Learn the advantages, legal framework, and benefits of QSF for litigators. Find out how to choose the right QSF administrator and maximize settlement benefits.
As a litigator, one of the most critical aspects of your responsibilities is ensuring that your clients receive the maximum and most flexible settlement benefits possible. One powerful tool that can help you achieve this goal is Qualified Settlement Funds (QSFs). This paper explains QSFs, their advantages, the legal framework governing them, and how they can maximize settlement benefits. We shall also discuss common misconceptions about QSFs and how to choose a QSF administrator.
A Qualified Settlement Fund (QSF) is a tax arrangement created under IRC §1.148B-1 et seq. that allows litigants to set aside settlement funds in a trust. This arrangement enables the parties involved to resolve legal disputes without distributing the settlement funds immediately. Instead, the QSF’s funds are held, tax-deferred, within the QSF until disbursed to the intended recipients.
A welcome benefit of a QSF is that you, as the attorney, never receive client funds. As such, a QSF is not an IOLTA and is not reportable to your state Bar. The QSF administrator manages the funds, eliminating the burden and risks that would ordinarily be associated with funds in your firm’s IOLTA.
There are several additional advantages to using a QSF for settlement funds. First and foremost, a QSF allows the parties involved to settle a case without immediately disbursing the settlement funds to the plaintiffs. This flexibility and tax defer treatment can be particularly beneficial in cases where there are multiple plaintiffs or uncertainty about the final amount of the settlement due to liens or other issues. Also, by using a QSF, the parties involved can avoid negotiating separate settlement agreements and instead focus on resolving the underlying legal dispute.
Another advantage of using a QSF is that it can help to simplify the settlement process. Instead of having to negotiate separate agreements with each plaintiff, the parties involved can negotiate a single settlement agreement outlining the method of allocation and distribution from the QSF. This advantage helps to streamline the settlement process and reduce the administrative burden on all parties involved.
The legal framework governing QSFs is in IRC §1.468B-1 et seq. of the Internal Revenue Code. This section provides the requirements for a QSF to be established, qualified and maintained. These requirements include:
Additionally, a QSF can be invested (usually in a FDIC insured money market account). However, any interest income generated by the QSF (less allowable deductible expenses) is subject to income tax.
Another of the key benefits of using a QSF is that it allows litigators to offer settlement flexibility to their clients. When utilizing a QSF, litigators empower the plaintiff with the flexibility to choose their payment options (i.e., lump sum, third-party assignment, structured settlement annuity, or any combination thereof) and payment timing.1
A QSF also allows the plaintiff to choose their financial advisor(s) and removes the limitations associated with a defense-provided annuity.
QSFs also provide similar benefits for you as the lawyer by providing you and your firm the flexibility to choose fee payment options (i.e., lump sum, third-party assignment, fee structure, or any combination thereof) and payment timing.
Despite the many advantages of using a QSF, some common misconceptions exist about this legal arrangement. One of the most common misconceptions is that a QSF is only available in cases with multiple plaintiffs. In reality, a QSF can be beneficial, even with a single plaintiff.
Another common misconception is that a QSF is too complex and expensive to set up. While it is true that a QSF requires some upfront costs (as low as $500), these costs are typically offset by the long-term benefits that a QSF can provide. Additionally, some QSF administrators specialize in setting up and managing QSFs, which can help simplify the process for litigators. For example, online platforms like QSF 360 offered by Eastern Point Trust Company are low-cost and allow you to create a QSF and receive the necessary governmental approval in as little as one business day.
One of the most important decisions litigators must make when setting up a QSF is choosing the right QSF administrator. The QSF administrator is responsible for managing the funds in the QSF and ensuring that all legal and tax requirements are fulfilled. When choosing a QSF administrator, litigators should consider the administrator’s experience, whether they are licensed fiduciaries, speed of distributions, and fees.
The QSF administrator should have the necessary trust accounting systems, experience in managing QSFs, and be familiar with the legal and tax requirements governing these arrangements. Additionally, the administrator should have experience working with litigators and be able to provide references from other clients.
The QSF administrator’s licensing is also essential. Litigators should research the administrator’s status as a licensed fiduciary (preferably a Trust Company). The administrator should also be able to provide information about the FDIC insurance that applies to the account. Some platforms, such as QSF 360, provide up to $240 million in FDIC coverage; however, these amounts are expandable with the correct structure.
Finally, litigators should consider the fees that the QSF administrator charges. While choosing an administrator with the experience, systems, and licenses needed to manage the QSF effectively is essential, litigators should also ensure that the fees are reasonable and transparent.
In conclusion, Qualified Settlement Funds (QSFs) are a powerful tool that can help litigators to maximize settlement benefits for their clients and themselves. By using a QSF, litigators can provide your clients (and your firm) with the flexibility that includes a structured, third-party assignment, or a lump-sum payment. Additionally, a QSF can help to simplify the settlement process and reduce the administrative burden on all parties involved.
Despite some common misconceptions, QSFs are not complex or expensive to set up. With the help of a qualified QSF administrator, litigators can establish and manage a QSF that meets all legal and tax requirements in as little as one business day. In summary, when choosing a QSF administrator, litigators should consider the administrator’s experience, systems, licensing, fiduciary, escrow, and ministerial services and fees.
If you are a litigator interested in using a QSF, do your research and speak with a qualified QSF administrator (preferably a Trust Company.) Using a QSF can help ensure your clients, and your firm, receive the flexibility to maximize settlement benefits, fee and financial planning options.
As someone who may receive a pending settlement or judgment in a lawsuit, you may wonder how to manage best and maximize your funds.
As someone who may receive a pending settlement or judgment in a lawsuit, you may wonder how to manage best and maximize your funds. One option that has gained popularity recently is using a Qualified Settlement Fund (QSF) under IRC Section 1.468B-1. In this article, we shall explore what a QSF is, its advantages, how to set one up, and common misconceptions about them.
A QSF is a type of trust that is created to hold settlement funds in a legal dispute. They are often used in cases where there are multiple plaintiffs or where the distribution of funds may otherwise be delayed due to ongoing litigation. Essentially, a QSF is a temporary holding account for settlement funds until they can be properly distributed to the intended parties.
IRC Section 1.468B-1 outlines the rules and regulations governing QSFs. This section of the tax code provides a safe harbor for using QSFs in legal settlements, and it outlines the requirements for establishing and maintaining a QSF and the tax treatment of funds held in a QSF.
One of the most significant advantages of using a QSF is that it allows for a more efficient and organized distribution of settlement funds. Rather than waiting for all parties to agree on a distribution plan, funds can be placed in a QSF and distributed as soon as possible. This advantage can be beneficial in cases with multiple plaintiffs or where some parties may be difficult to locate.
Another advantage of using a QSF is the tax benefits it can provide. Funds held in a QSF are not subject to income tax until distributed to the intended parties (settlement proceeds for personal injury are never taxable). Additionally, funds held in a QSF can be invested, potentially increasing the overall value of the settlement, and are usually held in FDIC-insured bank deposits. Some QSF administrators have custodial platforms that provide up to $240 million in FDIC coverage. These advantages allow for more flexibility in financial planning and reducing the tax consequences of a settlement payment.
One common misconception about QSFs is that they are challenging to set up and manage. While it is true that specific requirements must be met, such as having a qualified administrator, the process is not overly complicated. However, choosing the right QSF administrator is essential to ensure that the funds are properly managed and distributed. Platforms like QSF 360 offered by Eastern Point Trust Company are low-cost and allow you to create a QSF in as little as one business day.
Another misconception is that QSFs can only be used in certain types of legal disputes. While QSFs are more commonly used in cases with multiple plaintiffs or complex distribution issues, they can be a valuable tool in any settlement, including those with only one plaintiff. Compared to other options, such as a defense-provided structured settlement or a lump-sum payment, a QSF offers more flexibility, better financial outcomes and tax benefits.
In conclusion, a Qualified Settlement Fund under IRC Section 1.468B-1 is a valuable tool for managing and maximizing settlement funds. By understanding the basics of what a QSF is, its advantages, and the misconceptions surrounding it, you can make an informed decision about whether it is the right option for your situation. To ensure your QSF is appropriately managed, choose a qualified administrator who can guide you through the process and help you make the most of your settlement.
Explore the Qualified Settlement Funds (QSF) requirements, and the quick turnkey solution provided by QSF 360.
According to IRS regulation §1.468B-1(c)(1) and (e), a Qualified Settlement Fund (“QSF”) is a specialized type of statutory trust established by a “governmental authority” to resolve claims arising from specific events such as breaches of contracts, torts, or violations of law pursuant to 26 CFR §1.468B-1. The term governmental authority is defined within the regulations as:
“…the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing…”
Thus, the governmental authority must issue its initial or preliminary approval (or order) to establish the QSF. Often overlooked is that the initial approval or order may be subject to review or revision. However, this does not detract from the validity of the QSF once the governmental authority gives its initial approval.
Note: So, called “Firmwide QSFs” mix unrelated claims in violation of the “related claims” requirement of §1.468B-1(c)(2) and therefore do not satisfy the qualification requirements to operate as a Qualified Settlement Fund. (See Firmwide QSFs - What Can Go Wrong? Part 1 and Part 2)
A key provision within §1.468B-1(e) clarifies that the governmental authority’s order or approval has no retroactive effect. This part of the regulation means that a fund, account, or trust cannot be deemed a Qualified Settlement Fund before the date the approval is granted. The regulation ensures that the statutory establishment of a QSF follows a transparent chronological process and maintains accountability for the fund’s activities.
However, §1.468B-1(j) (2) provides a method for a QSF to be deemed coming into existence via a “relation-back rule” election as on the later of the date the fund, account, or trust meets the requirements of paragraphs (c)(2) and (c)(3) of 1.468B-1 or January 1 of the calendar year in which all the requirements of paragraph (c) of 1.468B-1 are satisfied:
§1.468B-1(j) (2)
“Relation-back rule—(i) In general. If a fund, account, or trust meets the requirements of paragraphs (c)(2) and (c)(3) of this section prior to the time it meets the requirements of paragraph (c)(1) of this section, the transferor and administrator (as defined in §1.468B–2(k)(3)) may jointly elect (a relation-back election) to treat the fund, account, or trust as coming into existence as a qualified settlement fund on the later of the date the fund, account, or trust meets the requirements of paragraphs (c)(2) and (c)(3) of this section or January 1 of the calendar year in which all the requirements of paragraph (c) of this section are met. If a relation-back election is made, the assets held by the fund, account, or trust on the date the qualified settlement fund is treated as coming into existence are treated as transferred to the qualified settlement fund on that date.”
In conclusion, the governmental authority plays a pivotal role in establishing and regulating a QSF, but the approval can be difficult, costly, and time-consuming. QSF 360 provides a turnkey solution to establish a QSF with the necessary governmental authority approvals in as little as one business day, making the process quick and easy. The order or approval from the governmental authority serves as the definitive starting point for a QSF, ensuring that the Qualified Settlement Fund operates within the established regulatory framework.
A QSF serves as a temporary financial reservoir, defers taxation, and offers a controlled distribution mechanism, making it a crucial tool in legal settlements. Learn more about QSFs here.
In the intricate world of legal proceedings the Qualified Settlement Fund (QSF) stands out for its distinctiveness. A QSF, although perhaps not widely recognized by the general public and even many lawyers, holds a unique and pivotal role in the resolution of legal cases, particularly those involving multiple claimants such as class-action lawsuits and mass tort litigation. QSFs are also widely used in single event cases and single plaintiff cases. In essence, the QSF serves as a temporary holding ground for settlement funds (in effect, the funding is held in “tax limbo”), offering an array of unusual and beneficial characteristics that make it a crucial instrument in settlements and judicial award distributions.
TIP: There is no IRS restriction regarding a “Single Claimant” QSF – see Actually, Single-Claimant Settlement Funds Are Valid (Wood, Brown - Tax Notes Federal, February 10, 2020).
At its core, a QSF is a legal entity that meets the qualification requirements of §1.468B-1 et seq. The purpose of a QSF is to receive and disburse settlement funds in cases where one or more claims are being satisfied. The nature of QSFs lends itself to certain characteristics that are not only unusual but also vital in modern legal proceedings.
One of the most remarkable aspects of QSFs is their role as a temporary financial reservoir. In scenarios where one or more claims conclude with a settlement agreement (or judicial award), defendants deposit the associated sums into the QSF. This core feature is the essential facet of a QSF’s function: it is a short-term container that safeguards the settlement funds until properly allocated to the respective claimant(s). Unlike traditional settlements where claimants receive compensation directly from the defendant, a properly constructed QSF introduces a layer of separation that ensures organized and deliberate distribution(s) while triggering no economic benefit or constructive receipt.
Perhaps one of the most advantageous features of the QSF is its capacity to defer taxation. When deposited into the QSF, the settlement funds assume a “contingent liability” status, effectively postponing the recognition of income and taxation for the claimant(s). This unique attribute can have substantial financial implications. The claimant(s) can strategize and plan for the tax consequences of their settlements, a luxury not commonly afforded in other settlement frameworks. The deferral of taxation can prove invaluable, especially for a claimant who might otherwise face immediate and potentially burdensome tax liabilities.
The QSF introduces a controlled distribution mechanism that minimizes potential accelerated taxation, chaos, and confusion in cases involving several claimants, liens, secondary claims, or the desire to preserve other beneficial tax treatments. Often, in class-action or mass tort litigation, the number of individuals seeking compensation can be substantial, with varying degrees of damages or injuries. The QSF administrator or trustee plays a pivotal role in overseeing the distribution process, ensuring the disbursement of funds per the terms outlined in the settlement agreement. This controlled distribution mechanism safeguards against potential misallocation and promotes equity and transparency in the compensation process.
The realm of complex litigation, which encompasses cases with numerous claimants or intricate legal dynamics, finds a haven in the QSF structure. Its versatility makes it particularly suitable for these complex scenarios. As a QSF allows for a more flexible and accommodating approach, a QSF may be necessary when determining eligibility, appropriate allocation, lien resolution, and resolving other secondary matters that demand meticulous scrutiny and time. Also, the claimant(s) benefits from additional time to exercise due diligence in reviewing and approving the intricacies of the settlement distribution plan.
One must bear in mind that the state tax landscape surrounding QSFs can vary significantly based on jurisdiction. Some states like California apply high state income tax rates on the QSFs “Modified Gross Income,” as defined by 1.468B-2 et seq. Therefore, legal professionals and stakeholders must consider levels of state taxation when selecting the situs of a QSF. Platforms such as QSF 360 utilize low or zero state tax jurisdictions thereby reducing state tax burdens.
In conclusion, a QSF is a unique and valuable tool. A QSF’s unusual characteristics, ranging from serving as a temporary financial reservoir to deferring taxation, make it a vital tool in legal professionals’ and claimants’ arsenal. The controlled distribution mechanism ensures fairness and transparency, while its adaptability renders it well-suited for the complexities of modern litigation. As legal frameworks and practices evolve, the QSF’s solutions, such as QSF 360, continue to provide the state of the art in settlement administration.
To learn more about Qualified Settlement Funds – click here.
Qualified Settlement Funds (QSFs) are tax-qualified trusts designed to manage litigation settlement proceeds, offering advantages for all parties involved. Learn about the key features, tax implications, and benefits of QSFs.
Qualified Settlement Funds (QSFs), or 468B Trusts, are tax-qualified trusts designed to manage the proceeds from litigation settlements. These unique financial tools offer many advantages for plaintiffs, defendants, lawyers, and settlement administrators alike, but they also come with their own tax implications.
As per Section 1.468B-1 et seq. of the Internal Revenue Code (IRC), QSFs operate solely to resolve certain types of litigation, allowing the defendant to deposit funds into a trust and receive a full release of liability. They first arose from class action lawsuits and are now commonly used in various cases, including personal injury actions and other cases involving multiple plaintiffs.
The fund may be a trust, an account, or even a segregated portion of the transferor’s assets. Although a written trust agreement is generally a good practice, an attorney’s trust account could theoretically serve as a QSF. However, particular rules apply to the establishment and operation of a QSF.
Defendants can benefit from QSFs in several ways:
Plaintiffs also stand to gain from the use of QSFs:
The low cost of QSF 360 to establish a QSF is typically overwhelmingly outweighed by the added benefits gained through vastly improved financial returns.
Since QSFs are separate tax entities, they are required to pay tax on any interest and dividend income. The tax rate is equal to the maximum rate in effect for trusts, which is currently 39.6%. Remember that the tax is a self-financing tax resulting solely from the interest earned on the QSF.
Several other income tax considerations must be taken into account when dealing with QSFs:
It’s crucial to note that the tax implications of QSFs can be complex, and working with an experienced QSF trustee/administrator, such as Eastern Point Trust Company, can assist you in navigating potential pitfalls.
The Regulations require a QSF to have an “Administrator.” If the QSF is a trust, the same person can serve as both Trustee and Administrator, or there can be a separate trustee and a separate Administrator. The Trustee/Administrator is responsible for making distributions from the QSF to claimants, State Medicaid Agencies to satisfy liens, CMS to satisfy Medicare liens, ERISA Plans to satisfy ERISA liens, and any other lien holders that require satisfaction from the settlement fund.
Additionally, the Trustee/Administrator assists with the proper funding process of any structured settlements, including making a §130 Qualified Assignment to a third-party assignee who shall make the periodic payments.
Additionally, the Trustee/Administrator oversees the KYC/AML process of the QSF.
The general rule for the taxability of amounts received from the settlement of lawsuits and other legal remedies is established in IRC Section 61. This section dictates that all income is taxable from whatever source derived unless exempted by another code section. However, the facts and circumstances surrounding each settlement payment are essential to determine the purpose of the underlying settlement or judicial award because not all amounts received from a settlement are exempt from taxes.
Awards and settlements can be divided into generally distinct groups to determine whether the payments are taxable or non-taxable. The most common are claims relating to physical injuries, and the other is for claims relating to non-physical injuries but other damages, as shown below, which may apply:
In conclusion, Qualified Settlement Funds offer a unique solution for managing and distributing litigation settlement proceeds. QSFs provide significant benefits for all parties involved but also have complex tax implications that require careful management. As such, working with experienced professionals when dealing with QSFs is crucial to ensure compliance with all tax and regulatory requirements.
Learn about FATCA, an agreement between the U.S. and 100+ countries to identify non-U.S. financial accounts held by U.S. citizens, to combat tax evasion.
FATCA stands for the Foreign Account Tax Compliance Act. FATCA is an information-sharing agreement, created via a 2010 U.S. federal law, between the United States and more than 100 foreign countries. The goal of FATCA is to identify non-U.S. financial accounts opened or controlled by U.S. citizens or businesses for the purpose of avoiding U.S. taxes—for instance, in tax havens, tax-free countries, or countries with lower corporate tax rates to avoid taxation.
FATCA does not require reporting related to non-U.S. citizens. So, if you are not a U.S. Citizen (or company) and have an account in one or more U.S. financial institutions, FATCA does NOT apply. However, foreign companies controlled by U.S. citizens are subject to FATCA reporting.
The objective of FATCA is to identify U.S. persons who may evade U.S. taxes by placing assets in foreign (non-U.S.) accounts -- either directly or indirectly through certain foreign entities such as corporations or trusts.
For foreign (non-U.S.) financial institutions (FFIs) in countries that have not entered into an intergovernmental agreement with the U.S., FATCA requires FFIs to either:
To address privacy and regulatory concerns related to FATCA, many countries negotiated intergovernmental agreements (IGAs) with the U.S. These IGA "partner countries" entered into one of two standard model agreements, and implemented laws to require financial institutions to collect and report information required by FATCA.
FFIs comply with FATCA in one of three ways:
U.S. financial institutions are automatically required to comply with FATCA.
Note: the term U.S. Reportable Account is an account owned by a U.S. individual (person), U.S. entity, or a non-U.S. entity that has U.S. controlling persons -- regardless of the currency of the account itself. FATCA applies to all types of financial accounts, including insurance, investments, trust, assignment, escrow, and other business accounts.
EPTC complies with FATCA regulations in all jurisdictions in which it operates.
In general, the countries that are included in FATCA have entered into either a Model 1 or Model 2 agreement. In a Model 1 country, financial data about United States citizens is collected by the partner country's various financial institutions and sent to that country's governmental tax authority. That authority then passes the information on to the IRS, which uses it to ensure the person is paying the amount of tax they legally owe. A total of 94 countries fall under the Model 1 agreement.
In a Model 2 country, the partner government's tax authority is removed from the transfer chain and information is passed directly from the country's financial institutions to the IRS. 14 countries have entered into a Model 2 agreement. Both models also include variants in which the US would reciprocate by providing similar information about any of the partner country's citizens residing in the U.S.
Algeria | Denmark | Jersey | Saint Lucia |
Angola | Dominca | Kazakhstan | Saint Vincent and the Grenadines |
Anguilla | Dominican Republic | Kosovo | Saudi Arabia |
Antigua and Barbuda | Estonia | Kuwait | Serbia |
Australia | Finland | Latvia | Seychelles** |
Australia | France | Liechtenstein | Singapore |
Azerbaijan | Georgia | Lithuania | Slovakia |
Bahamas | Germany | Luxembourg | Slovenia |
Bahrain | Gibraltar | Malaysia** | South Africa |
Barbados | Greece | Malta | South Korea |
Balarus | Greenland | Mauritius | Spain |
Belgium | Grenada | Mexico | Sweden |
Brazil | Guernsey | Montenegro | Thailand** |
British Virgin Islands | Guyana | Montserrat | Trinidad and Tobago |
Bulgaria | Haiti** | Netherlands | Tunisia |
Cambodia | Honduras | New Zealand | Turkey |
Canada | Hungary | Norway | Turkmenistan |
Cape Verde** | Iceland | Panama | Turks and Caicos Islands |
Cayman Islands | India | Peru** | Ukraine |
China** | Indonesia** | Philippines** | United Arab Emirates |
Colombia | Ireland | Poland | United Kingdom |
Costa Rica | Isle of Man | Portugal | Uzbekistan |
Croatia | Israel | Qatar | Vatican City/Holy See |
Curacao | Italy | Romania | Vietnam |
Cyprus | Jamaica | Saint Kitts and Nevis | |
Czech Republic |
Note: Countries marked with ** have a signed agreement or an agreement in substance, but the agreement has not yet entered into force.
Armenia | Macao |
Austria | Moldova |
Bermuda | Nicaragua |
Chile** | Paraguay** |
Hong Kong ** | San Marino |
Iraq** | Switzerland |
Japan | Taiwan** |
Note: Countries marked with ** have a signed agreement or an agreement in substance, but the agreement has not yet entered into force.
Understanding the significance of KYC procedures in finance, including customer KYC verification, risk assessment, and compliance with AML laws to prevent money laundering, terrorism financing, and other financial crimes.
In 2021, reported fraud losses experienced a significant increase, reaching $5.8 billion, which represented a surge of over 70 percent within a single year [1]. To combat the rise in financial fraud and money laundering, one effective strategy is to reduce the prevalence of anonymous bank accounts and closely monitor suspicious activities. Financial organizations, including banks, credit unions, and Fortune 500 financial firms, need to adopt measures to know their customers and continuously monitor for risk factors. This process is known as KYC or "Know Your Customer" [1].
While the specific programs to meet KYC requirements are developed by individual organizations, financial institutions must comply with complex regulations to verify customer identity, known as KYC [1]. It is essential for businesses in various industries to prioritize KYC compliance; non-compliance can result in steep fines, increased fraud risk, and reduced consumer trust [1].
KYC, which stands for "Know Your Customer," is a due diligence process employed by financial companies to verify the identity of their customers and assess and monitor their risk [2]. The purpose of KYC is to ensure that customers are who they claim to be [2]. Complying with KYC regulations plays a crucial role in preventing money laundering, terrorism financing, and other types of fraud [2]. By verifying a customer's identity during the account opening process and continuously monitoring transaction patterns, financial institutions can more accurately identify suspicious activities [2]. To meet KYC requirements, clients are typically required to provide proof of their identity and address, such as ID card verification, face verification, biometric verification, and document verification [2]. Examples of KYC documents include a passport, driver's license, or utility bill [2]. KYC is not only essential for determining customer risk but also a legal requirement to comply with Anti-Money Laundering (AML) laws [2].
The importance of KYC in banking lies in its role as a legal requirement for financial institutions and financial services companies to establish the identity of their customers and identify risk factors [3]. KYC procedures help prevent various financial crimes, including identity theft, money laundering, financial fraud, terrorism financing, and other illegal activities [3]. Failing to meet KYC requirements can lead to severe consequences, including substantial fines and penalties [3]. The implementation of KYC regulations gained momentum after the 9/11 attacks, leading to stricter requirements under the Patriot Act [3].
Under the Patriot Act's Title III, financial institutions are required to fulfill two core components of KYC: the Customer Identification Program (CIP) and Customer Due Diligence (CDD) (CDD may also include Enhanced Due Diligence (EDD) for high risk or suspicious activity clients.)[3]. The current KYC procedures embrace a risk-based approach to counter identity theft, money laundering, and financial fraud [3]. KYC helps establish proof of a customer's legal identity, preventing the creation of fake accounts and identity theft through forged or stolen documents [3]. Additionally, it limits the ability of criminal sectors to use dummy accounts for illegal activities such as narcotics, human trafficking, smuggling, tax fraud and racketeering [3]. KYC also helps prevent fraudulent financial activities, such as sham loans or fraudulent loan applications using fake or stolen IDs to obtain funding through fraudulent accounts [3].
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 [3]. Financial institutions are responsible for developing their own KYC processes and ensuring compliance with specific AML standards dictated by any applicable jurisdiction or country [3].
Financial institutions that deal with customers while opening and maintaining financial accounts are required to have KYC processes in place [3]. This includes banks, credit unions, wealth management firms, broker-dealers, finance tech applications (fintech apps) depending on their activities, private lenders, and lending platforms [3]. 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 [3].
Discover the tax consequences of plaintiff recoveries, including double tax issues, deductions, penalties, and ways to reduce taxes for plaintiffs with taxable recoveries. Learn how to increase after-tax recovery and address taxes before and after settlement.
The taxation of plaintiff litigation recoveries is confusing. But it’s important to know the right answers. This is because the income tax consequences are so significant, especially where there are “double tax” issues.
1. Recoveries in connection with personal injuries are not always tax-free.
2. Many other types of individual plaintiff recoveries are taxable.
Compensatory and emotional distress damages for physical injuries are tax-free, but the related punitive damages and interest are taxable.
These include non-physical injuries and related emotional distress, mental anguish, defamation, breach of contract, malpractice, fraud, securities law violations, intellectual property and more.
3. Many individual plaintiffs receiving taxable recoveries CANNOT DEDUCT their legal fees.
Personal attorney fees are “miscellaneous itemized deductions,” which are nondeductible. IRC §67(g). There are limited exceptions (e.g., employment discrimination, whistleblower). It’s important to know whether the IRC permits the deduction of your attorney fee.
4. The U.S. Supreme Court held that plaintiffs must include the attorney fee portion of their taxable recovery in income – creating the double tax.
This is the 2004 ruling in Commissioner v. Banks. As a result, in taxable cases where the attorney fee is not deductible, both the plaintiff and lawyer pay tax on the attorney fee portion of the recovery – hence the “double tax.”
5. In “double tax” situations, plaintiffs in high-tax jurisdictions end up with little or nothing.
A plaintiff might keep 10% after paying 40% to their lawyer and 50% in taxes. (Looking at you California!) And if their lawyer had significant expenses that are not covered by the contingent fee, the plaintiff may end up with nothing.
6. Defendants are subject to huge 1099 penalties in taxable cases if they don’t issue a 1099, or if they exclude the attorney fee portion.
The penalty can be 10% of the unreported amount, without limit. IRS Regulation 1.6041-1(f); IRC §6722(e).
7. Plaintiff lawyers must consider client tax issues.
American Bar Association (ABA) materials advise that “competent representation” of plaintiffs requires “considering the tax implications of the settlement.” ABA, Ethical Guidelines for Settlement Negotiations (August, 2002). Ethics rules require that personal injury lawyers tell clients the consequences of not addressing taxes or seeking competent tax advice.
8. Many suggested ways of reducing plaintiff recovery taxes don’t work.
These include reporting to the IRS only the portion of the recovery received by the plaintiff (excluding the attorney fee portion), treating the attorney-client relationship as a partnership or business, or excluding the structured portion of the attorney’s fees. Not only do these not work, they subject the plaintiff to massive penalties and interest if the IRS finds out.
9. Plaintiffs with taxable recoveries can increase their after-tax recovery if they act before a final resolution of the claim.
One way to do so is to draft the complaint or settlement agreement to consider the taxes (to the extent the facts allow). Another way to avoid taxation on the attorney fee portion of the recovery is to contribute the claim to a Plaintiff Recovery Trust (PRT). A PRT uses a traditional charitable trust planning arrangement, modified to the litigation context to achieve this result. There are other methods to reduce the taxes associated with a taxable recovery, such as selling the claim.
10. Addressing taxes after settlement is hard.
Tax planning to reduce plaintiff taxes on their recoveries is possible while the case is contingent and doubtful, i.e., not finally resolved. Careful planning is required. There are limited opportunities once the claim resolves. In this regard, few accountants are familiar with plaintiff recovery taxation matters and they tend to get involved only after the recovery, when it’s too late.
Qualified Settlement Funds (QSF) – Listicle of 12 Things to Know. Learn about their purpose, benefits, eligibility, tax implications, QSF administration, etc.
Qualified Settlement Funds (QSF) – Listicle of 12 Things to Know:
FOR IMMEDIATE RELEASE
[7/8/24] Joe Sharpe, ETPC President, explained, “QSFs are powerful financial tools to streamline and manage settlements, especially in complex cases. They provide tax benefits, flexibility, and efficient administration for all parties involved. With platforms like QSF 360™, creating and managing a QSF is quick, easy, and fully compliant. From establishing a QSF to understanding the roles of administrators, tax implications, and investment options, our comprehensive listicle covers all you need to know about these financial mechanisms.”
Learn the advantages of QSFs over other settlement structures, QSF regulatory oversight, and best practices for effective management. Make the most of your settlements with QSFs and ensure a smooth, compliant, and beneficial process.
Eastern Point Trust Company invites legal professionals, plaintiffs, and all interested parties to explore more and discover the transformative potential of QSFs in post-settlement dispute resolution. To read the complete listicle and learn more about the advantages of QSFs, visit https://www.easternpointtrust.com/articles/qualified-settlement-funds-listicle-of-12-things-to-know.
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The co-designer of the Plaintiff Recovery Trust, Lawrence Eisenberg, a tax attorney and founder of Forward Giving, Inc., a 501(c)(3) charity, publishes in Tax Notes an article addressing the double taxation of settlements.
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 is pleased to announce the release of a new guide designed to address the challenging intricacies of post-settlement litigation disputes.
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:
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.
Eastern Point is proud to announce the release of its latest publication, Unveiling the Complex World of Taxable and Tax-Free Settlements.
FOR IMMEDIATE RELEASE
[5/17/2024] — Eastern Point is proud to announce the release of its latest publication, Unveiling the Complex World of Taxable and Tax-Free Settlements. This comprehensive guide delves into the intricate workings of taxable and non-taxable settlements, offering invaluable insights into compensatory damages, punitive damages, and the tax treatment of various settlement types.
Ms. Rachel McCrocklin, Eastern Point’s Chief Trust Officer, commented, “The guide provides a detailed understanding of the pivotal role of IRS Section 104 and the taxability of various settlement types. Our goal is to equip readers with the knowledge to make informed decisions and minimize potential tax liabilities.”
The guide explores strategic methods to minimize tax obligations on settlements, including leveraging structured settlement annuities, Plaintiff Recovery Trusts, and proper allocation in settlement agreements. It is an essential resource for individuals and businesses navigating the complex landscape of settlement taxation.
Arm yourself with knowledge, make informed decisions, and minimize potential tax liabilities with Eastern Point's newest guide.
For more information on Unveiling the Complex World of Taxable and Tax-Free Settlements, please visit https://www.easternpointtrust.com/articles/unveiling-tax-free-settlements-what-you-need-to-know or contact 855-222-7513.
CTRO
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A new comprehensive guide has emerged catering to those seeking to conduct private placements. This guide outlines the pivotal role of escrow accounts in private placements, providing a secure, regulated structure that safeguards investor assets and boosts investor confidence.
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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Phone: 855-222-7513
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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.
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 (“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.
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 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.
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) are powerful financial tools to administer settlements, especially in complex matters. Parties involved in disputes contemplated under 1.46B-1 et seq. can effectively manage and benefit from Qualified Settlement Funds’ tax and financial advantages.
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:
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.
Eastern Point Trust Company se complace en ofrecer a los clientes de habla hispana un número gratuito exclusivo, así como acceso a un equipo de servicios al cliente compuesto por personal hispanohablante nativo profesional y de alto nivel.
Para obtener más información, comuníquese con el equipo al (855) 412-5100, esperamos trabajar con usted.
BP OIL SPILL/
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INDONESIA JETCRASH FLIGHT 152
AIR PHILIPPINES FLIGHT 531
VW GROUP OF AMERICA INC SETTLEMENT (DIESEL CASE)
3M
AMAZON
GENERAL MOTORS
MATCH
INTUIT MULTI-STATE SETTLEMENT
BERNARD MADOFF
PURDUE PHARMA
POLARIS INDUSTRIES
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