s.”

But wait, there is the double tax bite. As all of Ms. Carroll's settlement proceeds are taxable, It is therefore subject to the plaintiff's “double tax” under the Supreme Court's banks taxation ruling. Thus, if her attorney receives a typical 40% contingency fee, then, of the $83 million, she will only end up with approximately $7.5 million; just nine cents on the dollar. Even if her award is reduced on appeal, the same double taxation treatment applies.

The good news is that the Plaintiff Recovery Trust, sponsored by Eastern Point Trust Company and Forward Giving, can eliminate the double tax burden. It does so by eliminating the plaintiff's requirement to pay tax on the attorney fee portion of the settlement, thereby materially increasing the plaintiff's net after-tax proceeds.

Contact Eastern Point to learn how the Plaintiff Recovery Trust may increase your after tax recovery up to 150%.

Litigation settlements and awards are typically sent to the plaintiff attorneys’ IOLTA account, but that may not be the best option for you, the attorney, or your client. Funds received into your IOLTA expose you, as well as your clients, to financial disadvantages including immediate taxation on taxable elements, loss or reduction of government benefits, and loss of the ability to structure or assign the proceeds.

However, a Qualified Settlement Fund (also known as a QSF) solves these problems. Being IRS qualified, the QSF holds the settlement funds, tax deferred, while affording you and your clients time to plan. Unlike an IOLTA a QSF preserves your ability to structure or assign any portion of your fees. Additionally, a QSF preserves your client's ability to structure or fund a special needs or settlement protection trust.

Most importantly, a QSF does all this without triggering constructive receipt or loss of government benefits. Authorized by the IRS in 1993, QSFs have a 30-year track record of providing tax and financial advantages to clients and law firms alike. Whether a single event case with a single plaintiff or multi-claimant complex litigation, QSFs offer unmatched advantages and flexibilities.

Motivated by multiple advantages, large and small law firms nationwide are adopting QSFs at an ever-increasing rate.

Join the growing number of law firms using Qualified Settlement Funds. Reach out to us today. Discuss how the quick, easy, and affordable QSF 360 platform can benefit you, your firm and your clients.

Take a minute of your time and learn why creating a Qualified Settlement Fund with Eastern Point Trust Company allows you to leverage on of the most effective settlement tools with one of the industry's most reputable licensed trustee. Utilizing technology EPTC has revolutionized the QSF offering to ensure it is the highest quality product and service delivered at industry leading low cost price points and the quickest establishment and distribution timing in the industry. Find out more today by contact 855-222-7513 or visiting our website www.easternpointtrust.com.

Eastern Point Trust Company is your most complete, efficient, and economical Qualified Settlement Fund solution. Our patented technology allows us to perform tasks same day as opposed to weeks or even months with other providers in the industry.

Setup is simple. Click the “Get Started” button on our homepage, login, click “Create Trust”, and select the necessary information, easily broken out with explanations along the way. A one-click submission allows for instant receipt by our dedicated team of specialists. Your approval and accompanying documents are delivered securely in as little as one business day.

Benefits include same day distributions, tax reporting, real-time access to balances and statements, 24/7 access to an online document library, and more, all with security of a licensed trustee and fiduciary oversight at the industry’s most competitive price: $500 to establish and $500 to administer. Thank you for considering EPTC for your qualified settlement fund needs. Reach out to us with any questions. We look forward to working with you.

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.

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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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Eastern Point Trust Company Unveils Comprehensive Guide on Navigating Post-Settlement Disputes and Complexities with Qualified Settlement Funds

[5/17/2024] — Eastern Point Trust Company is pleased to announce the release of a new guide designed to address the challenging intricacies of post-settlement litigation disputes. The guide focuses on utilizing Qualified Settlement Funds (QSFs), also known as 468B trusts, as a streamlined solution for efficient settlement fund management and dispute resolution.

It is not uncommon for secondary disputes to arise following a litigation settlement or court award. These disputes can range from family disagreements over their "fair share" to lawyers disputing fee splits, plaintiffs contesting attorney fees, and third-party lien holders emerging to stake claims against the litigation proceeds. Such complexities often hinder the settlement process and prolong the resolution.

Eastern Point Trust Company's newly released guide provides detailed insights into how QSFs can be employed to manage these disputes effectively. By offering a structured approach to fund management and tax compliance and providing the necessary time for informed decision-making, QSFs present a viable solution to post-settlement challenges.

Sam Kott, Vice President of Eastern Point Trust Company, emphasized the significance of the guide, stating, "This guide explores the advantages of QSFs, specifically their ability to address complex issues such as post-settlement disputes, secondary litigation, and lien resolution. The guide also provides direction on navigating post-settlement challenges and highlights the benefits of QSFs in achieving the best possible outcomes for all parties involved."

The guide delves into the various advantages of utilizing QSFs, including:

• Efficient Fund Management: QSFs ensure that settlement funds are FDIC-insured, reduce misallocation risks, and ensure fair distribution.
• Tax Compliance: QSFs help maintain compliance with tax regulations, thereby minimizing potential tax liabilities for the parties involved.
• Informed Decision-Making: By providing time and space for thoughtful decision-making, QSFs help to resolve disputes amicably and equitably.

Eastern Point Trust Company invites legal professionals, plaintiffs, and all interested parties to explore the guide and discover the transformative potential of QSFs in post-settlement dispute resolution. To read the complete guide and learn more about the advantages of QSFs, visit here.

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Eastern Point is proud to announce the release of its latest publication, Unveiling the Complex World of Taxable and Tax-Free Settlements.

FOR IMMEDIATE RELEASE

[5/17/2024] — Eastern Point is proud to announce the release of its latest publication, Unveiling the Complex World of Taxable and Tax-Free Settlements. This comprehensive guide delves into the intricate workings of taxable and non-taxable settlements, offering invaluable insights into compensatory damages, punitive damages, and the tax treatment of various settlement types.

Ms. Rachel McCrocklin, Eastern Point’s Chief Trust Officer, commented, “The guide provides a detailed understanding of the pivotal role of IRS Section 104 and the taxability of various settlement types. Our goal is to equip readers with the knowledge to make informed decisions and minimize potential tax liabilities.”

The guide explores strategic methods to minimize tax obligations on settlements, including leveraging structured settlement annuities, Plaintiff Recovery Trusts, and proper allocation in settlement agreements. It is an essential resource for individuals and businesses navigating the complex landscape of settlement taxation.

Arm yourself with knowledge, make informed decisions, and minimize potential tax liabilities with Eastern Point's newest guide.

For more information on Unveiling the Complex World of Taxable and Tax-Free Settlements, please visit https://www.easternpointtrust.com/articles/unveiling-tax-free-settlements-what-you-need-to-know or contact 855-222-7513.

CTRO

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A new comprehensive guide has emerged catering to those seeking to conduct private placements. This guide outlines the pivotal role of escrow accounts in private placements, providing a secure, regulated structure that safeguards investor assets and boosts investor confidence.

FOR IMMEDIATE RELEASE

[5/2/2024] — A new comprehensive guide has emerged catering to those seeking to conduct private placements. This guide outlines the pivotal role of escrow accounts in private placements, providing a secure, regulated structure that safeguards investor assets and boosts investor confidence.

It reviews the advantages of choosing a trust company over a traditional bank account for escrow services, emphasizing active independent oversight that enhances transaction security and integrity.

Ned Armand, CEO, noted, “The guide also highlights the critical role of an escrow agent in managing funds prudently, ensuring a smooth progression of transactions under the regulatory frameworks.” Offerors of private equity and Reg D, Reg A, Reg A+, Reg CF, and Reg S offerings are encouraged to explore this guide, available on Eastern Point Trust Company.

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In today's dynamic business landscape, where environmental liabilities pose significant challenges, the Qualified Settlement Fund (QSF) emerges as a beacon of efficiency and reliability. Contrasting against traditional Environmental Remediation Trusts (ERT), Eastern Point’s QSF offers unparalleled advantages, revolutionizing the approach towards environmental liability management.

FOR IMMEDIATE RELEASE

[2/27/2024] — In today's dynamic business landscape, where environmental liabilities pose significant challenges, the Qualified Settlement Fund (QSF) emerges as a beacon of efficiency and reliability. Contrasting against traditional Environmental Remediation Trusts (ERT), Eastern Point’s QSF offers unparalleled advantages, revolutionizing the approach towards environmental liability management.

The Qualified Settlement Fund stands as a testament to expediency, with the capability to be established and funded within a mere business day, a stark contrast to the lengthy processes associated with ERTs. By swiftly assuming environmental liabilities from present and future claims under CERCLA, state, and local law, QSF ensures immediate action and resolution.

One of the most compelling aspects of QSF is its affordability, with establishment costs as low as $500. This cost-effectiveness, coupled with the tax advantages it provides over ERTs, makes QSF an attractive proposition for businesses seeking prudent financial solutions.

Flexibility is another hallmark of QSF, allowing for single-year or multi-year funding without any maximum duration constraints, ensuring adaptability to diverse business needs. Furthermore, the ability to hold real estate expands the horizons of asset management within the fund.

The benefits extend to tax optimization, with QSF accelerating the transferor's tax deduction for funds transferred to the current tax year, thereby enhancing financial planning and efficiency. Moreover, by shifting liability and associated funding transfers irrevocably to the QSF, businesses can streamline their balance sheets, mitigating risks and enhancing transparency.

In addition to these financial advantages, QSF facilitates seamless settlement agreements to capitate and resolve environmental liabilities, assuring regulators and interested parties of the irrevocable availability of funds for amelioration.

The transition to QSF not only eliminates future administrative burdens but also entrusts the fund's administration to a dedicated trustee, relieving businesses of operational complexities and enhancing focus on core activities.

In conclusion, the Qualified Settlement Fund stands as a beacon of innovation in environmental liability management, offering unmatched advantages over traditional Environmental Remediation Trusts. Its expediency, affordability, flexibility, and tax optimization capabilities redefine the landscape, empowering businesses to navigate environmental challenges with confidence and efficiency.

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Eastern Point Trust Company Announces Sponsorship Grants to National Forest Foundation

FOR IMMEDIATE RELEASE

[10/13/2022] — Eastern Point Trust Company (“EPTC”) announced that it entered into a sponsorship with the National Forest Foundation (“NFF”) to provide grant funding in support of NFF’s mission to restore and enhance our National Forests and Grasslands.

Working on behalf of the American public, the NFF leads forest conservation efforts and promotes responsible recreation. Its mission is founded on the belief that these lands, and all they provide, are an American treasure and vital to our communities’ health.

Rachel McCrocklin, Eastern Point’s Chief Client Officer, stated, “Eastern Point welcomes the opportunity to partner with the National Forest Foundation in support of its mission to improve and protect our national lands. A portion of Eastern Point’s revenue is dedicated to funding priority reforestation and enhanced wildlife habitat by supporting the National Forest Foundation’s 50 million for Forrest campaign.”

About Eastern Point Trust CompanyWith over three decades of trustee and trust administration experience, Eastern Point is a world leader in trust innovation that provides fiduciary services to individuals, courts, and institutional clients.

Eastern Point has the benefit of practical experience and industry-leading technology, providing services to over 6,000 trusts with more than 20,000 users across the U.S. and internationally.

About The National Forest FoundationThe National Forest Foundation is the leading organization inspiring personal and meaningful connections to our National Forests, the centerpiece of America’s public lands.

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Eastern Point Trust provides services across the U.S. and internationally.

FOR IMMEDIATE RELEASE

[11/21/2022] — Eastern Point Trust Company (“EPTC”) announced recent successes of the Plaintiff Recovery Trust (“PRT”) solution in solving the Plaintiff Double Tax, which is the unfair result of 2017 legislation that can cut plaintiff recoveries in half.

Glen Armand, Eastern Point’s CEO, expressed, “Eastern Point’s gratitude for the testimonials of Mirena Umizaj, Joseph Di Gangi, Rebekah Reedy Miller, Susan Gleason, Jennifer White, Andy Rubenstein, and Zane Aubert. By utilizing the PRT, you are the catalyst for saving plaintiffs over $30 million of federal and state taxation.”

Mr. Armand also announced Joseph Tombs as Director of Plaintiff Recovery Trusts (PRT). Mr. Armand also noted, “The contributions of Lawrence Eisenberg and Jeremy Babener for partnering on our newest settlement solution.”

Settlement and financial planners and CPAs can learn and access resources on Eastern Point’s PRT Planner Page here: https://www.easternpointtrust.com/plaintiff-recovery-trust-for-planners

About Eastern Point Trust Company
Eastern Point is a world leader in trust innovation that provides fiduciary services to individuals, courts, and institutional clients across the U.S. and internationally.

With over three decades of trustee and trust administration experience, Eastern Point provides the benefits of practical experience, industry-leading technology, and innovation. Eastern Point Trust provides services across the U.S. and internationally.

About The Plaintiff Recovery Trust
The Plaintiff Recovery Trust is the proven solution to increase the amount plaintiffs keep in taxable cases. Without it, plaintiffs are taxed on the settlement proceeds paid to their lawyers. https://www.easternpointtrust.com/plaintiff-recovery-trust

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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.

Wrongful Death Case Study

In the heart of Georgia, a family’s world shattered when John Doe, a 34-year-old father, tragically lost his life due to the negligence of his employer. Left behind were his grieving spouse and minor children, including a 12-year-old daughter, Emily. As the family grappled with their loss, they faced the daunting task of navigating a complex legal landscape. Such a circumstance is where the power of a Qualified Settlement Fund (QSF) came into play, offering hope for Emily’s future.

The Legal Labyrinth

The wrongful death suit resulted in a $3 million settlement, bringing relief and responsibility. Under Georgia law, the spouse and children were equal beneficiaries, with the spouse guaranteed at least one-third of the settlement. However, the presence of a minor beneficiary added complexity to the case.

The family’s attorney recognized the need for a solution to protect Emily’s interests while allowing for thoughtful, long-term financial planning. “In cases involving minors, we must think beyond immediate needs,” the lawyer noted. “We needed a mechanism to give us time to craft a comprehensive plan for Emily’s future.”

Opting for the Qualified Settlement Fund

Emily’s lawyer proposed the establishment of a Section 468B Qualified Settlement Fund, a legal tool that would prove invaluable in this case. The QSF offered several key advantages:

1. Protection of Emily’s Interests: The fund acted as a safeguard, holding Emily’s portion of the settlement in FDIC-insured money market accounts until the supervising court approves the minors’ settlement.
2. Flexibility in Distribution: The QSF allowed for careful planning of how and when funds are available, considering Emily’s evolving needs as she grew.
3. Long-term Financial Planning: With the pressure of immediate distribution removed, the family had time to consult with financial advisors and structure the settlement optimally.
4. Tax Benefits: The defendant could fund the QSF, claim their tax deduction, and remove themselves from the post-settlement process, simplifying matters for all parties.

What is a QSF?

A Qualified Settlement Fund, established under IRS Section 1.468B-1, is a financial and legal mechanism used primarily in settling lawsuits, particularly cases involving multiple claimants. It’s a settlement trust account established to receive and administer funds from a defendant in a legal settlement.

Key Features:

1. Temporary Holding: A QSF acts as a temporary repository for settlement funds.
2. Tax Benefits: It offers potential tax advantages for both defendants and claimants.
3. Time Flexibility: Claimants gain more time to make informed decisions about their settlement proceeds.
4. Protection: It provides a layer of protection for settlement funds.

How QSF Contributes to Crafting a Secure Future

1. When dealing with legal settlements, a Qualified Settlement Fund can be instrumental in ensuring a more secure financial future:
2. Informed Decision-Making: By allowing claimants more planning time, 468B trust enables better financial decisions.
3. Professional Management: Funds in a 468B Settlement Fund are typically managed by experienced trustees and QSF Administrators.
4. Structured Settlements: QSFs facilitate the creation of structured settlements, which can provide long-term financial stability.
5. Risk Mitigation: Experienced and licensed Qualified Settlement Fund administrators mitigate risks associated with large settlement payments and the related tax implications.

Integrating QSF in Your Financial Planning

Considering a Qualified Settlement Fund as part of your strategy for crafting a secure future can be beneficial when involved in a legal settlement. It’s essential to consult with legal and financial professionals to determine if a QSF aligns with your specific situation and long-term financial goals.

Crafting a Secure Future for Emily

With the plan in place and the luxury of time to plan, Emily’s guardian, her mother, worked closely with financial advisors to create a comprehensive plan. They explored various options, including:

• Structured Settlements: A portion of Emily’s funds was allocated to a structured settlement, providing guaranteed periodic payments throughout her college years and beyond.
• Education Trust: Creating an education trust to cover future tuition and related expenses, ensuring Emily’s academic aspirations have funding.
• Health and Wellness Fund: Allocation of funds to address the potential long-term emotional impact of losing a parent and the associated counseling or health-related needs, for potential.

“The 468B Settlement Trust gave us breathing room,” Emily’s mother shared. “Instead of making rushed decisions, we could carefully consider Emily’s future and make choices that truly honored her father’s memory.”

Securing a Future with a QSF

The implementation of the QSF, in this example case, serves as a model for similar situations. It demonstrates how thoughtful legal and financial planning can turn a tragedy into an opportunity for long-term security and growth.

The lawyer reflected on the case: “By utilizing a QSF, we were able to transform a moment of profound loss into a foundation for Emily’s future. It’s a powerful reminder of how the right legal and tax tools can make a real difference in people’s lives.”

As Emily grows, she’ll have the financial resources she needs to pursue her dreams, thanks to the foresight and care taken in managing her settlement via a Qualified Settlement Fund. While nothing can replace the loss of a parent, the security provided by this approach offers some solace and hope for the future.

Using a Qualified Settlement Fund can be a game-changer for families facing similar circumstances. It provides the time and flexibility needed to make informed decisions, ensuring that the interests of minor beneficiaries are protected and nurtured for years to come.

Learn more about how Qualified Settlement Funds benefit the minor’s settlement process.

Contact a QSF 360 specialist today at (855) 979-0322.