Explore the complex tax implications of lawsuit settlements. Learn how to minimize tax liability, understand the role of settlement agreements, and navigate the distinctions between physical and non-physical injury claims.
Receiving a settlement from a lawsuit can provide much-needed financial relief, but it can also raise important questions about the taxability of those funds. Understanding the tax implications of lawsuit settlements is crucial for individuals seeking to maximize compensation, minimize the associated tax impact, and avoid potential pitfalls with the Internal Revenue Service (IRS).
In this analysis, we focus on:
Generally, the primary law regarding the taxability of amounts received from lawsuit awards and settlements is Section 61 of the Internal Revenue Code (IRC).
Specifically, this code section states that “gross income means all income from whatever source derived…” unless another code section exempts the income source.1 Section 104 of the IRC excludes taxable income settlements and awards due to lawsuits stemming from physical injuries.2 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.”3
Judicial awards and settlements can be divided into groups to determine whether the associated payments are taxable or non-taxable. According to relevant IRS guidance, “the first group includes claims relating to physical injuries, and the second group is for claims relating to non-physical injuries.”4 Once funds have been classified into one of these two groups, a further subdivision is made, and the funds will usually fall into the following categories:
Importantly, award or settlement proceeds received for personal physical injuries or sickness are excludable from the recipient’s gross income under IRC Section 104(a)(2).5 For emotional distress recoveries to be excludable from taxation, the underlying damages must be due to personal physical injuries or illness.
Pro Tip: Any amount which is a reimbursement of past actual medical expenses that was previously deducted is also taxable.6
Pro Tip: Punitive damages are never excludable from gross income (thus, they are always taxable), except for damages awarded for wrongful death in states where only punitive damages may be awarded.7
There are several strategies plaintiffs can employ to minimize their tax liability on settlement money. Plaintiffs may reduce their taxable income by justifiably allocating damages to non-taxable award categories like physical injuries and medical expenses and decreasing amounts related to emotional distress.
Structured settlements offer a way to spread payments over multiple years and may keep the plaintiff in a lower tax bracket and reduce the overall tax burden compared to receiving a lump sum.
Qualified Settlement Funds (QSFs) provide short-term tax deferral and flexibility for plaintiffs to plan when and how to receive payments while allowing defendants to claim an immediate tax deduction. QSFs act as a settlement resolution tax tool, assuming tort liability from defendants. While QSFs do not directly provide long-term tax reduction benefits, they facilitate spreading settlement payments over time as ordinary income or capital gains instead of taking a large lump sum, which can significantly lower the taxes owed by keeping the plaintiff out of higher tax brackets in a given tax year. A QSF should be strongly considered for every settlement, as they facilitate lien resolution and other post-settlement issues and disputes.
Navigating the complex tax implications of lawsuit settlements requires guidance from subject matter experts and experienced tax professionals. Consulting with an experienced settlement tax expert before finalizing a settlement agreement or even before filing the case can provide valuable insights into the potential tax consequences and help plaintiffs negotiate more favorable tax outcomes.
If justified, allocating damages to non-taxable categories like physical injuries and medical expenses may be helpful. However, avoid unwarranted attempts to negotiate the amount reported on Form 1099, as adverse tax consequences may arise from such tactics.
Pro Tip: Be aware that above-the-line income deductions for attorney fees typically raise IRS audit flags, and the IRS, as their examination guidelines call for, will apply scrutiny to the elements of the original pleadings, which is often known as the origin-of-the-claim test. The IRS can use the original pleadings against the taxpayer to disallow exemption classification. The origin-of-the-claim test (not the 1099 issued) will determine the nature of legal fees, thereby deciding how the attorney fees are treated for tax purposes. It is essential to examine the facts of the pleaded claim(s) and ask why the individual hired an attorney – for example, was it to enforce a civil right violation or enforce some other claim(s)? Answering these questions should enable the determination of whether the fees are nondeductible personal expenses, business or income-related, or capitalizable as related to a property interest. As much as some advisors will lead you to believe otherwise, if not justified, there are severe potential adverse consequences for classifying the attorney’s fee portion in this manner.
In Commissioner v. Banks, 543 U.S. 426 (2005), the United States Supreme Court addressed the question of the plaintiff’s taxation of the portion of a judgment or settlement paid to a taxpayer’s attorney under a contingent-fee agreement.
There, the Court held that the total (taxable) settlement proceeds, including the contingent attorney fee portion, are income attributable to the plaintiff-taxpayer for federal income tax purposes. As such, attorney fees also impact a plaintiff’s tax obligations, and the Tax Cuts and Jobs Act of 2017 severely limited the deductibility of legal fees. Tools like structured settlement annuities and Plaintiff Recovery Trusts can significantly mitigate the tax burden and maximize the plaintiff’s net recovery.
It is crucial for plaintiffs, with tax implications in mind, to shield their settlements from excessive taxation by seeking professional tax advice and carefully shaping the settlement agreements.
Lawsuit settlements can provide much-needed financial relief, but understanding their tax implications is crucial for maximizing compensation while avoiding issues with the IRS. By recognizing the distinction between physical injury and non-physical injury settlements, utilizing settlement agreements effectively, and considering tools like Qualified Settlement Funds and the Plaintiff Recovery Trust, plaintiffs can minimize their tax liability and protect their financial interests. Seeking guidance from experienced tax professionals and attorneys is essential to navigating the maze of settlement taxation.
Proactive tax planning and carefully structured settlement agreements shield the associated proceeds from unnecessary taxation. By being informed and working closely with legal and financial experts, plaintiffs can ensure they receive the full benefits of their settlements while minimizing their tax obligations, allowing them to focus on moving forward after successfully resolving their legal claims.
To minimize taxes on settlement money, consider the following strategies:
Settlements for physical injuries are generally not taxable. Therefore, you typically do not need to pay taxes on these types of settlement money (except for any associated punitive damages, which are always taxable).
The taxable portion of a legal settlement, including those that involve previously deducted medical expenses related to physical injuries or illnesses and punitive damages, should be reported as miscellaneous (other) income on your tax return. Any interest earned on the settlement the plaintiff receives is also taxable.
Learn the differences between Qualified Settlement Funds and Environmental Remediation Trusts and the tax and administrative advantages of a QSF.
From time to time, Eastern Point Trust Company (EPTC) receives requests to create and administer a Qualified Settlement Fund (“QSF”) pursuant to 26 CFR §1.468B-1 et. seq to fund current or future liabilities (by way of example, future response or remediation requirements) arising from Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) claims (and violations of state and local environmental law).
This White Paper summarizes via a FAQ format the utilization of a QSF established and operated pursuant to 26 CFR §1.468B-1 related to funding CERCLA environmental claims (and violations of state and local environmental law) and the key advantages of a QSF over an Environmental Remediation Trust (“ERT”) established under IRC §301.7701.
The author assumes for this paper that the reader is familiar with CERLA, ERTs, the associated federal, state, and local environmental law, and the related environmental remediation liability aspects and processes.
Answer: On December 23, 1993, the IRS issued a final regulation regarding Qualified Settlement Funds, which went into effect on January 1 as 26 CFR §1.468B-1 et seq., establishing the qualification and operational requirements for a QSF.
26 CFR §1.468B-1 included torts, breach of contract, violation of law, and environmental claims under CERLA as qualifying events.
According to 26 CFR §1.468B-1(c), a QSF must meet the following criteria:
“(c) Requirements. A fund, account, or trust satisfies the requirements of this paragraph (c) if -
(1) It is established pursuant to an order of, or is approved by, 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 and is subject to the continuing jurisdiction of that governmental authority;
(2) It is established to 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 -
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 USC 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law; or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).”
Answer: Yes, a QSF, pursuant to 26 CFR §1.468B-1(c)(2)(i), qualifies to fund the associated liabilities under CERCLA if:
“it is established to “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 -
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 USC 9601 et seq.
(ii) Arising out of a tort, breach of contract, or violation of law; or”…
As noted, 26 CFR §1.468B-1(c)(2)(i) implicitly provides for liabilities under CERCLA as eligible for QSF treatment if (pursuant 26 CFR §1.468B-1(f)(2)) the transferor’s sole remaining liability to the Environmental Protection Agency (“EPA”) upon transfer to the QSF “is a remote, future obligation to provide services or property.”
“(2) CERCLA liabilities. A transferor’s liability under CERCLA to provide services or property is described in paragraph (c)(2) of this section if following its transfer to a fund, account, or trust the transferor’s only remaining liability to the Environmental Protection Agency (if any) is a remote, future obligation to provide services or property.”
Notwithstanding the foregoing, and pursuant to 26 CFR §1.468b-1(c)(2), if, on a facts and circumstances basis, a QSF established in good faith on the then known facts would remain qualified if reopener claims arose as new claims arising from “claims that have resulted or may result from an event (or related series of events).”
Practice Note: It is common to have multiple QSFs associated with the same event. Nothing in 26 CFR §1.468B-1 et seq. prohibits the bifurcation of liabilities into multiple QSFs, each addressing different elements of the claims, different transferors, or other administrative-related segmentation. However, a QSF may not hold claims arising from an unrelated series of events.
Practice Note: As clarified in 26 CFR §1.468B-1 - Example 7 (regarding a landfill operator), there must be at least one claim asserting a liability. General business obligations are not a claim, such as a future cost to perform, even if the law nominally requires the obligation.
PLR Number: 200821019 Release Date: 5/23/2008 clarifies that the funds in the QSF must “resolve or satisfy claims described in section 1.468B-1(c)(2)” and Example 7 considered the following scenario: “There a corporation owned and operated a landfill in a state that required the corporation to transfer money to a trust annually based on the total tonnage of material placed in the landfill during the year. Under the law, the corporation is required to perform (either itself or through contractors) specified closure activities when the landfill is full, and the trust assets would be used to reimburse the corporation for these closure costs. The trust in that example is not a qualified settlement fund because it is established to secure the liability of the corporation to perform such closure activities.”
Additionally, 26 CFR §1.468B-1(c)(2)(ii) provides that claims “Arising out of a tort, breach of contract, or violation of law” qualify under the regulation. Thus, those liabilities arising from violations of state law and other environmental laws comparable to the federal CERCLA, to the extent they satisfy 26 CFR §1.468B-1(c)(2)(ii), qualify for transfer into a QSF.
Practice Note: QSFs have unique qualifications and operational requirements; the best practice is to have an independent, institutional trustee with well-established experience appointed to administer a QSF and act as the trustee. The trustee shall act on behalf of the QSF, established as a trust under state law, to enter into a Settlement Agreement between the QSF and the EPA (or other applicable state agency). The associated Settlement Agreement, incorporated into the terms of the QSF, formalizes the agreement between the trustee acting on behalf of a QSF and EPA (or other applicable state agency), defining the obligations under the QSF.
Answer: Yes, unlike ERTs, which provide for no Economic Performance at the time of funding, a QSF pursuant to 26 CFR 26IRC §1.468B-3(c)(1) provides for the “Economic Performance” of the “transferor” at the time of the irrevocable funding of the QSF. Accordingly, a QSF, which is properly qualified, allows a current-year tax deduction of the irrevocable funding amount(s).i
“In general. Except as otherwise provided in this paragraph (c), for purposes of section 461(h), economic performance occurs with respect to a liability described in 26 CFR §1.468B-1(c)(2) (determined with regard to 26 CFR §1.468b-1(f) and (g)) to the extent the transferor makes a transfer to a qualified settlement fund to resolve or satisfy the liability.”
By contrast, an ERT is a Grantor Trust, and each respected funder of an ERT is a “Grantor,” which retains ownership and control of the funds in the ERT, for tax purposes, and the Grantor Trust rules apply. Under the Grantor Trust rules, the funder of an ERT is the owner of the portion of the ERT contributed by that respective Grantor, as the funding does not constitute Economic Performance. Only when the ERT makes payments for the remediation project are the corresponding amounts deductible by the Grantor(s), and only in the current tax year in which the payments occur.
As such, the Grantor is not allowed to claim a deduction based solely upon the funding of the ERT.
Answer: Yes, funding transferred from an existing ERT into QSF would constitute Economic Performance and allow the “transferor” a corresponding tax deduction for the funding amount in the current tax year.
Answer: Yes, 26 CFR §1.468B-1 et seq. establishes no limit on the number of funding events within the lifetime of a QSF, and each funding of a QSF shall constitute Economic Performance at the time of funding. The deduction of multiple fundings within the current year tax is likewise afforded to the transferor.
Answer: No, there is no statutory or regulatory time limit on the duration of a QSF. A QSF may operate for so long as potential liabilities are outstanding.
Answer: No, unlike an ERT, upon establishing a QSF, the transferor irrevocably transfers the funding and the associated value of the liability to the QSF. Therefore, the transferor no longer carries on their Balance Sheet the transferred portion of the environmental remediation liability or the assets held within the QSF.
Practice Note: Transferors report that the ability to remove liabilities from their Balance Sheet irrevocably provides secondary benefits of isolating liabilities and improving their reportable financial condition.
Answer: No, unlike an ERT (whose assets and investment gains are the transferor’s property), a QSF is responsible for its tax liability and files its own IRS Form 1120-SF (https://www.irs.gov/pub/irs-pdf/f1120sf.pdf).
Accordingly, a QSF is a separate entity, and the transferor has no ongoing accounting, tax liability, or reporting requirements related to the operation of a QSF.
Pursuant to 26 CFR §1.468B-2, a QSF is subject to taxation on its modified gross income. A QSF must file IRS form 1120-SF each tax year it exists (even if it has no assets) until terminated. The trustee/administrator of a QSF typically prepares and files the IRS Form 1120-SF along with any necessary 1099 reporting requirements that may arise from distributions made during the operation of a QSF.
Practice Note: A QSF’s tax treatment of income, distributions, deductions, and income differs materially from the rules generally governing trust taxation via IRS Form 1041. Seek the advice of an experienced QSF tax professional.
Answer: No, if excess funds remain in a QSF upon satisfying all environmental remediation obligations and claims and the pending termination of a QSF, there is no option to revert the funds to the transferor without compromising the transferor’s original deduction of the funding. Reverting the funds to the transferor would nullify the deductibility of the original transfer in the year of funding, thereby necessitating the transferor to file an amended tax return(s) for the year(s) corresponding to the original deduction(s).
Excess funds may offset trustee/administrator expenses, tax liabilities of the QSF, accounting and legal services of the QSF, notification of claimants and claim processing expenses, or other deductions.
Practice Note: One should be conservative in funding a future liability as additional funding may be added to the QSF at any time, but generally, excess funds may not revert without impacting the qualification of the QSF (some exceptions may apply as noted in PLR Number: 200821019 Release Date: 5/23/2008). If excess funds exist, it is not uncommon for a QSF to make a charitable contribution to distribute them or transfer / escheat them to an appropriate government entity.
Answer: No, a transferor may choose to fund all or any portion of the potential or actual liability for environmental remediation, into a QSF, at their discretion. The corresponding liabilities are transferred into a QSF, and Economic Performance occurs as the funding occurs.
Practice Note: When applicable, transferors have conducted studies to determine the Net Present Value of funding required to offset the liabilities. Utilizing actuarial studies and or an appropriate funding vehicle, the transferor funds the associated QSF with the Net Present Value of the liabilities. In such a circumstance, transferors have transferred the entire liability to the associated QSF. However, the transferor may only claim a tax deduction for the actual funding, not the future value of the entire transferred liability. Further, depending on the investment performance of the assets within a QSF, additional funding into a QSF may be required to fulfill the potential or actual liability for environmental remediation liabilities if they exceed the associated QSF’s available funds. A fixed-income investment vehicle such as an annuity can pre-fund and match the long-term stewardship obligations. With an appropriate inflation factor, some cleanup companies shall agree to a guaranteed fixed-price contract. (The details of such arrangements are not within this White Paper’s scope.)
Answer: No, pursuant to 26 CFR §1.468B-1(c)(1), a QSF must meet the following criteria regarding governmental approval:
“(c) Requirements. A fund, account, or trust satisfies the requirements of this paragraph (c) if -
(1) It is established pursuant to an order of, or is approved by, 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 and is subject to the continuing jurisdiction of that governmental authority;”
Eastern Point’s online turnkey QSF platform allows you to design a QSF in as quickly as 15 minutes and create a QSF in as little as a single day, including the necessary governmental authority approvals and the IRS granting an EIN.
Answer: Yes, pursuant to 26 CFR §1.468B-1(d), a transferor may transfer (fund) “money or property to a qualified settlement fund to resolve or satisfy claims”
“Definitions. For purposes of this section -
(1) Transferor. A “transferor” is a person that transfers (or on behalf of whom an insurer or other person transfers) money or property to a qualified settlement fund to resolve or satisfy claims described in paragraph (c)(2) of this section against that person.”
Property such as real estate may be contributed to a QSF to fund claims settlement, but not as an income-producing property. IRS regulations prescribe the method to value property transfers to a QSF properly. The initial basis for the property a QSF receives is the property’s fair market value on the date of transfer to the fund.
Practice Note: Exercise caution to ensure a fair market valuation of the transferred property, which establishes the property’s initial basis.
QSFs provide material tax and financial advantages over an ERT.
QSF Advantages:
Today’s QSF industry provides quick, inexpensive, and easy solutions to implement a QSF to fund environmental remediation liabilities with material tax and financial advantages.
ABOUT EASTERN POINT TRUST COMPANY
Eastern Point Trust Company is a global leader in trust innovation, providing technology-empowered services to individuals, courts, and institutional clients around the world.
Eastern Point is the only “end-to-end” turnkey QSF escrow solution., As an experienced provider, Eastern Point allows for QSF creation, approval, and operation in as little as one business day for QSF of all types.
Find out why Qualified Settlement Funds (QSF) are vital for personal injury cases and complex settlements, and their associated financial planning benefits.
When confronted with resolving a personal injury case, whether or not involving a client reliant on public assistance, intricate issues such as the allocation of proceeds, settlement planning, and lien negotiations must be meticulously managed. One critical question arises: where can the settlement funds be temporarily held while establishing any requisite public benefit preservation trusts, determining the distribution of proceeds, devising a comprehensive financial plan, and finalizing lien negotiations? How can one secure immediate payment from the defendant without compromising the client’s potential settlement planning strategies?
The solution to these complex challenges lies in utilizing a Qualified Settlement Fund (QSF), also known as a 468B Trust. Continue reading to gain a deeper insight into QSFs and understand why they are essential for personal injury attorneys to master.
A Qualified Settlement Fund is a provisional trust (think of it as “tax limbo”) established to manage the settlement funds received from one or more defendants. The primary function of a QSF is to distribute the deposited funds to multiple claimants pursuant to the parties’ agreement or, if necessary, a court order. The QSF termination occurs once all the funds are vested and distributed.
There are several benefits to utilizing a QSF in complex settlements. Chief among them is the simplicity of its establishment. There are only three stipulations for forming a QSF. First, the QSF has approval requirements from a “governmental authority” with jurisdiction over the QSF. Second, the QSF must settle only tort claims or other legal disputes as outlined by Treasury regulations 1.468B-1, et seq. Finally, if established as a trust, it must qualify as such under relevant state law. Any “governmental authority,” irrespective of its jurisdiction over the case, can approve the establishment of the QSF and maintain continuing oversight of the QSF.
Qualified Settlement Funds are a provisional repository for litigation and settlement proceeds. Its purpose is not to function as a perpetual support trust for claimants. Instead, the QSF remains operative only until all allocation disputes among parties and third-party liens are complete and the necessary planning for fund distribution is final. This duration can sometimes extend from several weeks to months or even years.
PRO TIP: No predefined time constraint exists on how long a QSF can remain active. Using a QSF to serve as a long-term tax deferral vehicle is improper. The best practice is that a QSF should remain open no more than 12 calendar months beyond resolving all secondary issues and disputes.
QSFs provide numerous advantages for all involved parties, particularly concerning tax implications, income timing, and settlement planning requirements. A QSF allows for establishing a tax-exempt structured settlement and a tax-deferred arrangement for attorney fees. The management of income timing is possible with a QSF. Generally, claimants are not taxed on the amounts held within the QSF until those amounts are vested by the trustee and disbursed. Additionally, a QSF affords claimants additional time and flexibility (through tax deferral) to make informed decisions regarding their tax, financial planning, and settlement planning strategies.
The benefits for a defendant are that transferring the associated proceeds into the QSF results in an immediate tax deduction in exchange for their permanent release from the obligation. This benefit is significant for defendants, who usually cannot claim a deduction until the claimant receives the funds, which can be postponed in complex settlements.
PRO TIP: Note that the timing of distributions to the claimants from the QSF does not affect the defendant’s ability to claim this tax deduction concurrently upon the transfer.
For the plaintiff, the benefits are the advantage of unrushed additional time to explore tax and financial planning options and resolve liens and other types of secondary disputes. This benefit is significant for plaintiffs, as valuable tax and financial options would otherwise not be available.
The tax structure for Qualified Settlement Funds is straightforward. Each QSF is assigned a unique Employer Identification Number (EIN) by the Internal Revenue Service. QSFs are subject to taxation based on their modified gross income, excluding the monetary settlement or award receipts, and the corporate income tax rate applies only to the “investment income” of the QSF. Consequently, the tax obligation pertains to the growth of the principal amount through interest or dividends minus permissible deductions such as administrative expenses.
Internal Revenue Code §468B, alongside the Income Tax Regulations articulated in §1.468B-1, et seq., governs the application of a Qualified Settlement Fund. These statutes stipulate that a defendant may execute a qualifying payment to the QSF, thereby achieving “economic performance” — a critical tax consideration for the defendant. Consequently, the trustee of the QSF is empowered to accept settlement funds, enabling the defendant to claim a deduction for the current fiscal year and extricate themselves from litigation.
Post receipt of the settlement/litigation proceeds, the QSF trustee can consent to future periodic payments to a plaintiff, delegate this responsibility to a third entity by assignment or novation, and facilitate the plaintiff’s reception of tax-exempt payments under Internal Revenue Code §104(a) coupled with §130. This specific provision excludes structured settlement periodic payments from being counted as gross income in personal injury cases.
PRO TIP: If the settlement is paid into the law firm’s IOLTA, the plaintiff loses the ability to assign, novate, or structure. Likewise, the same loss of ability to enter into an attorney fee structure or assign occurs when funds are received into the IOLTA.
Establishing a QSF is a straightforward process in terms of procedural steps. Initially, the “governmental authority” is petitioned to form the QSF. The governmental authority receives the associated petition and documents and approves the establishment of the QSF. Upon the court’s approval and signing of the order, the defendant(s) issue the payment(s) to the QSF by wire or a check, and in exchange, the associated defendant receives a release from liability pertaining to the payment.
PRO TIP: A QSF’s records should document the payment into the QSF rather than directly to the plaintiff or the law firm.
The timing of distributions from a QSF is contingent upon either an agreement with the plaintiffs or an order by a court. When disbursing funds from the QSF, it is incumbent upon the trustee to secure a release from the claimants (or their agent), which serves as evidence that their claims against the QSF have been resolved or satisfied by the distribution. Upon the disbursement of all funds, the trustee terminates the QSF.
QSFs are an essential resource for personal injury trial attorneys primarily because they speed up the process by mitigating the time pressures associated with lien negotiations, allocations, and probate processes.
The conclusion (whether by settlement or award) of a personal injury lawsuit often leads to a frenzied period to finalize details, a situation referred to as the “settlement pressure cooker.” In such hurried circumstances, one might overlook critical details, neglect vital settlement planning matters, trigger unnecessary accelerated taxation, or unfairly pressure the plaintiff to make hasty decisions.
Establishing a QSF enables the receipt of settlement funds, allowing sufficient time for meticulous future planning.
PRO TIP: Plaintiff counsel can promptly receive payment of the claimant’s attorney fees and costs obligations while allowing the plaintiff’s portion net of the plaintiff’s attorney fee obligations to remain in the QSF.
PRO TIP: The QSF is the sole owner of the funds and the associated income of the QSF (§468B(b)(c)(3)). Until the trustee vests a benefit, no claimant has any vested right. Further, the claimants may have a personal obligation to their attorneys for a portion of the settlement as fees, but that obligation vests no rights to the attorneys within the QSF. Therefore, attorneys have no greater standing than any other party that may have a general personal lien against a claimant. Thus, when the QSF makes payments to the attorneys, such payment is solely from the claimant’s proceeds for the administrative convenience of the claimant to fulfill the claimant’s personal obligation.
Once the defendant transfers “collected” funds into the QSF, the claimant may “petition the trustee” to vest and disburse funds subject to all other factors, such as allocation, the satisfaction of liens, resolution of secondary disputes, etc. This arrangement facilitates the negotiation of liens, determining fund allocations, implementing public benefit preservation trusts, and considering settlement planning issues, including structured settlements. Moreover, this mechanism preserves the attorney’s ability to assign or structure their fees. Consequently, the QSF is a valuable tool for trial attorneys to implement effective financial planning.
QSFs serve as a unique tool and valuable resource in personal injury cases by removing the post-settlement/litigation time pressures and affording flexible tax and financial planning options for the defendants, the plaintiffs, and the plaintiff lawyers, as well as facilitating lien resolution and the option to deal with post-settlement secondary disputes.
Qualified Settlement Funds (QSF) streamline post-settlement disputes and ensure tax compliance, with tax benefits for defendants and plaintiffs.
Great! You have won the case but now face secondary claims and litigation.
No, you are not the first to encounter these issues, and it is not uncommon for post-settlement secondary disputes to occur. For example, families argue over their “Fair Share,” lawyers dispute fee splits, plaintiffs dispute attorney fees, 3rd party lien holders come out of the woodwork to make claims against the litigation proceeds, and more.
Navigating the post-settlement challenges can be overwhelming for lawyers and their clients. But, there is a simple solution - a Qualified Settlement Fund, also referred to as a 468B trust, presents an option to simplify the post-settlement process and handle the hurdles that emerge. By setting up a QSF, the parties can resolve the secondary issues, effectively preserve the settlement funds, ensure tax compliance, and allow time for making informed decisions by deferring taxation.
Here, we delve into the details of QSF and its valuable role in post-settlement planning and administration.
A Qualified Settlement Fund, sometimes shorthanded as a “QSF,” is an entity created according to IRC Section 468B and its associated regulations to settle various legal disputes. Defendants can place funds into a QSF and receive a release from liability while allowing time for the other parties to resolve secondary disputes and carefully consider their settlement proceeds options.
QSFs trace back to the Tax Reform Act of 1986, which incorporated Section 468B into the Internal Revenue Code. Initially utilized in class action lawsuits, QSFs have since extended to the broad breadth of legal conflicts such as single events, single claimant personal injury claims, and contract breaches.
To establish a QSF, specific requirements must be met:
PRO TIP: Online QSF platforms like QSF 360 can fully establish a QSF in as little as one business day.
Qualified Settlement Funds offer numerous advantages for all parties involved in post-settlement dispute resolution. By establishing a QSF, defendants can claim immediate tax deductions and extricate themselves from ongoing litigation. At the same time, plaintiffs gain tax deferral, which provides them valuable time to make informed decisions regarding the allocation of settlement funds, aiding in the negotiation of competing claims and liens, and implementation of financial and tax planning strategies.
Conflicts arise when plaintiffs and their family members are suing each other, and sometimes even when the lawyers get into the act by suing one another or their clients over the allocation of the settlement. Qualified Settlement Funds offer a way to handle these disputes by allowing tax-deferred time to resolve the conflict and preserving the core settlement. The QSF administrator administers the distribution depending on each case’s details and implements the court’s final instructions.
The use of QSFs has transformed how lawyers and their clients navigate the realm of post-settlement disputes and allocation affairs. By offering a streamlined approach to settlement fund management, addressing liens and conflicts, and facilitating settlements, QSFs bring numerous advantages to all parties involved.
By staying up to date, collaborating with experienced QSF professionals, and adapting to the requirements of each case, attorneys and plaintiffs can harness the full potential of QSFs and secure optimal outcomes in the post-settlement stage.
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.
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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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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.
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