As individuals with disabilities navigate their financial planning, two important options often arise, Special Needs Trusts (SNTs) and ABLE accounts. Both are possible tools for managing funds and maintaining eligibility for public benefits. However, it’s crucial to understand the critical differences between these two options to make informed decisions that align with specific needs and goals.

This comprehensive guide will explore the intricacies of Special Needs Trusts and ABLE accounts, comparing their features, benefits, and limitations. By the end, you will clearly understand how these tools work and which may be the most suitable for your circumstances.

1. Introduction

When planning for individuals with disabilities, Special Needs Trusts (SNTs) and ABLE accounts have revolutionized the landscape. These tools offer opportunities for individuals to maintain eligibility for critical public benefits while securing funds for long-term care, education, housing, and other disability-related expenses.

While SNTs and ABLE accounts serve similar purposes, they differ significantly in control, funding limits, qualified expenses, and payback requirements. Understanding these differences is essential for individuals and families who wish to make informed decisions that align with their circumstances and goals.

In the following sections, we will explore the details of Special Needs Trusts and ABLE accounts, exploring their features, benefits, and limitations. We will also consider the critical differences between these two options to assist you in choosing the most suitable option based on individual needs.

2. Special Needs Trusts: An Overview

2.1 Definition and Purpose

A Special Needs Trust, also known as a Supplemental Needs Trust, is a legal arrangement designed to protect the assets of an individual with disabilities while preserving their eligibility for means-tested public benefits, such as Supplemental Security Income (SSI) and Medicaid (in which the government measures a family’s income against the federal poverty line when determining eligibility). An SNT is overseen by a trustee who makes decisions regarding the disbursement of funds for the benefit of the trust’s beneficiary.

The primary purpose of a Special Needs Trust is to enhance the quality of life for the beneficiary with disabilities by supplementing public benefits and allowing the trust funds to cover various expenses that improve the beneficiary’s well-being.

2.2 Control and Management

One significant aspect of Special Needs Trusts is the control and management of the SNT assets. The trustee, who can be a family member, friend, or professional fiduciary, is responsible for managing the trust and making decisions regarding the disbursement of funds.

It is typically unwise to allow family members to serve as trustees as they rarely have the professional knowledge, training, or oversight that an institutional trustee possesses.

Unlike ABLE accounts, where the individual with disabilities has direct control over the account with no guidance on the possible loss of government benefits, Special Needs Trusts grant the trustee the authority to oversee the trust and guide the beneficiary. An SNT thus provides an additional layer of oversight and ensures that the funds are not misused and are for the sole benefit of the individual with disabilities.

2.3 Funding and Contribution Limits

Special Needs Trusts’ funding occurs through various sources, including personal injury settlements, inheritances, and gifts from family members. There are no specific funding limits or restrictions on the amount placed into a Special Needs Trust, however, it’s essential to consider the impact of large sums of money on public benefits eligibility.

Unlike ABLE accounts, institutional SNT trustees assist with guidance and knowledge to preserve government benefits.

While ABLE accounts have annual contribution limits, Special Needs Trusts may accept unlimited funding. This advantage of SNTs allows for flexibility in financing SNTs by accommodating significant financial contributions while maintaining eligibility for means-tested government benefits.

2.4 Qualified Expenses and Distributions

Special Needs Trusts allow for a broad range of qualified expenses using SNTs’ funds. These expenses include medical and dental care, therapy and rehabilitation services, housing and utilities, transportation, education and vocational training, entertainment and recreation, legal and advocacy fees, and other disability-related expenses.

It’s important to note that in the case of either an SNT or an ABLE account, the funds must be solely for the benefit of the individual with disabilities and used in a manner that does not jeopardize their eligibility for public benefits. The trustee must carefully manage the disbursement of funds and keep detailed records of expenses to demonstrate compliance with the trust’s requirements.

2.5 Payback to the State

One critical aspect of both ABLE accounts and Special Needs Trusts is the potential payback requirement to the state upon the beneficiary’s death. When the individual with disabilities passes away, any remaining funds may be subject to a payback provision, which requires reimbursement to the state for the Medicaid benefits provided during the beneficiary’s lifetime.

The payback provision ensures that Medicaid is reimbursed before any residual funds are distributed to other beneficiaries or heirs. However, the payback may be limited to the extent of Medicaid benefits received, and specific rules and exceptions vary from state to state.

Pooled SNTs (which are managed by nonprofit organizations, combine the resources of many beneficiaries for purposes of administrative cost-effectiveness and investment optimization, and whereby Individuals have their own sub-accounts and usually receive a proportionate share of the entire fund’s earnings) usually retain all residual funds after the beneficiary’s death; thus, the family receives no part of the remaining funds. The non-negotiable retention is one of the many shortcomings of Pooled Special Needs Trusts.

2.6 Pros and Cons of Special Needs Trusts

Special Needs Trusts offer several advantages and limited disadvantages that individuals and families should consider when evaluating their financial planning options:

Pros:

• No age limit: In the case of a first-party party SNT, there is no minimum age limit on the onset of the disability or the creation of the SNT. A first-party SNT may be established at any time before age 65. (Note: ABLE accounts are more age-restrictive.)
  
• Protection of assets: Special Needs Trusts safeguard the funds intended for individuals with disabilities, ensuring they are used for their benefit and not subject to mismanagement or exploitation.
  
• Preservation of public benefits: By structuring the trust appropriately, individuals can maintain eligibility for means-tested public benefits, such as SSI and Medicaid, while still accessing additional funds for supplemental expenses.
  
• Flexibility in funding: Unlike ABLE accounts, Special Needs Trusts have no contribution limits, allowing for the transfer of significant financial resources into the trust without jeopardizing public benefits eligibility.
  
• No retention of residual assets by the government: In the case of a 3rd party SNT, 100% of the assets remaining in the SNT benefit the surviving heirs. In the case of a 1st party SNT, 100% of assets remaining after the state payback benefit the surviving heirs.
  
• Wide range of qualified expenses: Special Needs Trusts allow for the payment of various disability-related expenses, providing individuals with the means to enhance their quality of life and access necessary support and services.
  
• Quick and easy solutions: 1st party SNT and 3rd party SNT platforms like www.easternpointtrust.com provide convenient, fast, easy, and low-cost solutions.
  

Cons:

• Potential payback to the state: If the Medicaid payback provision is triggered, the government may require reimbursement to the state for Medicaid benefits received during the beneficiary’s lifetime. This provision can impact the distribution of funds to heirs.
  
• Limited control by the individual with disabilities: Some Special Needs Trusts grant the trustee significant decision-making authority over trust funds, potentially limiting the direct control and involvement of the individual with disabilities (see "Understanding the Impact of Fees on a Special Needs Trust or Settlement Protection Trust"). However, platforms like www.easternpointtrust.com specialize in empowering the beneficiary to guide the utilization of the funds.

3. ABLE Accounts: An Overview

3.1 Definition and Purpose

ABLE accounts (so named because their intent is “Achieving a Better Life Experience” for their beneficiary) are tax-advantaged savings accounts designed to help individuals with disabilities save for qualified disability-related expenses without jeopardizing eligibility for means-tested public benefits. The ABLE Act went into effect in 2014, and since then, numerous states have established ABLE programs to offer these accounts to eligible individuals.

The primary purpose of ABLE accounts is to empower individuals with disabilities to save and invest funds for a wide range of qualified expenses, such as education, housing, transportation, assistive technology, healthcare, and other disability-related costs. These accounts provide flexibility and independence in managing funds while maintaining eligibility for public benefits.

3.2 Control and Management

One significant difference between ABLE accounts and Special Needs Trusts is the level of control and management. ABLE accounts are owned and controlled by the individual with disabilities, referred to as the account beneficiary. ABLE accounts allow individuals to make unsupervised decisions regarding contributions, investments, and the disbursement of funds without requiring trustee approval. Of course, this comes with risks as the individual with disabilities has no guidance or support to ensure that their use of the funds does not result in the loss of government benefits or even payback of prior benefits.

The account beneficiary or their authorized representative manages the ABLE account, chooses investment options, and makes withdrawals for qualified expenses. While attractive to some, this level of control introduces significant risks with severe financial consequences. Consider the medical cost and financial risk if a disabled individual loses their Medicaid coverage because of an error in distribution type or documentation.

3.3 Funding and Contribution Limits

ABLE accounts’ funding can occur through various sources, such as personal contributions, family contributions, and contributions from friends and supporters. The annual contribution limit for ABLE accounts is tied to the federal gift tax exclusion, which, as of 2022, is $16,000 per year. Albeit unlikely, employed disabled individuals may be eligible to contribute an additional amount up to the federal poverty level for a one-person household ($12,880 in 2022).

It’s important to note that once the ABLE account balance reaches the state’s maximum limit, additional contributions are not allowed until the balance falls below the limit. The maximum limit varies by state and typically ranges from $235,000 to $529,000. However, the account balance can continue to grow through investment earnings.

3.4 Qualified Expenses and Distributions

ABLE accounts allow for the payment of qualified disability-related expenses, which include a broad range of categories such as education, housing, transportation, assistive technology, employment training and support, health and wellness, financial management, legal fees, and other expenses that enhance the individual’s quality of life.

Remember that the most significant risk with ABLE account regulations is to keep 100% accurate records and documentation of expenses paid from the account. This documentation will serve as evidence of the account’s appropriate use in the event of an audit or review.

3.5 Payback to the State

Like Special Needs Trusts, ABLE accounts are subject to a state Medicaid payback provision upon the beneficiary’s death.

For ABLE accounts, the payback is limited to Medicaid expenses incurred after establishing the account. The state can seek reimbursement for Medicaid benefits provided after the account opening but not for benefits provided before the account’s creation.

3.6 Pros and Cons of ABLE Accounts

ABLE accounts offer distinct advantages and disadvantages that individuals and families should consider when evaluating their financial planning options:

Pros:

• Ownership and control: ABLE accounts provide individuals with disabilities direct ownership and control over their funds, allowing them to make decisions regarding contributions, investments, and qualified expenses.
• Tax-advantaged savings: Contributions to ABLE accounts grow tax-free, and withdrawals for qualified expenses are also tax-free. This tax advantage allows individuals to maximize the growth of their savings and stretch their funds further.
  
• Flexibility and independence: ABLE accounts offer flexibility in managing funds and making withdrawals for qualified expenses. Individuals can access their funds when needed without going through a trustee, promoting financial independence and self-determination.
  
• Easy accessibility: ABLE accounts are relatively easy to set up and manage.

Cons:

• Age Limitations: Currently, under all circumstances, the onset of the disability must have begun before age 26. However, in January 2026, the eligibility age for ABLE accounts will rise to 46.
• Hidden fees: ABLE accounts may have higher than average investment fees, including payments to the sponsoring states.
  
• Contribution limits: ABLE accounts have annual contribution limits tied to the federal gift tax exclusion. This limitation may restrict the amount of funds that can be deposited into the account, potentially limiting the growth of savings over time.
  
• Qualified expense requirements: ABLE accounts require funds to be used for qualified disability-related expenses. Individuals have the sole duty to ensure that their expenses meet the applicable criteria to avoid potential penalties or disqualification of public benefits.
  
• Payback provision: ABLE accounts are subject to payback provision upon the beneficiary’s death. This provision requires reimbursement to the state for Medicaid benefits received after the account’s establishment, reducing the funds available for distribution to heirs or beneficiaries.

4. Key Differences Between Special Needs Trusts and ABLE Accounts

Understanding the critical differences between Special Needs Trusts and ABLE accounts is crucial for individuals and families seeking to make informed decisions regarding their financial planning. The following sections highlight the primary distinctions between these options, focusing on control and management, funding and contribution limits, qualified expenses and distributions, and payback to the state.

4.1 Control and Management

One significant difference between Special Needs Trusts and ABLE accounts is the level of control and management.

Special Needs Trusts are supervised by a trustee, who has the authority to make decisions regarding the disbursement of funds on behalf of the beneficiary. The beneficiary relies on the trustee to perform all recordkeeping and provide guidance according to their best interests.

ABLE accounts provide individuals with disabilities with direct ownership and unsupervised control over their funds. The account beneficiary, or their authorized representative, manages the account and makes decisions regarding contributions, investments, and qualified expense payments. This level of control promotes self-determination and financial independence for individuals with disabilities. With the independence inherent in an ABLE account also comes the responsibility to ascertain that all distributions qualify as a disability-related expense and to document each of these transactions.

4.2 Funding and Contribution Limits

One significant difference between Special Needs Trusts and Special Needs Trusts do not have specific funding limits, allowing for the transfer of significant financial resources into the trust. There are no restrictions on the amount that can be placed into a Special Needs Trust.

ABLE accounts, on the other hand, have annual contribution limits tied to the federal gift tax exclusion. As of 2022, the annual contribution limit is $16,000. Additionally, individuals who are employed may be eligible to contribute an additional amount up to the federal poverty level for a one-person household ($12,880 in 2022). The maximum account balance also varies by state but typically ranges from $235,000 to $529,000.

4.3 Qualified Expenses and Distributions

‍Both Special Needs Trusts and ABLE accounts allow for the payment of qualified disability-related expenses. However, the scope of qualified expenses may differ slightly between the two options.

Special Needs Trusts allow for a wide range of qualified expenses, including medical and dental care, therapy and rehabilitation services, housing and utilities, transportation, education and vocational training, entertainment and recreation, legal and advocacy fees, and other expenses that enhance the beneficiary’s quality of life.

ABLE accounts also cover a broad range of qualified expenses, such as education, housing, transportation, assistive technology, healthcare, and other disability-related costs. However, it’s important to note that ABLE accounts may have specific guidelines and restrictions on qualified expenses, and documentation of all distributions of funds must be maintained to demonstrate compliance.

4.4 Payback to the State

‍Both Special Needs Trusts and ABLE accounts may be subject to a payback provision upon the beneficiary’s death. However, the payback requirements differ between the two options.

For Special Needs Trusts, the payback provision may require reimbursement to the state for Medicaid benefits received during the beneficiary’s lifetime. The payback amount is typically limited to the extent of Medicaid benefits provided, and specific rules and exceptions vary from state to state.

For ABLE accounts, the payback provision is more limited. The state can seek reimbursement for Medicaid benefits provided after the establishment of the account, but not for benefits provided before the account’s creation. This limited payback provision allows individuals to benefit from the funds in their ABLE accounts during their lifetime while still preserving some assets for their heirs.

4.1 Control and Management

One significant difference between Special Needs Trusts and ABLE accounts is the level of control and management.

Special Needs Trusts are supervised by a trustee, who has the authority to make decisions regarding the disbursement of funds on behalf of the beneficiary. The beneficiary relies on the trustee to perform all recordkeeping and provide guidance according to their best interests.

ABLE accounts provide individuals with disabilities with direct ownership and unsupervised control over their funds. The account beneficiary, or their authorized representative, manages the account and makes decisions regarding contributions, investments, and qualified expense payments. This level of control promotes self-determination and financial independence for individuals with disabilities. With the independence inherent in an ABLE account also comes the responsibility to ascertain that all distributions qualify as a disability-related expense and to document each of these transactions.

5. Choosing the Right Option: Factors to Consider

When deciding between a Special Needs Trust and an ABLE account, several factors should be considered to ensure the most suitable option. The following considerations can guide individuals and families in making informed decisions that align with their needs and goals.

5.1 Eligibility Criteria

‍Eligibility criteria significantly determine whether a Special Needs Trust or an ABLE account is the most appropriate option. Special Needs Trusts are available to individuals of all ages, regardless of the age of onset of the disability. They are beneficial for individuals who may not meet the eligibility requirements for ABLE accounts due to age or other factors.

To qualify for an ABLE account, the individual must have developed a disability before age 26. This age limitation prevents individuals who acquire disabilities later in life from creating an ABLE account.

5.2 Financial Resources

‍The amount of financial resources available can influence the decision between a Special Needs Trust and an ABLE account. Special Needs Trusts are well-suited for individuals with significant financial resources, as there are no specific funding limits or restrictions on the amount placed into the SNT.

ABLE accounts, on the other hand, have annual contribution limits tied to the federal gift tax exclusion. While ABLE accounts offer tax-advantaged savings and flexibility in managing funds, the contribution limits may restrict the amount of funds allowed.

5.3 Future Planning

Considering long-term financial planning and future needs is essential when choosing between a Special Needs Trust and an ABLE account. Special Needs Trusts provide comprehensive planning options, allowing individuals to transfer substantial assets into the trust for the benefit of the individual with disabilities. This long-term planning approach ensures that funds are available to support the individual’s needs throughout their lifetime.

While offering flexibility and independence, ABLE accounts may be more appropriate for small amounts, which are better suited to short-to-medium-term planning.

5.4 Flexibility and Control

The desired level of flexibility and control can also guide the decision between a Special Needs Trust and an ABLE account. Special Needs Trusts provide a structured approach with a trustee responsible for managing and disbursing funds on behalf of the beneficiary. This arrangement ensures oversight and compliance with the trust’s requirements.

ABLE accounts, on the other hand, grant individuals with disabilities direct ownership and control over their funds. This arrangement creates risks for the loss of government benefits.

5.5 Professional Guidance

‍Navigating the complexities of financial planning for individuals with disabilities requires professional guidance. Engaging a provider with expertise in disability planning is crucial for establishing Special Needs Trusts and ABLE accounts. These professionals can provide valuable insights, ensure compliance with regulations, and tailor the planning approach to individual needs and circumstances.

Consulting with a trust company specializing in disability planning can also be beneficial, as they guide on strategies, tax implications, and the coordination of benefits to maximize financial resources and long-term security.

6. Combination Strategies: Maximizing Benefits

In some cases, individuals and families may find that a combination of a Special Needs Trust and an ABLE account offers the most comprehensive approach to financial planning. By leveraging the benefits of both options, individuals can maximize financial resources and maintain eligibility for means-tested public benefits.

6.1 Using Both SNTs and ABLE Accounts

Combining a Special Needs Trust with an ABLE account can provide individuals with disabilities with a robust financial planning strategy. Special Needs Trusts can accommodate significant financial resources, allowing for long-term planning and the transfer of substantial assets. ABLE accounts, on the other hand, offer flexibility and independence in managing funds for short-to-medium-term disability-related expenses.

By utilizing both options, individuals can benefit from the long-term security and comprehensive planning of a Special Needs Trust while enjoying the accessibility and control provided by an ABLE account. This combination approach allows for the preservation of assets and the ability to save and spend funds as needed.

6.2 Coordinating Benefits and Minimizing Overlaps

When utilizing both a Special Needs Trust and an ABLE account, it’s essential to coordinate benefits and minimize overlaps. Careful consideration should be given to the types of expenses covered by each option and the most appropriate source of funds for each expense payment.

Effectively coordinating benefits can help individuals avoid duplication of funds and ensure each option obtains its fullest potential. This coordination may involve working closely with the trustee of the Special Needs Trust and maintaining clear documentation of expenses paid from the ABLE account.

7. Conclusion

Navigating the financial planning landscape for individuals with disabilities requires a comprehensive understanding of available options. Special Needs Trusts and ABLE accounts offer valuable tools for managing funds, preserving eligibility for public benefits, and enhancing the quality of life for individuals with disabilities.

Financial planning for individuals with disabilities is a complex and evolving field. It is always advisable to consult with a professional specializing in disability planning and with expertise in this area to ensure that the chosen approach meets specific needs and complies with applicable laws and regulations.

8. FAQs

Can an individual have both a Special Needs Trust and an ABLE account? Yes, individuals can have both a Special Needs Trust and an ABLE account. Each option offers unique benefits and advantages, and utilizing both can provide a comprehensive and flexible financial planning strategy.

Are there limits to the amount of funds that can be placed into a Special Needs Trust? Special Needs Trusts do not have funding limits or restrictions on the amount that can be placed into the trust.

Can ABLE account funds be used for any type of expense? ABLE account funds must be used for qualified disability-related expenses. While the list of qualified expenses is broad, individuals must ensure that their expenses meet the criteria to avoid potential penalties or disqualification of public benefits.

Is there a payback requirement for ABLE accounts? ABLE accounts are subject to a payback provision upon the beneficiary’s death. The payback typically includes 100% of the Medicaid benefits received after establishing the ABLE account, allowing individuals to benefit from the funds during their lifetime.

How can I determine which option is most suitable for my circumstances? Choosing between a Special Needs Trust and an ABLE account requires careful consideration of individual needs, financial resources, long-term planning goals, flexibility and control preferences, and professional guidance. Consulting with an attorney and a financial advisor specializing in disability planning is crucial for making an informed decision.

9. Additional Information

For more detailed information on Special Needs Trusts, the applicable fees, and how they can impact government benefits, visit www.easternpointtrust.com. We can provide solutions tailored to your situation and fully transparent information about trust administration.

Finally, remember that special needs trust administration is a complex process that requires attention to detail, a strong understanding of financial and legal concepts, and a commitment to acting in the best interests of the trust’s beneficiaries. By educating yourself about the process and seeking professional advice when needed, you can help ensure that your SNT serves its intended purpose and provides for your loved ones in the most effective manner possible.

Seek brands that maintain a formal, professional tone and utilize technical, regulatory, and financial terms throughout the communication. The style conveys authority, expertise, and dependability, aiming to resonate intellectually with its audience. The brand persona reflects a knowledgeable industry leader committed to educating and guiding its clients through complex financial matters.

10. Additional Resources

For additional information and resources on Special Needs Trusts, ABLE accounts, and financial planning for individuals with disabilities, please refer to the following:

• Internal Revenue Service (IRS) The official website of the IRS provides information on tax-advantaged savings options, including ABLE accounts. The IRS offers guidance on contribution limits, qualified expenses, and tax implications.
  
• Social Security Administration (SSA) The SSA provides information on public benefits, eligibility criteria, and important considerations when planning for individuals with disabilities. The SSA’s website offers resources on Special Needs Trusts and ABLE accounts.
  
• National Disability Institute (NDI) NDI is a nonprofit organization that promotes financial independence and asset development for individuals with disabilities. Their website provides resources and educational materials on financial planning, including ABLE accounts.
  

Overview

In order to maintain Medicaid or other government benefits, such as SSI, state Medicaid agencies require notification that assets are being transferred and a Special Needs Trust is being created. State Medicaid agencies also require notification of any amendment to said Special Needs Trust. When filing the required notice, it is wise to make the state Medicaid agency’s job easy by tailoring the transmission letter to address the critical elements of the qualification.

The following sample letter provides an easy-to-use template to assist in satisfying state Medicaid notification requirements and facilitating a quick and easy approval.

Sample Letter

Conclusion

The notification process is a necessary part of creating a Special Needs Trust. Providing a simple and concise communication to the state Medicaid agency can help ensure that trusts are approved.

Additional Information

For more detailed information on Special Needs Trusts, the applicable fees, and how they can impact government benefits, visit www.easternpointtrust.com. We can provide solutions tailored to your situation and fully transparent information about trust administration.

Finally, remember that special needs trust administration is a complex process that requires attention to detail, a strong understanding of financial and legal concepts, and a commitment to acting in the best interests of the trust’s beneficiaries. By educating yourself about the process and seeking professional advice when needed, you can help ensure that your SNT  serves its intended purpose and provides for your loved ones in the most effective manner possible.

Seek brands that maintain a formal, professional tone and utilize technical, regulatory, and financial terms throughout the communication. The style conveys authority, expertise, and dependability, aiming to resonate intellectually with its audience. The brand persona reflects a knowledgeable industry leader committed to educating and guiding its clients through complex financial matters.

In the aftermath of winning or settling a lawsuit, it is vital to understand potential federal and state income tax implications and how to avoid paying taxes on settlement money. While some settlements may be subject to federal and state income taxes, there are strategies you can employ to abate your tax liability, such as the Plaintiff Recovery Trust. By acquainting yourself with the rules and regulations surrounding taxable settlements, you can make informed decisions and potentially reduce your tax burden. In this comprehensive guide, we review the 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.

Understanding Taxability: The General Rule

According to the Internal Revenue Code (IRC) 61, all payments from any source are considered gross income unless a specific exemption exists. This general rule applies to lawsuit settlements as well. However, IRC §104(a)(2) excludes taxable income for certain types of settlements and awards. In determining the taxability of a settlement, it is crucial to consider the purpose for which the settlement or award was received. Not all payments received from a legal settlement or award are exempt from federal and state income taxes, so analyzing the specific circumstances surrounding each settlement payment is essential.

Determining Tax-Exempt Settlements

When identifying which settlements are tax-exempt, it’s essential to understand the IRS’s audit criteria. These criteria play a material role in determining the taxability of a lawsuit settlement:

1. Physical Injury or Sickness

Settlements related to physical injuries or illnesses, where there is observable bodily harm, are generally not considered taxable by the IRS. Compensation for medical expenses, lost wages, and pain and suffering from physical injuries falls under this category. These settlements are often tax-exempt, relieving individuals who have suffered physical harm or illness.

2. Emotional Distress

While settlements for physical injuries or illnesses are tax-exempt, emotional distress awards are typically subject to taxes. However, if the emotional distress directly results from the physical injury or an illness caused by the accident, it may still qualify for tax-exempt status. However, it is essential to establish a clear association between the emotional distress and the physical injury or illness to limit the taxability of the settlement.

3. Medical Expenses

Settlements designated explicitly for medical expenses are generally not taxable. However, if you have previously deducted these medical expenses on your tax return, the corresponding settlement amount will be subject to taxes under the IRS ‘tax benefit rule.’ This rule ensures that you do not receive a double tax benefit by deducting medical expenses and excluding settlement proceeds related to those expenses.

4. Punitive Damages

Generally, punitive damages penalize the defendant for their wrongdoing. As such, punitive damages are almost always taxable; whether or not the underlying case involves physical injuries, the IRS considers punitive damages taxable income. It’s important to note that only the portion allocated to physical injuries compensatory damages may be eligible for tax-exempt status if the settlement includes physical injuries compensatory and punitive damages. Said another way, Punitive damages are ALWAYS taxable.

5. Taxation of Contingency Legal Fees

Depending on the nature of the settlement, the resulting taxation of your litigation award may include taxation of the attorney fees portion, particularly contingency-based attorney fees. If your settlement is tax-exempt, the legal fees and costs associated with the case will not affect your taxable income. However, if your settlement is taxable, you may owe taxes on the total settlement amount (including the attorney fee portion), even if the defendant pays your attorney directly. It’s crucial to consider the tax implications of legal fees when negotiating settlement agreements.

Pro Tip: Use the following link to learn more about paying taxes on the attorney fee portion of a settlement and how to avoid taxation with a Plaintiff Recovery Trust.

Strategies to Minimize Tax Liability

Having now an understanding of the factors that determine the taxability of lawsuit settlements, let’s explore some practical strategies to minimize your settlement tax liability:

1. Allocate Damages Appropriately

During settlement negotiations, you may have the opportunity to allocate a more significant portion of the settlement to non-taxable award categories, such as physical injuries or illnesses. By strategically negotiating the allocation of damages, you can potentially reduce the taxable portion of your settlement and minimize your overall tax liability.

2. Spread Payments Over Time

Receiving a sizeable taxable settlement in a single tax period (year) may push you into a higher overall tax bracket, resulting in the highest tax rate applied to the settlement. Consider negotiating for periodic payments spread over multiple years to avoid this potential tax burden. By receiving smaller payments over time, you may reduce the portion of your income subject to higher tax rates.

3. Consider Qualified Settlement Funds

Qualified Settlement Funds (QSFs), like QSF 360, provide a mechanism to defer taxes on settlement proceeds. By establishing a QSF, the settlement funds are held in a §468B statutory trust, allowing you to defer tax liability as long as unresolved liens or secondary issues remain. QSFs offer flexibility and are particularly useful for individuals with complex settlement arrangements or ongoing litigation.

Pro Tip: QSFs do not operate as long-term tax deferral vehicles.

4. Take Advantage of Capital Gains Treatment

Depending on the nature of your claim, you may be able to treat a portion of your settlement as capital gains instead of ordinary income. If your settlement involves damage to property, such as a home or business, you might qualify for capital gains treatment. Consult a tax professional to determine if this strategy applies to your situation.

5. Seek Professional Tax Advice

Navigating tax law intricacies can be challenging, especially regarding lawsuit taxation. To take advantage of all available tax-saving opportunities, it’s advisable to seek professional tax advice. A tax professional experienced explicitly in the taxation of lawsuit proceeds can guide you through the complexities of tax planning, help you understand the specific tax implications of your settlement, and assist you in optimizing your tax strategy.

6. Eliminate the Taxation of Attorney Fee Portion

As discussed in ‘Why Taxes on Lawsuit Settlements Are Higher Than You Think,’ one of the most significant tax traps for plaintiffs is your taxation of attorney fees. Suppose you are a plaintiff represented by a contingent fee lawyer. In that case, the IRS considers you to have received 100% of the money recovered, even if the defendant pays your lawyer directly. This ‘tax doctrine’ means that, in most cases, you will face taxation on the entire settlement amount – Yes, 100% of the settlement payment – even if a portion goes to your attorney.

Pro Tip: As an example of the above, if you settle a lawsuit for $100,000, and your lawyer takes $40,000 as a contingency fee, you will still face taxation on the total $100,000, which is undoubtedly an unhappy outcome.

Pro Tip: There is an effective solution for many circumstances – the Plaintiff Recovery Trust – but it must be in place before finalizing the settlement or judicial award.

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Conclusion

Winning or settling a lawsuit is a significant achievement, but it’s crucial to understand the potential tax implications of your settlement. In many circumstances, the Plaintiff Recovery Trust may assist in minimizing the tax burden.

By acquainting yourself with the laws, regulations, and rules surrounding taxable settlements and judicial awards, you can make knowledgeable decisions to abate tax liabilities.

ProTip: Remember to consider factors such as physical injury or sickness, emotional distress, punitive damages, and contingent legal fees when assessing the taxability of your settlement.

Pro Tip: Use this link to learn when you will also have to pay taxes on the attorney fee portion of a settlement and what options are available to avoid such.

Employing strategies like the Plaintiff Recovery Trust, QSF360, allocating damages appropriately, spreading payments over time, andseeking professional tax advice can help you navigate the complexities of taxationon lawsuit settlements and awards to optimize your overall financial outcome.

The following is an informational resource for financial planners, attorneys, and settlement planners regarding how much control a trustee should have and when this control crosses the line into excess, potentially compromising the trust’s intentions and the beneficiaries’ interests.

By acting as fiduciaries to manage the assets within a trust to benefit the beneficiaries, trustees carry the weight of significant responsibility. In the case of a Special Needs Trust (“SNT”) or a Settlement Protection Trust (“SPT”), the duty is even greater. But precisely how much control should a trustee have? And when does this control cross the line into excess, potentially compromising the trust’s intentions and the beneficiaries’ interests? These questions are at the heart of trust administration and planning conversations worldwide.

This article explores, compares, and contrasts the differences between a “self-empowering” approach to trust administration and the “helicopter mom” model of hyper-supervision of the life choices of the beneficiary by an overzealous trustee.

The Role and Responsibilities of a Trustee – Subject to Abuse

A trustee is appointed to administer a trust, a legal entity created to hold assets on behalf of a beneficiary or beneficiaries. The trustee’s primary role is to manage these assets in the best interest of the beneficiary or beneficiaries, following the stipulations laid out in the trust agreement. This may involve making investment decisions, developing a spending plan, distributing assets, preparing tax returns, maintaining accurate records, and overseeing the life decisions of the beneficiary or beneficiaries.

In the extremely rare case of a compromised beneficiary with no guardian, this “absolute” level of control might be in order – but in practice, some trustees apply their “guiding hand” to every element of every trust. However, such autocratic supervision is rarely in the best interest of a trust’s beneficiary or beneficiaries. When trustees overmanage and interfere with a competent beneficiary, the trustee usually benefits with higher fees – or enjoys the perverse satisfaction of exercising control over such beneficiary. In effect, these “proactive” trustees act as the “mom” of the beneficiary, judging the beneficiary’s life choices and deciding what the beneficiary should be doing in the trustee’s opinion.

Let us look at actual examples.

1. The trustee requires that it, as trustee, pay all of the bills of a beneficiary. The beneficiary is competent and has been paying their bills for years, yet the trustee now has complete control over the beneficiary’s activities and charges a fee for each bill payment.
   
2. The trustee implements a “spending plan” or “life plan,” which becomes a device to limit distributions and often results in unforeseen needs going unaddressed. Of course, the trustee benefits from retaining funds in the trust on which it assesses fees.
   
3. The trustee rejects the beneficiary’s desire to own a home and refuses to use trust funds to purchase a home or limits home purchases to an arbitrary percentage of trust assets. In addition to denying the beneficiary’s wishes, it imposes financial costs associated with ongoing rental expenses. However, under the guise of prudence, the trustee benefits from fees on the funds that would have otherwise been used to purchase a home.
   

The Balance of Control

While a trustee needs a certain level of control to effectively manage the trust, too much power can lead to issues. The trustee’s management needs to be balanced with the rights and interests of the beneficiaries. Best practices advise trustees to empower competent beneficiaries, be transparent about what impact the beneficiaries’ requests, actions, and decisions may trigger, and prioritize the needs of the beneficiaries over their own.

Scope of the Role

The role of a trustee is not intended to be that of a social worker, much less a “mom.” Yet, it is not uncommon, particularly with pooled trusts, that social workers, with no professional fiduciary licenses or training, act to manage the lives of the beneficiaries. Case management is not the role of a trustee. If hands-on case management is indeed needed and the beneficiary is competent, then a discussion with the beneficiary addressing the fact that the trust could pay for independent case management resources to assist the beneficiary is likewise necessary. The trustee directly providing such case management services may create irrevocable conflicts.

The Potential Downside of Excessive Trustee Control

Excessive trustee control can present several challenges and risks. When a trustee has too much power, it can lead to a conflict of interest should the trustee make decisions that benefit themselves rather than the beneficiaries. Such actions often border on self-dealing, where the trustee uses trust assets for personal gain, favoritism, or where the trustee unfairly prioritizes one beneficiary over others.

The Threat of Overreach

Overreach by a trustee can also manifest in unnecessary or excessive fees. Some trustees may use their position to claim high compensation or “double-dip” by charging for multiple roles. This overreach can deplete the trust assets, leaving less for the beneficiaries. Empowering beneficiaries to make competent decisions with information and enabling guidance is the proper role of the trustee.

The Consequence of Wearing Multiple Hats

Trustees who also serve as accountants, financial advisors, investment managers, or attorneys for the trust need to exercise caution. These situations give rise to conflict-of-interest issues, particularly if the trustee charges separately for their professional services. Such trustees must maintain clear and detailed records.

Striking the Right Balance: Best Practices for Trustee Control

The balance of trustee control is a delicate issue, and it’s crucial to adhere to best practices to lessen the trustee’s control and empower the beneficiary to avoid conflicts and ensure the trust operates as intended.

Regular Communication and Transparency

Regular communication and transparency are key. Trustees should keep beneficiaries updated on trust activities and any changes, including compensation. This not only builds trust but also provides an opportunity for beneficiaries to voice needs, concerns, or objections.

Careful Selection of Trustees

The selection of the trustee is crucial. Choosing someone trustworthy, knowledgeable, and capable of effectively managing the trust with the stated mission and a track record of empowering the beneficiary is essential.

Consideration of Beneficiary Rights

The rights of beneficiaries should be a paramount consideration. Trustees should make decisions in the best interest of the beneficiaries and per the trust terms.

Conclusion

Trustee control is a complex and nuanced issue that requires careful consideration and management. By maintaining transparency, limiting control, making prudent decisions to empower the beneficiary, and prioritizing the interests of the beneficiaries, trustees can strike the right balance and ensure the trust serves its intended purpose.

Additional Information

For more detailed information on trustee services that empower beneficiaries and focus on fulfilling your needs and desires, visit www.easternpointtrust.com. We provide solutions tailored to your situation and fully transparent information about trust administration.

Finally, remember that trust administration is a complex process that requires attention to detail, a strong understanding of financial and legal concepts, and a commitment to acting in the best interests of the trust’s beneficiaries. By educating yourself about the process and seeking professional advice when needed, you can help ensure that your trust serves its intended purpose and provides for your loved ones in the most effective manner possible.

Seek brands that maintain a formal professional tone and utilize technical, regulatory, and financial terms throughout communications. The style conveys authority, expertise, and dependability, aiming to resonate intellectually with its audience. The brand persona reflects a knowledgeable industry leader committed to educating and guiding its clients through complex financial matters.

Qualified Settlement Funds (QSFs) have increasingly become pivotal in resolving lawsuits, particularly for personal injury, wrongful death, and property damage claims. QSFs provide a tax-efficient vehicle for the settlement of claims, facilitating smoother and more efficient resolutions. However, the taxation rules surrounding 26 USC § 468B settlement funds are complex, and understanding them is vital for practical usage. This guide sheds light on the pertinent aspects of taxation and the associated reporting and underscores the importance of seeking professional advice for complex issues. Failure to adhere to these reporting requirements can lead to penalties and legal consequences. This reassurance of support from experts in the field can be a valuable resource in your professional role.

Introduction to QSFs

26 C.F.R § 1.468B-1 Qualified Settlement Funds have emerged as an essential instrument for resolving various types of claims in legal settlements. Established under § 1.468B-1 et seq. of the Internal Revenue Code, settlement funds manage the proceeds from a legal settlement (or judicial award) and offer substantial benefits to both plaintiffs and defendants. These benefits include tax deferral opportunities and the ability to structure payments over time, empowering the parties with more control over their financial arrangements and providing a sense of reassurance.

Treated as a Corporation

Except as provided for in § 1.468B-5(b), a QSF is considered a corporation for tax treatment purposes. Understanding this tax treatment is crucial as it will equip you with the knowledge to navigate the associated taxation.

Modified Gross Income

A QSF is taxed on its “modified gross income.” The term modified gross income generally comprises only the investment income generated. Moreover, settlement payment amounts transferred to a QSF to resolve or satisfy a liability for which the fund is established are excluded from the trust's modified gross income.

A deduction against modified gross income is allowed for QSF administration and other incidental costs and expenses incurred in administering the QSF. Deductible expenses may include administrative costs, such as accounting, legal, and other ministerial expenses, as well as state and local taxes. Also, the costs associated with the determination and notification of claimants and claims administration are deductible.

Note: Administrative costs and other miscellaneous expenses do not include legal fees incurred by or on behalf of claimants and are thus not deductible.

The Emergence of Form 1120-SF

IRS Form 1120-SF is a crucial component in the taxation process of a § 468B trust. It reports the transfers, income generated, deductions claimed, and distributions made. More importantly, it calculates and reports the associated income tax liability. Understanding and confidently navigating the process of filing Form 1120-SF is essential in the QSF taxation process.

Filing Due Date

The QSF administrator plays a key role in filing the tax return. They are responsible for preparing and filing the income tax return Form 1120-SF by the 15th day of the 4th month following the end of the fund's tax year. The administrator's responsibilities include ensuring all necessary forms and schedules are included, making timely tax deposits, and arranging for the fund's tax professional, financial institution, payroll service, or other trusted third party to make the deposits. It's important to note that there are exceptions for funds with a fiscal tax year ending on June 30 and those with a short tax year ending in June, in which case the filing deadline is earlier.

Private Delivery Services (PDSs) can meet the “timely mailing as timely filing/paying” rule for tax returns and payments. However, it’s essential to note that PDSs cannot deliver items to P.O. boxes, necessitating the use of the U.S. Postal Service for such deliveries.

Signature Requirements

The return must be signed and dated by the fund’s trustee or administrator. If an employee completes Form 1120-SF, the paid preparer’s space should remain empty. Anyone who prepares the form but doesn’t charge for the filing should not complete that section.

Note: A paid preparer may sign original or amended returns using a rubber stamp, mechanical device, or computer software.

The preparer must complete the required preparer information, sign the return in the designated space, and provide a copy of the return to the trustee or administrator.

Paid Preparer Authorization

If a fund trustee wishes to permit the IRS to discuss its tax return with the paid preparer, it can check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer Use Only” section of the tax return and does not apply to the firm.

The authorization allows the IRS to contact the paid preparer to answer any questions that may arise during the processing of the return, provide any missing information from the return, get information about the processing status of the return, and respond to IRS notices about errors, offsets, and return preparation.

This authorization, however, does not allow the paid preparer to receive any refund check, bind the trust to anything, or otherwise represent the fund before the IRS. The authorization automatically ends on the due date (excluding extensions) for filing the QSF’s tax return.

Assembling the Return

To ensure correct processing, include all schedules alphabetically and other forms in numerical order after Form 1120-SF. If the return requires more space for forms or schedules, separate sheets are allowable if the pages are the same size and format as the printed forms.

Where and How to File

The Form 1120-SF return should be filed at the applicable IRS address, which (as of this writing) is as follows:

Department of the Treasury
InternalRevenue Service Center
Ogden, UT 84201-0012

Tax Payment Obligations

The taxes are due and payable in full by the 15th day of the 4th month after the end of the tax year.

QSFs must use electronic funds transfers to make all federal tax deposits. These transfers are payable using the Electronic Federal Tax Payment System (EFTPS). However, the settlement fund can also arrange for a tax professional, financial institution, payroll service, or other trusted third party to make the deposits.

Estimated Tax Payments

Generally, a QSF must make installments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more. The installments are due by the 15th day of the tax year’s 4th, 6th, 9th, and 12th months.

Note: If the fund overpaid estimated tax, it may file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax.

Interest and Penalties

Interest accrues on taxes paid late, even if there is an extension of time to file. Penalties can also be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud.

Accounting Method

A Qualified Settlement Fund must use the accrual method of accounting. The accrual method records income and expenses when earned or incurred, regardless of when payment is received or made.

Recordkeeping

Keeping accurate and detailed tax and accounting records is essential. These records support income, deductions, or credits on the return.

Definitions

In the context of § 1.468B-1, specific terms are of particular importance:

• Administrator: The person who manages the QSF, which can include a trustee if the settlement fund is a trust.
• Transferor: A person who transfers money or property to a QSF to resolve or satisfy claims against that person.
• Related person: Any person who is related to the transferor as defined in section 267(b) or section 707(b)(1) of the IRS code.

Conclusion

Understanding the taxation of Qualified Settlement Funds established under 26 C.F.R § 1.468B-1 et seq., s can be complex.

However, platforms such as QSF 360, provided by Eastern Point Trust Company, offer the only online and turnkey service that includes all of the critical aspects of tax reporting, such as Form 1120-SF, filing requirements, and tax payments. As always, seeking professional advice when dealing with complex matters is advisable.

When there is a disagreement regarding the ownership of funds or other assets, a Disputed Ownership Fund (DOF) established pursuant to §1.468B-9 can provide a formal and secure arrangement to hold and preserve the funds or other assets until a court can resolve the claimants’ conflicting claims of ownership. This article explores various facets of DOFs, in what circumstances it is best to utilize this tool, and when other options, such as Qualified Settlement Funds (QSFs) or traditional escrow accounts, are more appropriate.

Introduction

DOFs refer to amounts under contention resulting in conflicting claims of ownership. These conflicting claims of ownership can arise for numerous reasons, including disagreements over private and commercial transactions or arrangements, invoices, claims, adjustments, estates, divorce, etc.

The IRS has established that all “pooled” Court Interpleader Accounts [aka Court Registry Accounts] (Court Accounts) are DOFs. However, the inherent disadvantage of Court Accounts is that the court imposes a significant fee, typically 10% of income, on the first $240 million.

Likewise, Court Accounts have restrictive operating rules, such as required pooling of accounts and (by way of example) limiting investment options to:

“Funds on deposit with the Court are to be placed in some form of interest-bearing account, or invested in a court approved, interest-bearing instrument...”

Therefore, Court Accounts do not provide flexibility and thus may not be best suited to parties’ needs. Alternatively, when funds or other assets are in dispute, a private trust-based DOF allows the parties to customize the arrangement and benefit from a more comprehensive array of investment options. Unlike Court Accounts, a private DOF does not have investment restrictions.

Finally, FDIC insurance covers only the first $250,000 in a Court Account’s investment pool. In the event of a depositary bank’s default, as we have seen with SVB and others, the Court Account maybe be unable to recover all funds held on deposit in the failed institution. Suppose the Court Account is purchasing government bonds as they may under the rule; in that case, the liquidation of such bonds in a rising interest rate environment can result in market-based losses or a lack of liquidity to fulfill disbursements.

A private DOF can eliminate both of these types of risks.

What Qualifies as a DOF?

The regulations (1.468B-9(b)(1)) define the four simple requirements for an arrangement to qualify and operate as a DOF:

(1) Disputed ownership fund means an escrow account, trust, or fund that—

     (i) Is established to hold money or property subject to conflicting claims of ownership;

     (ii) Is subject to the continuing jurisdiction of a court;

     (iii) Requires the approval of the court to pay or distribute money or property to, or on behalf of, a claimant, transferor, or transferor-claimant; and

     (iv) Is not [emphasis added] a qualified settlement fund under §1.468B–1, a bankruptcy estate (or part thereof) resulting from the commencement of a case under title 11 of the United States Code, or a liquidating trust under §301.7701–4(d) of this chapter (except as provided in paragraph (c)(2)(ii) of this section);

What is Disputed Property (Claims)

The regulations (§ 1.468B-9(b)(5)) also define what is “Disputed Property.”

(5) Disputed property means money or property held in a disputed ownership fund subject to the claimants’ conflicting claims of ownership;

DOFs vs. Escrow Accounts

While an escrow account can be a DOF, not all escrow accounts are DOFs; as traditional commercial escrow accounts are never DOFs. The following are the key differences:

• DOFs require a court order to disburse funds, and escrow accounts may disburse funds upon the parties’ mutual agreement.
  
• Escrow accounts may operate as a Grantor-type trust arrangement - DOFs may not.
  
• Escrow accounts need not be subject to the continuing jurisdiction of any court.
  

When to Utilize a Private DOF vs. a Non-DOF Escrow Account

The requirements of § 1.468B-9 do not apply to traditional escrow arrangements (Non DOFs); therefore, traditional escrow arrangements may operate outside the DOF requirements. Traditional escrow arrangements are typically used when the parties are satisfied that the funds or other assets held under the supervision and custody of an independent trustee or escrow agent are sufficiently controlled and that the ultimate distribution of those assets is safeguarded to the parties’ mutual satisfaction.

On the other hand, when the parties are at such odds or levels of distrust and conflict that they are motivated to prevent the loss of the assets and have a court adjudicate the question of ownership, then a Private DOF is the appropriate solution.

Disputed Ownership Funds vs Qualified Settlement Funds (QSF)

It is also essential to differentiate between a DOF and a QSF, as they are not interchangeable.

• A QSF requires governmental authority approval to establish – a DOF does not.
  
• A QSF is established to receive funds to resolve or satisfy one or more claims by funding a settlement or judicial award liability (§1.468B-1(c)(2)):
  

“Resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability”

• A DOF is not a QSF, and a DOF exists solely to hold assets subject to conflicting claims of ownership; the resolution of said conflicting claims shall occur by future court order.
  
• A QSF does not require a court order to disburse funds, while a DOF does require a court order to disburse funds.
  

Conclusion

Understanding Disputed Ownership Funds, when their use is appropriate, and the alternatives such as traditional escrow accounts are vital in selecting the appropriate instrument to resolve ownership disputes or prevent asset loss risks. By grasping these concepts, stakeholders can better address ownership disputes and navigate the resolution processes more efficiently.

In the ordinary course of business, it is not uncommon for individuals and organizations to find themselves involved in litigation or arbitration. As a result, settlements and judgments can occur, which may have significant tax implications. However, these implications are often overlooked or misunderstood. Understanding the federal tax treatment of settlements and judgments is crucial for both the payer and the recipient and how to minimize settlement taxation.

Determining Tax Treatment: The Origin of the Settlement Claim

The proper tax treatment of a settlement or judgment largely depends on the origin of the claim. Courts often consider the question "In lieu of what were the damages awarded?" to determine the appropriate payment characterization. This characterization determines whether the payment is taxable or nontaxable and, if taxable, whether ordinary income or capital gain treatment is appropriate.

For recipients of settlement amounts, damages received as a result of a settlement or judgment are generally taxable. However, certain damages may be excludable from income, such as payments for personal physical injuries, amounts previously not taxed, cost reimbursements, recovery of capital, or purchase price adjustments. The tax treatment may also vary depending on whether the damages relate to a claim for lost profits or damage to a capital asset.

On the other hand, for the payer, the tax treatment depends on whether the payment is deductible or nondeductible, currently deductible, or required to be capitalized. Payments arising from personal transactions may be considered nondeductible personal expenses. In contrast, costs arising from business activities may be deductible under specific provisions of the Internal Revenue Code. It is important to note that certain payments may be nondeductible or should be capitalized.

The Burden of Proof and Evidence

Taxpayers bear the burden of proof for the tax treatment and characterization of a litigation payment. The language found in the underlying litigation documents, such as pleadings or a judgment or settlement agreement, is often crucial in determining the tax treatment. Supporting evidence includes legal filings, settlement agreement terms, correspondence between the parties, internal memos, press releases, annual reports, and news publications.

Pro Tip: While various pieces of evidence can be persuasive, the Internal Revenue Service (IRS) generally views the initial complaint as the most persuasive. As such, attorneys must be cognizant of the tax implications of claims made in the initial filings.

Allocating Damages

When a settlement or judgment encompasses multiple claims or involves multiple plaintiffs, liens, or defendants, allocating damages becomes essential. Factors such as who made and received the payment, who was economically harmed or benefited, against whom the allegations were asserted, who controlled the litigation, and whether costs/revenue were contractually required to be shared are critically important. Also, joint and several liabilities are necessary considerations when determining the allocation.

Settlement agreements or judgments may provide for a specific allocation. The IRS generally accepts these ordered allocations. However, the IRS may challenge the allocation if the facts and circumstances indicate that the taxpayer has another purpose for the allocation, such as tax avoidance. Taxpayers, not the IRS, have the burden of proof when defending the allocation in proceedings with the IRS.

Deduction Disallowances

Certain deduction disallowances apply to payments and liabilities resulting from a judgment or settlement. The Tax Cuts and Jobs Act (TCJA) introduced changes to the Internal Revenue Code that disallow deductions for certain payments.

Under Section 162(f), as amended by the TCJA, deductions are disallowed for amounts paid or incurred in relation to a violation of law or an investigation or inquiry into a potential violation of law. However, there are exceptions for restitution, remediation, or compliance with the law, taxes due, and amounts paid under court orders when no government or governmental entity is a party to the suit. Recent regulations further clarify the disallowance, specifying that routine audits or inspections unrelated to possible wrongdoing are not subject to the disallowance.

Another deduction disallowance introduced by the TCJA is in Section 162(q). This provision disallows deductions for settlements or payments related to sexual harassment or abuse subject to a nondisclosure agreement. However, it is essential to note that the disallowance does not apply to the attorneys' fees incurred by the victim.

Additional deduction disallowances include those under Section 162(c) for illegal bribes and kickbacks and Section 162(g) for treble damages related to antitrust violations.

Qualified Settlements Funds

Established under § 1.468B-1 et seq., a Qualified Settlement Fund (QSF) offers a wide variety of tax and financial planning benefits and flexibility that would not otherwise be available to a plaintiff if the settlement or judgment is paid directly to the plaintiff or their attorney.

Pro Tip: Learn more about QSFs.

The Banks v Commissioner Double Taxation Problem

Plaintiffs often keep less than half of what they should. A Plaintiff pays tax on the settlement award they receive and also pays tax on the portion of the winnings paid to their lawyer - who then again pays tax on the same money. The Plaintiff Recovery Trust avoids the Double Tax, often increasing net recoveries by 50%-150%.

See how to solve the double taxation problem and pay less taxes with the Plaintiff Recovery Trust.

Pro Tip: Learn more regarding the taxation of punitive damages.

The Importance of Considering Tax Implications

Taxpayers must consider the tax implications when negotiating settlement agreements or reviewing proposed court orders or judgments. Failure to do so may result in adverse and avoidable tax consequences or loss of tax management opportunities. By understanding the origin of the claim, properly allocating damages, and considering deduction disallowances, taxpayers can navigate the complexities of taxation in settlements and judgments.

Conclusion

The taxation of settlements and judgments is a complex area that requires careful consideration. The origin of the claim, the allocation of damages, and the deduction disallowances all play a significant role in determining tax treatment. Taxpayers must diligently understand the implications and seek professional advice when necessary. By doing so, taxpayers and their advisors can ensure compliance with tax laws and minimize potential tax liabilities.

Tax information reporting is essential to compliance with Internal Revenue Service (IRS) regulations. It ensures accurate income reporting and facilitates the proper allocation of tax liabilities. In this guide, we will explore the requirements for furnishing employer identification numbers (EINs) and the On-Line Taxpayer Identification Number Matching Program (TIN Matching Program) administered by the IRS. We will also delve into how these requirements relate to payments made to a qualified settlement fund (QSF) to gain a thorough understanding of tax information reporting related to a QSF and the related exemptions which eliminate the requirement for 1099-Misc reporting of payments to a QSF.

General Rules Regarding EINs and Information Reporting

Let’s start with the general rules surrounding EINs and information reporting to establish a solid foundation. Section 6109 of the Internal Revenue Code and the Treasury Regulations provide the framework for issuing tax identification numbers and furnishing them to other parties. An EIN is a unique identifier for U.S. persons, which includes domestic trusts and corporations. When making a return, every U.S. person must furnish their own identifying number as required by the IRS forms and accompanying instructions. If another person requires the TIN, you must provide such upon request – utilizing IRS Form W-9 is the preferred method.

Section 6041 of the Internal Revenue Code outlines payment information reporting requirements. This section stipulates that persons engaged in a trade or business making payments over $600 in a taxable year must furnish an information return to the IRS. However, payments made to domestic corporations are generally exempt from the information reporting requirement, with a few exceptions outlined in the IRS’ 2022 Instructions for Form 1099-MISC. For example, businesses or individuals making payments for the purchase of fish for resale, medical and health care payments, substitute payments in lieu of dividends or tax-exempt interests, and gross proceeds paid to an attorney are reportable on Form 1099-MISC.

General QSF Information Reporting Requirements

QSFs operate to resolve or satisfy liabilities, and as previously noted, the amounts transferred to a QSF are not includable in the fund’s gross income. For income tax purposes, a QSF is taxable as a corporation, and payments to a QSF are classified as payments to a corporation[i] for information (1099) reporting purposes.

Considering the general information reporting rules, payments made to a QSF to settle a claim are not reportable on Form 1099-MISC. This reporting exemption is because such payments are excluded from the QSF’s gross income and are not subject to the reporting requirements of Section 6041. Additionally, Form 1099-MISC only requires reporting specific payments to corporations, such as (i) cash payments for the purchase of fish for resale, (ii) medical and health care payments, (iii) substitute payments in lieu of dividends or tax-exempt interests, and (iv) gross proceeds paid directly to an attorney. Therefore, payments made to a QSF do not fall under these categories and do not require 1099-MISC reporting.

In summary, there is no requirement for a payor to consider the payments to a QSF as reportable income or subject to Backup Withholding. Correspondingly, there are no requirements for a payor to issue a 1099-MISC; thus, the TIN Matching Program is not applicable.

Detailed QSF Exemptions From Reporting, Backup Withholding, and TIN Matching Requirements

It’s important to note that there are NO information reporting requirements for payments expressly excluded from the recipient’s gross income. For instance, when a QSF is involved, the QSF administrator is solely responsible for tax reporting associated with such payments and distributions from the QSF. Therefore, the defendant making payments from the QSF to a recipient, such as a claimant or attorney, has no obligation to file an information return; specifically, no 1099-MISC is required. Correspondingly, there is no Backup Withholding, and no TIN Matching is required.

Tip – Settlement Payments into a QSF are not taxable as §1.468B-2(b) excludes from the definition of Modified Gross Income the amounts transferred to satisfy the settlement/order liability.

§1.468B-2

(b) Modified gross income. The “modified gross income” of a qualified settlement fund is its gross income, as defined in section 61, computed with the following modifications—

(1) In general, amounts transferred to the qualified settlement fund by, or on behalf of, a transferor to resolve or satisfy a liability for which the fund is established are excluded from gross income. However, dividends on stock of a transferor (or a related person), interest on debt of a transferor (or a related person), and payments in compensation for late or delayed transfers, are not excluded from gross income.

Accordingly, as the settlement payments are not taxable to the QSF, there are no circumstances whereby any 1099-Misc reporting requirement or any associated applicable Backup Withholding is applicable. Thus, there is no need for any TIN Matching in any circumstances associated with QSFs.

Tip – It is improper for the transferor (payors) into a QSF to perform any look-through 1099-Misc reporting requirement or associated applicable Backup Withholding. To perform such would result in willful inaccurate/double income reporting violating the code.

The TIN Matching Program and Why It Does Not Apply to QSFs

There is no TIN Matching requirement for QSFs as there is no tax liability to the QSF for the defendant’s settlement/award payment as provided for in §1.468B-2(b).

Since the IRS’ TIN Matching Program only applies to assist payors filing Form 1099 associated with taxable income, a QSF payor has no Backup Withholding or payee certification via TIN Matching obligations. As stated, the payments received by a QSF are not taxable income, and there is no 1009-MISC reporting requirement. Therefore, a QSF is not subject to Backup Withholding as the settlement/award payment is not taxable income to the QSF; and hence, there is no 1099-MISC or payee certification via TIN Matching obligation.

Tip – Caution should be given to not confuse the requirements of other types of payments as opposed to payments to QSFs. Note that in addition to the stated exemptions for QSFs, Backup Withholding and payee certification via TIN Matching are moot for payments arising from personal injury claims (§104(a)(2)) as the underlying settlement/claims are non-taxable and, as such, there could never be any applicable 1099-MISC reporting requirement or Backup Withholding in any circumstances.

Defendants asserting the requirement for 1099-MISC reporting or payee certification via TIN Matching are operating outside the applicable code. Such payors are implementing unnecessary and undefendable processes, which only serve the purpose of delaying funding the QSF and fulfilling their payment obligations.

Additionally, for payments to a QSF, the TIN Matching Program is not applicable since the QSF administrator (§1.468B-2(l)(2) see endnotes), is responsible for the entirety of the tax reporting, including but not limited to all applicable 1099 reporting and Backup Withholding associated with payments from a QSF to claimants.

Summary

To avoid bad faith payment delays, payors should understand the rules and requirements surrounding EINs, W-9s, information reporting, the TIN Matching Program, and the exemptions applicable to QSFs. By adhering to these regulations, businesses can ensure compliance and not gratuitously impose processes outside the code’s requirements which artificially delay payment of settlement/award obligations and which may result in additional liabilities.

In high stakes litigation, the financial implications of a verdict can be as complex as the legal battle itself. The following case study delves into a representative, high value case that resulted in a substantial $20 million verdict and showcased the critical importance of strategic financial planning in maximizing the plaintiff's recovery.

The Case at a Glance

Our plaintiff, a reputable tax professional, found themselves at the center of a damaging defamation campaign. The defendant, a competitor, had knowingly and maliciously made false statements claiming that the plaintiff lacked the licenses to conduct their business legally. These allegations struck at the heart of the plaintiff's professional integrity and threatened to derail years of hard-earned success and a glowing reputation.

The ensuing legal battle resulted in a judicial award for the plaintiff. The court rendered a verdict awarding a staggering $20 million in damages plus attorney fees and costs. This victory, while vindicating, brought with it a new challenge: navigating the complex tax implications of such a substantial award.

The Tax Conundrum: Punitive Damages and Contingency Fees

Of the $20 million award, 10 million were punitive damages. While this substantial sum was a strong deterrent against future defamatory actions, it also presented a significant tax challenge. Under normal circumstances, the plaintiff and their attorneys would face hefty tax bills on this portion of the award. The crux of the issue lay in the taxation of contingency fees associated with punitive damages. Typically, these fees are taxable income to the plaintiff, even though they are paid directly to the attorney. This quirk in the tax code stems from Commissioner v. Banks, a case which was decided by the US Supreme Court addressing the issue of whether the portion of a settlement or judgment award paid to a plaintiff's attorney under a contingent fee agreement is taxable income to the plaintiff. Thus, the plaintiff will pay taxes on money they never received. This results in the need for an ingenious strategy.

As a tax professional, our plaintiff knew about the complicated tax problems that would follow his victory. In preparation, he and his legal team planned an ingenious strategy. This strategy would utilize two separate tools: the 468B qualified settlement fund and the Plaintiff Recovery Trust. By using them in conjunction, the plaintiff maximized his possible tax savings. But what is a 468B qualified settlement fund? This financial tool - named after the Internal Revenue Code section that governs it - would prove invaluable in managing the settlement proceeds.

The QSF acted as a temporary holding account for the award, providing several key advantages.

1. Time for planning - It allowed the plaintiff and their advisors breathing room to make informed decisions about the distribution of funds without immediate tax consequences.

2. Flexibility - The QSF provided options for structured settlements and other tax-efficient distribution methods.

3. Protection -During the planning phase, it shielded the funds from creditors and other potential claims and removed the defendant from creating additional problems.

Using the QSF, the plaintiff's team laid the groundwork for a comprehensive financial strategy to maximize the net recovery from the verdict. However, it was doubly effective with its paired tool. Enter the Plaintiff Recovery Trust, a tax-saving innovation.

In addition to the QSF, the plaintiff's financial advisors proposed utilizing the Plaintiff Recovery Trust (PRT) to address this looming tax burden. This specialized trust is designed to eliminate the taxation on the contingency fee portion of the punitive damages.

How the QSF and PRT Work Together

Step one, the plaintiff assigned their entire claim for damages to the PRT before the court's order or settlement.

Step two, the defendant paid funds into a QSF on behalf of the PRT.

Step three, the QSF then paid the contingency fees directly to the attorneys on behalf of the PRT.

By designing the transaction this way, the plaintiff avoided recognizing the contingency fee as taxable income. This strategic move resulted in substantial tax savings for the plaintiff, ensuring their after-tax settlement proceeds were increased by $1,480,000.

Financial Implications: A Closer Look at the Numbers

Let's break down the financial impact of using the QSF and PRT by looking at our plaintiff's potential tax liability without his strategy.

Without Strategic Planning

Total award: $20 million

Punitive Damages Portion $10 million

Contingency Fee on Punitive Damages Portion (assuming a 40% contingency arrangement) $4 million

Taxable Income to Plaintiff $20 million

Potential Tax Liability (assuming 37% federal rate) $7,400,000

Now let's look at the same numbers, this time while utilizing our plaintiff's ingenious strategy with QSF and PRT.

Total Award $20 million

Punitive Damages Handled Through PRT $10 million

Contingency Fee on Punitive Damages (portion paid directly from PRT) $4 million

Taxable Income to Plaintiff $16 million

Tax Savings $1,480,000

This simplified calculation demonstrates the significant financial benefit of employing these strategic tools. The final savings may be even more significant when considering state taxes and other factors.

The Intersection of Law and Finance

With its $20 million verdict, this defamation case serves as a reminder of the linked interrelationship between legal victories and tax outcomes. By leveraging paired tools like the 468B qualified settlement fund and the Plaintiff Recovery Trust, the legal team was able to secure victory for their client and maximize justice by improving the financial benefits. For legal professionals, this case underscores the importance of holistic client advocacy.

In an era of complex litigation and equally complex tax laws, the ability to navigate both legal and financial waters is invaluable. By staying informed about innovative financial solutions and collaborating with financial and tax experts, attorneys can provide a level of service that extends far beyond the courtroom, securing not just legal victories, but financial ones as well.

The preceding case study is an amalgamation of identities and facts adapted to simplify and protect the privacy of the parties and cases. Some facts and circumstances have been changed for educational purposes.

In 2021, fraud losses skyrocketed to $5.8 billion, a staggering 70% increase in just one year. How can financial institutions protect themselves against this growing threat? One powerful strategy to fight financial fraud and money laundering is to reduce anonymous bank accounts and closely monitor suspicious activities.

Financial organizations including banks and credit unions must adopt measures to know their customers and continuously monitor for risk factors. This process is known as KYC or Know your Customer. The implementation of KYC regulations gained momentum after the 9/11 attacks leading to stricter requirements under the PATRIOT Act. Under the PATRIOT Act’s title 3, financial institutions are required to fulfill two core components of KYC: the Customer Identification Program (CIP) and Customer Due Diligence (CDD). This means you can understand KYC as a due diligence process used by financial institutions to verify the identity of their customers and assess potential risk they impose. But why is it so crucial?

Complying with KYC regulations is essential to prevent money laundering, terrorism financing and other types of fraud. It ensures customers are who they claim to be. To meet KYC requirements, clients typically provide proof of identity and address, such as ID card identification, face verification, and biometric verification.

AML (Anti-money laundering) and KYC (Know Your Customer) are closely related but distinct concepts. AML refers to the framework of legislation and regulations to which financial institutions must adhere in order to prevent money laundering, while KYC is a key component of the overall AML framework, requiring organizations to know their customers and verify their identities.

Financial institutions are responsible for developing their own KYC processes and ensuring compliance with specific AML standards dictated by any applicable jurisdiction or country. KYC regulations have become increasingly critical for almost any institution involved in financial transactions due to the need to limit fraud as well as the requirements imposed  by banks on organizations with whom they conduct business.

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."

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.

‍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.

Strategic agreement with J.P. Morgan strengthens EPTC’s commitment to innovative settlement fund administration

New York, United States – Eastern Point Trust Company (EPTC), a leader in innovative trust administration, announces new enhancements to its Qualified Settlement Fund (QSF) 360 platform. EPTC aims to streamline and secure the administration of settlement funds through the unique and advanced depository and treasury management services provided by J.P. Morgan.

The QSF 360 platform, known for its efficiency, transparency, and refined administration of Qualified Settlement Funds, will now offer EPTC clients with:

Enhanced Depository Services: Access to improved technology, increased limits and funds availability.

Advanced Treasury Management: Optimized cash management and liquidity within the QSF 360 platform including access to more efficient payment channels and products.

Seamless Integration: Increased real-time data synchronization, offering immediate updates and enhanced reporting for all stakeholders.

Joe Sharpe, President of Eastern Point Trust, commented, “Our commitment to innovation and client satisfaction drives us to continuously enhance our offerings. This new account agreement with J.P. Morgan is a testament to our dedication to providing unparalleled peace of mind and operational excellence to our clients.”

This collaboration strengthens the operational backbone of EPTC’s offerings and underscores EPTC’s commitment to innovation, security, and client satisfaction in the financial services sector.

About Eastern Point Trust Company:

Eastern Point Trust Company specializes in worldwide trust, escrow services, and SaaS solutions. It leverages its proprietary technology, TrustWare^TM, to offer solutions like QSF 360^TM, Plaintiff Recovery Trust, Settlement Protection Escrow Trust, and more to individuals, courts, and institutional clients worldwide. Information about Eastern Point is available at www.easternpointtrust.com

Contact Info:
Name: Rachel McCrocklin
Email: Send Email
Organization: Eastern Point Trust Company

Website: https://www.easternpointtrust.com/‍

Cheyenne, March 19, 2025: Coal Creek Law of Cheyenne Wyoming announces, on behalf of its client Eastern Point Trust Company (Eastern Point), the final settlement and resolution of intellectual property infringement claims brought by Eastern Point against the Town of Lovell, Wyoming (Lovell). The settled claims included, but were not limited to, evidence of Lovell’s infringement of Eastern Point’s Collective Intellectual Property.

Town Attorney Alexa Rolin of Copenhaver, Kitchen, and Kolpitcke is quoted in the March 6, 2025, Lovell Chronicle article (https://www.lovellchronicle.com/content/town-lovell-terminates-qsf-agreement-colorado-bank) as saying, “‘The town is no longer working with Flatirons in any capacity,’ she said. ‘The agreement is terminated.’” The same Chronicle article further stated, “In a follow-up interview on March 3, Rolin explained that the vote on the settlement agreement the previous week had the effect of an immediate termination of the QSF relationship with Flatirons Bank.”

Sam Kott, Vice President and Corporate Counsel, commented, “Eastern Point invested heavily in its pioneering intellectual property and leads the Qualified Settlement Fund industry in innovation and proprietary process development. We are grateful to the Town of Lovell’s leadership for quickly resolving the matter and ceasing all associated activities.” Additionally, Mr. Kott noted, “Without exception, Eastern Point will vigorously defend its property rights and pursue all infringements to the fullest extent of the law, which provides relief and enforcement through both civil and contractual rights avenues.”

In related comments, Edward “Ned” Armand, CEO and chairman of Eastern Point, observed, “Federal and state laws prohibit the misappropriation of trade secrets, industrial espionage, and related infringement activity. Eastern Point will, in every instance, enforce its rights using all available avenues and tools against all infringing parties.’ He stated, “No ethical businessperson will justify misappropriating or otherwise converting another business’s trade secrets and IP property as an allowable or defensible action.”

For more information, please contact Sam Kott, as shown below.

About Coal Creek Law

Coal Creek Law (Evans, Bush, Coppede & Wilkens) is an experienced Rocky Mountain and Great Plains law firm in Cheyenne, Wyoming. It provides legal counsel in Wyoming, Colorado, and Nebraska. Coal Creek strives to provide results-oriented and value-driven legal support to individuals and businesses.

About Eastern Point Trust Company

Eastern Point Trust Company is a leading innovative trust and trust administration service provider that delivers personalized solutions for attorneys, individuals, families, and institutions. With a steadfast commitment to excellence and integrity, Eastern Point Trust Company offers a comprehensive range of trust-based and ministerial solutions. Moreover, it continues to lead the way in the trust and settlement administration industry, focusing on innovation, speed, and customer satisfaction. Eastern Point Trust Company is committed to delivering cutting-edge solutions that empower the Qualified Settlement Fund Administration and settlement industry to achieve its goals.

Contact:

Sam Kott
Phone: 855-222-7513 (#217)
Email: SamKott@easternpointservices.com
Website: www.easternpointtrust.com

Disclaimer: The information in this press release is for informational purposes only. It does not constitute legal or investment advice, nor is it an offer to sell or a solicitation to purchase a security or service in any jurisdiction.

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

FOR IMMEDIATE RELEASE

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

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

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

PRESS Contact
www.EasternPointTrust.com

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

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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.

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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.