Learn about the unique tax consequences of the $150 million judgment against Rudy Giuliani and the impact on plaintiffs like Ruby Freeman and Shaye Moss. Understand the complexities of double taxation and the benefits of Plaintiff Recovery Trust (PRT).
As numerous professional commentators have noted, the Rudy Giuliani defamation case has unique and complicated tax implications for Mr. Giuliani and the plaintiffs.
A Georgia jury awarded former Georgia election workers Ruby Freeman and Shaye Moss a judgment of nearly $150 million in damages against Mr. Giuliani. The verdict is large by any measurement: for defamation, Ms. Freeman and Ms. Moss were awarded $16.171 million and $16.998 million, respectively, $20 million for emotional distress, and $75 million total in punitive damages.
Albeit a large sum, there is a glimmer of hope for Mr. Giuliani as it relates to the tax consequences of his newfound liability. Because Mr. Giuliani was likely engaged in his business as a lawyer for former President Trump (or another similar business pursuit), he may have a good chance of treating the nearly $150 million payment as a business expense and thus deducting it from his tax liability. Conversely, for Ms. Freeman and Ms. Moss, these large verdicts will come with equally large tax consequences. Under the Internal Revenue Code (IRC), punitive damages and certain other damages are taxable as ordinary income, even for death or severe injury. To make matters worse, in most cases, the tax on litigation settlements has no corresponding deduction for legal fees, and the recovering plaintiff is taxed on the full amount of the settlement—including monies corresponding to the plaintiff’s attorneys under a contingent fee agreement. The taxation of plaintiff litigation recoveries can be haphazard, crazy, and often punitive and unfair; there are even cases where a plaintiff’s taxes can exceed the recovery amount itself!
Many criticize this arrangement because it leads to double taxation—the plaintiff pays taxes on the full recovery amount (again, including the contingent legal fees owed to the plaintiff’s attorneys), and the attorneys are also taxed on the same funds. However, plaintiffs like Ms. Freeman and Ms. Moss would do well to remember that plaintiffs have planning options. When elected promptly (meaning before the final verdict or settlement is issued), the Plaintiff Recovery Trust (“PRT”) is well-suited to make the best of a bad tax situation.
The Supreme Court of the United States addressed the issue of contingent fee double taxation in Commissioner v. Banks. There, the Court held that a plaintiff would be taxed on the full amount of his recovery (including money owed to his attorneys under a contingent-fee agreement) because the plaintiff had “complete dominion over the income in question.”1 In addressing the question of what constitutes “dominion” over income, the Court ruled that the person who “owns or controls the source of the income also controls the disposition of that which he could have received himself and diverts the payment from himself to others...”2 The Court elaborated on this, specifically putting these concepts in the context of litigation, holding that the income-generating asset is “the cause of action that derives from the plaintiff’s legal injury.”3 So long as the plaintiff maintains dominion over the income-generating asset (the lawsuit), such a plaintiff will be considered the taxpayer and double taxation will ensue.
This is where a PRT’s usefulness and tax benefits are proven. By using a PRT, plaintiffs and their attorneys avoid double taxation and benefit from several other perks afforded by a PRT. In essence, a plaintiff assigns their right and interest in the litigation, thereby giving up dominion of the income-generating asset. To learn more about PRTs, read through our article discussing PRTs in more depth.
Learn about Qualified Settlement Fund (QSF) trust assets, ownership, and legal implications for claimants and trustees—expert insights on QSF management, disbursement, and tax benefits.
A Qualified Settlement Fund (“QSF”) is a distinctive financial tool that plays a crucial role in litigation or non-litigation dispute settlements. A QSF is a tax-efficient financial mechanism that allows the parties settling a dispute to manage their funds effectively and securely.
This white paper focuses on the question of ownership of the QSF and its property. Specifically, this white paper deals with who owns a QSF and who owns the property within the Qualified Settlement Fund.
An extensive list of case law dealing with the topics is included at the end of this document.
A Qualified Settlement Fund is a statutorily authorized “fund, account, or trust…”1 that allows a defendant in a dispute to assign its associated financial liability to the QSF. Although not required to be trusts, QSFs are typically created under an irrevocable trust structure rather than as a non-trust-based fund or account. A QSF may not be established or operated as a revocable (grantor) trust – unless the single defendant establishes the trust pursuant to § 1.468B-1(K). Because of this, traditional trust rules and laws apply—including provisions addressing trust asset ownership and asset title. QSFs are a valuable tool available to quarreling parties in the dispute settlement process. Qualified Settlement Funds afford beneficial tax consequences to the parties, serve as a controlled distribution mechanism, allow for fairness and transparency, and allow flexibility in the complex world of modern-day dispute resolution.
A QSF trust must be created as a “statutory trust” and approved by a “Governmental Authority” as defined by § 1.468B-1(c) and, as mentioned above, established under state trust law. The regulations in § 1.468B-1 cover aspects such as transfers to the fund, income earned by the Qualified Settlement Fund, and distributions made by the fund. Although not required to settle a dispute, the parties to the dispute may choose to use a QSF, or the Court having jurisdiction over the matter itself may order a QSF. When a QSF is established for settlement purposes, the defendant or their insurer transfers the agreed settlement or judicial award amount into the Qualified Settlement Fund.
Pro Tip:
A court is not required to approve the trust. Any “governmental authority defined by 1.468B-1(c)(1) may authorize the creation."
Qualified Settlement Fund trust property consists of the assets the defendant (or their insurance carriers) transferred into the settlement trust to resolve one or more claims arising from an event or a related series of events against the defendant. QSF trust property can include cash, real estate, or tangible or intangible property such as bank accounts or business interests. A QSF trust can hold any property transferred into it. It is important to note that while a settling party (or their insurance carrier) may have transferred settlement funds into the QSF trust, the funding of the QSF trust does not create an ownership interest in the plaintiffs (claimants), their attorneys, agents, or any other third party.
Like any other trust, a QSF trust has the following characteristics:
Once assets are transferred to the Qualified Settlement Fund trust and titled as the legal property of the trustee, such assets are held in trust for the future beneficial expectations of claimants once allocated and vested by the trustee.
Pro Tip:
26 U.S. Code § 468B(b)(3)(C) plainly states that “the fund shall be treated as the owner of the property in the fund (and any earnings thereon).” There can be no question of ownership based on the black-letter law established by Congress. Building on the statute, numerous court cases have upheld and expanded this portion of the law. You now have the silver bullet answer, but you can keep reading for additional reasons that reinforce the statutory provision and why the ownership of a QSF is not held by the claimants or their attorneys.
It is important to note that in a properly constructed QSF, the mere potential of a future benefit from a trust does not confer ownership. In North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, the Supreme Court of the United States held that when a trustee maintains control of the trust, the mere expectation of a benefit from the trust does not imbue the beneficiaries of a trust with the right to “control, possess, or enjoy the trust assets.”2 It is hornbook law that the ability to request via a petition that the trustee considers an action does not constitute control, possession, or enjoyment of trust assets.
Additionally, note that well-drafted QSF trust documents are vital in ensuring trust ownership. Well-drafted sample language regarding ownership might read something like:
For the purpose of clarity and the avoidance of confusion; (i) the sole ownership of the Assets of the Trust resides with the trust, and (ii) the trustee has the sole authority, control, and absolute discretion over the funds held within the trust, their disposition and the application of the Claw Back (Reversion) provision, and (iii) the trustee has the sole authority, control and absolute discretion over the operation of the Trust subject to the continuing jurisdiction of the Governing Authority.
Understanding the difference between a vested interest and a contingent interest is central to the question of ownership. When a person or entity has only a contingent interest in the property (such as in a QSF), they lack absolute and unconditional ownership rights. In the case of a QSF, the trustee must vest the right to such property by such action —to create absolute and unconditional ownership rights to the property.
Third parties (such as a law firm’s contingent fee interest or a hospital medical lien) asserting a claim to property in the QSF trust do not have a vested interest in such property – they only have a claim against the underlying client. In a properly constructed Qualified Settlement Fund, the trustee is the only authorized party who may vest a benefit and qualify a claimant as a “distributee,” as defined by the state trust code. A law firm, on behalf of a claimant or other party, may petition the trustee to consider vesting a right in trust assets and distributing them. However, the trustee, in their discretion, may approve or deny the request based on various factors such as unresolved liens, ongoing litigation, other claims, or other uncertainty or factors. Only when the trustee approves the petition for distribution is the party making the petition vested in that property.
It is helpful to note that well-drafted Qualified Settlement Fund trust documents are crucial. Well-drafted sample language regarding ownership might read something like:
“Vested Right” – Means: that the trustee may, in its sole authority and absolute discretion, elect to vest a right to a portion of the Trust Assets for a Distribution to a Claimant. Prior to the trustee vesting a right to any portion of the Trust Assets, no Claimant has a Vested Right to any Trust Assets. All Trust Assets are Unvested Rights and only constitute a mere future expectancy until the trustee grants the benefit as a Vested Right in its sole authority and absolute discretion. Upon a Claimant obtaining a Vested Right, they become a Distributee, as defined herein, only to the extent of that specific Vested Right and Distribution, and such claimant shall remain an unqualified Claimant relative to any other potential future benefit expectancy. Only the trustee may confer a Vested Right, and no provision of this Trust Administration Agreement and the Trust Agreement shall confer any absolute Vested Right. The Vested Right provision is a Material Purpose of the Trust.
AND
Trustee may from time to time, in its sole authority and absolute discretion, after granting a Vested Right, thereby qualifying the claimant as a Distributee as defined herein, disburse to a Claimant a vested interest in the trust as follows:
(a) Distribute directly to the claimant; and/or
(b) Distribute to the IOLTA account of the Law firm or Attorney representing the Claimant; and/or
(c) Distribute to the Claimant’s Guardian, Conservator, Parent, Family member or another person who has assumed responsibility for the care of such claimant, for his or her suitable support, maintenance, welfare, education or other appropriate needs; and/or
(d) Hold in a Trust and distribute by direct application in such amounts for the benefit of the claimant; and/or
(e) Assign into a “first party” Special Needs Trust to preserve the government benefits of the claimant; and/or
(f) Distribute or assign in such manner as the trustee, in its sole authority and absolute discretion, deems appropriate or necessary.
There is often the question of whether attorneys (or other such agents) have an ownership right in the Qualified Settlement Fund trust or the assets held in such trust. The answer is a resounding NO.
The United States Supreme Court addressed this question in Commissioner v. Banks. There, the Court held that a “lawyer is not a joint owner of his client’s claim in the legal sense any more than the commission salesman is a joint owner of his employer’s accounts receivable.”3 The reasoning for this holding was based on the basic premise of agency law that, even when the agent is acting independently and without the consultation of the principal, the agent is still obligated “to act solely on behalf of, and for the exclusive benefit of, the client-principal, rather than for the benefit of the attorney or any other party.”4 The Court specifically stated that attorneys (or other such agents) who may have contingent-fee agreements (or other payment agreements) with the plaintiffs might be entitled to secondary claims against the claimants by contract with the claimants), but they are certainly not entitled to claim ownership rights over those assets.5
In sum, attorneys and other plaintiffs’ agents do not have ownership rights in assets held in a QSF trust. Still, they may claim a security interest in such assets. It is helpful to think of a security interest like a lien levied against someone else’s property—you do not own the property in question, but you can assert a claim against it at the appropriate time and through the proper mechanisms.
To avoid imputed ownership by triggering the constructive receipt or economic benefit doctrines, noted tax commentators have suggested that funds held in a QSF should be disbursed within twelve (12) calendar months of resolving all associated secondary matters. This recommendation is to avoid using a Qualified Settlement Fund as a mere tax deferral scheme. Platforms like QSF 360 provide integrated management of the associated QSF duration.
Decanting is creating a new trust or sub-trust and transferring the trust property and terms into a segregated version of the original trust. Decanting is not a distribution; it does not vest ownership or a distribution to any beneficiary and usually does not trigger constructive receipt or economic benefit doctrines. In the case of a QSF trust, decanting is the transfer (as a look-through, secondary transfer) of the defendant’s liability and the associated assets into a new QSF trust or a Sub-QSF trust. The act of decanting related to a Qualified Settlement Fund often results in multiple ongoing funding events as various recoveries from carriers or defendants are received over time. Remember, when a trust is decanted (whether into a new trust or sub-trusts), the same terms and conditions of the original trust apply to new or sub-trusts.
In general, all states allow for trust decanting, but the definitions and requirements differ by state, as the below examples indicate.
In Virginia, “decanting power” is defined as the power of an authorized fiduciary to distribute property from one trust to another or modify the first trust’s terms.6 Additionally, § 64.2-779.12 of the Virginia code sets out some limitations on decanting power, such as limiting the fiduciary’s ability to exercise its decanting power if the first-trust instrument expressly prohibits it.
In Michigan, “trust decanting” is defined as the process of transferring property from one trust to another.7 The statute also sets out two conditions that must be met for the transfer to be valid. First, the terms of the second trust must not materially change the beneficial interests of the beneficiaries of the first trust. Second, the governing instrument of the subsequent trust must not be inconsistent with the tax planning that informed the first trust.
In Florida, the term “decanting” is not specifically defined, but the statute allows for a trustee with absolute power to distribute trust property to distribute some or all of the property to a second trust.8 The statute has additional requirements, such as requiring the trustee to notify all qualified beneficiaries in advance of such distribution and requiring that the beneficiaries of the second trust must include only beneficiaries of the first trust.9
Thus, decanting is not an act by the trustee to vest any benefit, nor is it a determination of an unqualified right as a distributee. It is merely the transfer of all or a part of a trust which continues the original intent of the original trust into one or more subsequent trusts. In the case of a Qualified Settlement Fund trust, the trustee may decant a portion of the settlement to facilitate a more rapid administration of the QSF.
Well-drafted sample language regarding decanting might read something like:
“Decant” (a.k.a. Decanting) - Means: the distribution of part or all of the Assets of the Trust or a subsequent Trust into a recipient trust pursuant to the terms of this Trust Administration Agreement and the Trust Agreement as an exercise of the trustee’s sole authority and absolute discretion. Specifically, the trustee may invade the principal of the trust to create another Trust for the claimant’s best interests, welfare, comfort or happiness which for the purpose of the trust constitutes an “absolute power” under the laws of the Principal Place of Administration.
Qualified Settlement Fund trusts may have multiple claimants and other third parties with adverse interests who assert claims against the QSF trust. During the administration, the trustee and/or the trust administrator (as applicable) may use notational workpapers to administer the Qualified Settlement Fund and maintain records of claims asserted against the QSF trust. These notational workpapers or related documents do not vest any benefits nor change the ownership status of the QSF trust or its assets. Many trusts include within their terms and conditions a stipulation that administrative notational utility records or worksheets do not constitute a record of a vested right.
As noted previously, it is only when the trustee, in their sole authority and absolute discretion, (i) vests a claimant to a right in QSF trust assets; (ii) qualifies a claimant as a beneficiary-distributee; and (iii) the trustee does, in fact, disburse the funds to the vested and qualified claimant-beneficiary that a claimant becomes an owner of the funds.
Accordingly, notational allocation worksheets do not constitute a trustee’s affirmative action to vest a right.
Well-drafted sample language regarding notational accounting might read something like:
For the purpose of clarity and the avoidance of doubt, it is conclusively stipulated that interim worksheets, interim allocations, interim calculations, interim working papers and interim ministerial sub-accounts of the trust are solely for the administrative and ministerial convenience of the Trustee and Trust Administrator, are only notational and do not convey or establish any Vested Right, constructive receipt or economic benefit to or on any respective Claimant. Further, interim notional allocations may change from time to time at the discretion of the trustee.
A Power of Appointment is a type of power that the grantor of a trust confers to another person (the “Power Holder”). A Power of Appointment allows the Power Holder to direct the distribution of property to any person or entity subject to the terms and conditions specified in the trust’s documents. The Power of Appointment can be general or limited, but we will not delve into the differences in this paper as the distinction does not affect ownership of QSF trust assets.
In a well-constructed Qualified Settlement Fund, only the trustee will have a Power of Appointment, thereby allowing the trustee, in its sole authority and absolute discretion, to vest beneficial rights in claimants to trust assets.
QSF trust language here again provides clarity:
The trustee shall solely possess a general power of appointment to allocate, resolve and settle all claims and obligations of this Trust and the associated Settlement Agreement which the trustee may exercise from time to time, in its sole authority and absolute discretion. For the purpose of clarity and avoidance of confusion; no Claimant holds any general or specific power of appointment nor may they exercise such within the meaning of § 2041 and § 2514 of the Internal Revenue Code.
The constructive receipt and economic benefit doctrines help determine whether a taxpayer has taxable income in a given year and under certain circumstances. We address these concepts in this paper because they can indicate whether a taxpayer has “income” or access to income from a given source, thereby triggering an ownership claim.
As noted by Robert Wood, a distinguished tax attorney and the foremost authority on Qualified Settlement Funds:
“The benefits of a QSF are enormous and provide a firewall to the fundamental tax concepts of constructive receipt and economic benefit. QSFs promote dispute resolution and are specifically authorized by section 468B and the regulations. The constructive receipt and economic benefit rules are non-IRC tax doctrines borne in the case law. Constructive receipt broadly stands for the proposition that a taxpayer with a legal right to receive money who simply chooses not to receive it is still taxed because he could have received it. The economic benefit doctrine is similar. It stands for the concept that when money is irrevocably set aside for someone and will inure to his benefit, he should be taxed on it, even if he cannot receive it immediately. If waiting is the only impediment, the IRS can tax it. QSFs bypass both these rules, but they do so for valuable policy reasons: dispute resolution.”10
The doctrine of constructive receipt states that if funds are set aside for a taxpayer, credited to the taxpayer’s account, or “otherwise made available so that [the taxpayer] may draw upon it at any time…” even though the taxpayer may not have possession of those funds, such funds will be considered constructively received by the taxpayer and thus taxable.11 However, the federal regulations clearly state that “income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.”12 In essence, if funds have been set aside for a taxpayer, such as a plaintiff via a QSF trust, but the taxpayer’s access to or control of those funds is subject to substantial limitations or restrictions, there is no constructive receipt, no taxable income, and thus no ownership claim. In the instance of a QSF trust, a defendant (or their insurance carriers) will assign their liabilities to the QSF trust and fund it with settlement funds. However, as has been repeatedly stated, there are a multitude of persons and entities that can make a claim (or petition for distribution) on QSF trust assets, but it is ultimately the trustee—subject to various terms and conditions, secondary claims, and various other contingencies—that has the power to vest a claimant and make distributions of QSF assets. Because of this, claimants’ control of receipt of funds is subject to substantial limitations or restrictions.
The economic benefit doctrine was established in case law, with Sproull c. Comm’r. of Internal Revenue being the seminal case for this doctrine. In Sproull, the Court held that a taxpayer received an economic benefit when his employer placed a bonus in trust for the taxpayer’s sole benefit.13 The tax court reasoned that since the taxpayer had nothing to do but assert his claim against the trust, the trustee’s only duties were to hold the monies in favor of the taxpayer, and “the trust agreement contained no restriction whatever on [taxpayer’s] right to assign or otherwise dispose…” of the trust’s assets, the taxpayer had an economic benefit.14 Out of this case came the Sproull elements—when all of the following three are present, there is an economic benefit.
“(1) There must be some fund in which money or property has been placed;
(2) The fund must be irrevocable and beyond the reach of the creditors of the party who transferred the funds to the escrow or trust; and
(3) The beneficiary must have vested rights to the money, with receipt conditioned only on the passage of time.”15
In the case of a Qualified Settlement Fund, the first two elements are easily found to be present. However, the third element is not present in a properly structured QSF trust. As has been discussed, the rights of a beneficiary (plaintiff) of a QSF trust and any other party claiming assets in the QSF trust are not vested, and the receipt of funds is not conditioned only on the passage of time; it is in the trustee’s sole and absolute discretion and authority—based on several conditions—to determine when and if to vest beneficiaries and make disbursements of funds.
Thus, in a properly constructed QSF, there is no constructive receipt or economic benefit, and, as such, there is no receipt or ownership of funds.
The ability to structure or assign from a Qualified Settlement Fund is well-established and widely implemented. A structure requires that the QSF trust assign the defendant’s original settlement obligation (which was transferred to the QSF), its liability, and associated assets to a third party (an insurance carrier or assignment company). If a claimant or attorney had ownership or control over the Qualified Settlement Fund assets, there would be actual receipt of funds and thus no ability to structure or assign. Because of this, no insurance carrier or assignment company would agree to any such assignments. Accepting this proposition would render decades of court precedent, tax precedent, IRS precedent, and business structures null and void—a ludicrous proposition.
If it were correct that the claimants owned funds in a QSF, then “Actual Receipt” would occur upon the funding of the QSF, triggering immediate taxation and eliminating the ability to structure or assign the settlement proceeds. Pattern and practice demonstrate that this is not the case. In the multiple decades of the history of QSFs, the IRS has never found nor asserted ownership (actual receipt) of funds held in an adequately constructed QSF. The IRS’ past Private Letter approvals and audits of QSFs show no corresponding enforcement action by the IRS. Accordingly, the notion of ownership of the Qualified Settlement Fund funds by the claimants is unsupported by fact, history, and legal doctrine. The IRS’ consistent actions demonstrate beyond any possible argument the falsity of claimants asserting ownership of the Qualified Settlement Fund or its property.
Regarding QSF ownership, Congress has expressed its intent in § 468B, so the IRS’ determination will be controlling. The IRS has issued a regulation stating that “if a fund, account, or trust that is a qualified settlement fund could be classified as a trust within the meaning of § 301.7701–4 [of the CFR], it is classified as a qualified settlement fund for all purposes of the Internal Revenue Code...”16 Section 301.7701–4 of the CFR says that a “‘trust’ as used in the Internal Revenue Code refers to an arrangement created…by an inter vivos declaration whereby trustees take title to property …”17
Pursuant to the plain language of the statutes and regulations, and with the over three decades of IRS precedent clearly showing the IRS’ interpretation of “ownership” for QSF purposes, the matter of ownership of the QSF and its assets is fully settled and establishes that the claimants are NOT the owners of the QSF or its assets. No reasonable court would find that the trustee of a QSF Trust is not the owner of the QSF Trust’s assets.
Qualified Settlement Funds are a valuable and common-place settlement tool, but it is essential to understand these trusts’ ownership structure. Assets held in a QSF trust are statutorily established to be owned by the QSF, not the claimants nor their attorney agents. Said QSF assets are “legally titled” in the name of the trustee. Further, a QSF trustee is solely empowered to vest rights to Qualified Settlement Funds assets in beneficiaries in the trustee’s sole and absolute discretion. Additionally, because the sole act of funding a QSF does not vest any party with rights to such assets, the constructive receipt and economic benefit doctrines are not triggered. Finally, a QSF’s duration under § 1.468B-1 is defined by the time taken to fulfill its intended purpose and resolve all related secondary matters such as liens, secondary litigation, appeals, and other conditional matters. This flexible duration, combined with the safeguards of a QSF, offers a comprehensive solution for managing settlement funds. A Qualified Settlement Fund enjoys the status and protection of a trust and does not convey ownership to the claimants until the trustee has resolved applicable secondary claims and allocated and vested a right to a distribution.
A comprehensive guide to the benefits, roles, and definitions of Qualified Settlement Funds (QSFs) for resolving complex legal disputes and maximizing tax advantages.
When settling high-stakes legal disputes, the complexities surrounding litigation settlements and judicial awards cannot be underestimated. The Qualified Settlement Fund (QSF) is a tool that has become increasingly popular due to its flexibility and tax benefits. Established under §1.468B-1 of the Code of Federal Regulations, QSFs are a powerful tool for resolving complex legal disputes, offering defendants and Claimants unique tax benefits and flexibility in facilitating settlements.
Before we analyze who is a “Claimant” in a QSF, let us briefly review QSFs.
A QSF is designed to hold funds associated with a legal dispute resolution involving one or more Claimant(s). A key feature of a QSF is that it allows the defendant(s) in a legal dispute to deposit funds into a QSF trust, thereby receiving a full release of liability and an immediate tax deduction. It is important to know that the assignment of liability by the defendant(s) into the QSF is not a transfer of ownership to the Claimant(s). The titled ownership of the QSF remains with the Trustee of the QSF—for a more thorough understanding of QSF ownership, read through our “Who is the Owner of a Qualified Settlement Fund” article. Neither does the transfer of funds into the QSF trigger the constructive receipt or economic benefit doctrines. For more information on QSFs, visit our in-depth analysis of QSFs article.
Qualified Settlement Funds offer various benefits to quarreling parties, making QSFs a desirable option for settling legal disputes.
Note: The QSF is not just an escrow account but a powerful tax tool providing strategic financial and tax advantages to defendants and Claimants alike.
The administrator/trustee of a QSF plays a pivotal role in managing the fund. The Plaintiff’s attorney typically selects the QSF administrator responsible for administering the QSF and facilitating the payment of funds to the Claimant(s), plaintiff attorney(s), and various lien holders. The QSF administrator also manages the QSF’s tax obligations and ensures compliance with all other legal and regulatory requirements.
The IRS has never defined the term Claimant. Still, we can infer from the name itself that the IRS intended to include anyone claiming a beneficial interest as a Plaintiff. It is also important to note that the IRS did not define the term otherwise but instead utilized the term Claimants in its common law meaning.
Likewise, from Black’s Law Dictionary, we can also take the guidance that a person asserting a claim (“A legal assertion; a legal demand; Taken by a person wanting compensation, payment, or reimbursement for a loss under a contract, or an injury due to negligence”) would be a Claimant.
But who can assert a claim? Once again, we look to the essence of what a QSF is – a QSF is the alter ego of the defendant. Thus, the defendant has no obligations to anyone but the Plaintiffs.
For instance, the following are examples of QSF provisions defining parties who are not Claimants, and specifically addressing the fact that an attorney representing a Plaintiff does not have standing as a Claimant against a QSF and definitively has no ownership of any QSF assets:
Attorneys’ Fees and Costs. The fees and expenses of attorneys representing the Claimants who receive payment from the QSF will be borne exclusively and personally by such Claimants based on individual engagement arrangements made between such Claimants and their respective attorneys. The QSF Trust, the Trustee, the Settlement Administrator, nor any other party shall have any liability for any such fees and expenses, and any Claims for such fees and expenses shall be disallowed as a claim against the QSF.
Or…
Plaintiff Attorneys’ Not a Claimant. The fees and expenses of attorneys representing Claimants (plaintiffs) who receive payment from the Trust will be borne exclusively and personally by each Claimant based on the applicable individual engagement arrangements made between such Claimants and their respective attorneys. Neither the QSF, the Trustee, the Settlement Administrator, nor any other party shall have any liability for any such fees and expenses, and any Claims for such fees and expenses shall be denied as without standing. However, the QSF Administrator, pursuant to its current policies and procedures, may, for the administrative convenience of the Claimants, allow the payment from the vested portion of a Claimant’s settlement proceeds to third parties to satisfy the individual obligations of the Claimant.
Finally, we only need to look to the Uniform Trust Code (UTC) to confirm our answer for any QSF created under the applicable trust creation portion of the state trust code.
SECTION 103. DEFINITIONS of the UTC stipulate that a Beneficiary is a person that:
(A) has a present or future beneficial interest in a trust, vested or contingent;
As we can see, any plaintiff (including an entity) holding a beneficial interest or claim (vested or contingent) is a Beneficiary and would thus be a Claimant.
Moreover, SECTION 103. DEFINITIONS of the UTC additionally stipulate the meaning of a “Qualified Beneficiary” (in some state’s trust codes, “Current Beneficiary”) as follows:
a beneficiary who, on the date, the Beneficiary’s qualification is determined:
(A) is a distributee or permissible distributee of trust income or principal;
(B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subparagraph (A) terminated on that date without causing the Trust to terminate; or
(C) would be a distributee or permissible distributee of trust income or principal if the Trust terminated on that date.
Accordingly, the UTC informs that a Beneficiary (Claimant) is a person who may have a present or future beneficial interest in a trust, vested or contingent right to funds, but has no vested right. The Beneficiary becomes a distributee only upon the QSF trustee vesting a distribution right.
However, someone who holds a separate right by contract against a Claimant is not themselves a Claimant by extension. Such a right would exist solely as a separate contractual right against the Claimant but not against the QSF.
A Qualified Beneficiary would have a vested right as a “distributee,” but only after the Trustee exercises its powers to vest a right and confer the status of Qualified Beneficiary (distributee).
Note: Some state’s trust codes also reinforce the provisions of the Qualified Beneficiary definition with an additional clarifying definition of Current Beneficiary as follows:
"Current Beneficiary” means a beneficiary that, on the date the beneficiary’s qualification is determined is a distributee or permissible distributee of trust income or principal.
Payments made to lien holders who holds a lien against a Plaintiff Claimant does not convey “Claimant Status” merely based on the fact that the QSF made an administrative payment on behalf of the Plaintiff Claimant to the holder of a lien against the Plaintiff Claimant. To further illustrate, when settlement proceeds are taxable the payment to a line holder retains the taxable income of the Plaintiff Claimant.
While not defined by the IRS, the term Claimant is established by case law and other statutory and regulatory precedents such as the UTC and the terms of the QSF itself. Simple application of facts would then determine whether a Plaintiff is Claimant for purposes of §1.468B-1 et seq.
An attorney holding a general lien against a Claimant individually for contingency attorney fees is not a Claimant and accordingly has no Claimant rights under a QSF.
Platforms like QSF 360 provide definitions consistent with the applicable code and properly classify Claimants as Plaintiffs who may have a present or future beneficial interest in a trust, vested or contingent right to funds, but have no ownership or vested right.
Discover how California's tax policy impacts the taxation of QSFs, as outlined in Legal Ruling 1993-4. Learn about the implications and considerations for managing QSF tax liabilities.
California is known for many things; great beaches, vivid scenery, award-winning wines, and high taxes. Often overlooked when creating a Qualified Settlement Fund (“QSF”) is that California applies its confiscatory tax policy and rates to QSFs operating in California or established by a governmental authority residing therein.
California’s maximum marginal corporate income tax rate of 8.840% is the 9th highest in the United States. Thus, Legal Ruling 1993-4 makes establishing a QSF in California an expensive mistake that can result in high taxation.
In its Legal Ruling 1993-4 issued November 15, 1993, the State of California Franchise Tax Board’s - Legal Division established California’s position regarding the “Taxation of a Qualified Settlement Fund”.
The Franchise Tax Board (“FTB”) ruling outlined the following:
The final holding of the FTB is as follows:
“FUND [sic QSF] income (other than interest on obligations of the United States) from California sources is taxable under RTC §24693. Income from intangible property (other than interest on obligations of the United States) received by a QSF which was established or approved by, and subject to the continuing jurisdiction of, a court or government agency located in California is attributable to California sources and taxable under RTC §24693, unless the QSF has established a commercial domicile elsewhere or the intangible property has acquired a business situs elsewhere.”
While some states have higher taxes than California, many have lower taxes or apply trust or no taxation to a trust-based QSF. Carefully consider in which jurisdiction you create a QSF and consider QSF 360 to manage your QSF tax liabilities.
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.
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