What is a Qualified Settlement Fund?
A Qualified Settlement Fund (QSF) is a settlement device that, when established pursuant to Court Order, assumes the tort liability from the original defendant party (or parties) before the settlement is made, at which time the original defendant party (or parties) is (are) dismissed with prejudice. The Qualified Settlement Fund (QSF) then stands in the shoes of the original defendant party (or parties) with the Plaintiffs. The Qualified Settlement Fund (QSF) may enter into a Settlement Agreement with the plaintiffs and can enter into a Qualified Assignment, pursuant to Rev. Proc. 93-34". The word qualified refers to the tax qualification of the settlement fund.
Origin of Qualified Settlement Funds
The "Qualified Settlement Fund" or QSF, came into being in 1993 when the United States Treasury issued regulations under 26 CFR 1.468B-1. It is sometimes referred to as a 468B Settlement Fund or 468B Settlement Trust, or occasionally by glib salespeople using the septic term "holding tank". Rest assured there is no need to call the "pump out boat". The Qualified Settlement Fund's origins stems back to the Designated Settlement Fund concept introduced in 1986, which enabled defendants to deduct amounts paid to settle class action multi-plaintiff lawsuits, before it was agreed how these amounts would be allocated. In these cases, the defendants and plaintiffs
had agreed how much the defendant(s) or their insurers would pay to settle the cases collectively, but not individually .
Benefits of Qualified Settlement Fund to Defendant
- Pay and walk away with a full release.
- Tax deduction A QSF enables the defendant (or insurer) to accelerate its tax deduction to the date that the settlement amount paid is to the Qualified Settlement Fund in exchange for a general release, rather than when each plaintiff, signs and is paid.
- End of Year Tax Planning A QSF may come in useful in end of year or quarter financial planning, where settlement negotiations stretch to the end of the year or the end of a quarter, an already established QSF can be helpful in establishing a paid loss.
Benefits of Qualified Settlement Fund to Plaintiffs
A qualified settlement fund may be favored by plaintiff attorneys under appropriate circumstances because:
- litigation can settle now, constructive receipt can be avoided, leaving all client options open.
- enables clients to get proper counseling and wealth orientation (at a pace that is comfortable to them) on multiple claimant cases, while determining appropriate distribution amounts to their clients.
- in some cases, where there are concerns about the solvency of a defendant or insurer, resolving a case via a QSF eliminates risk of insolvency of the defendant or its insurer
- allows time for an agreement on allocation and negotiation of lien claims
- can be very useful to administer mass tort cases where there are multiple disparate defendants contributing to the settlement.
- With New York state wrongful death cases, a QSF may be an option to help overcome a potential legal malpractice trap created by legislative oversight in a 2005 amendment to EPTL 5-4.6. There are other ways to tackle the problem besides using a qualified settlement fund, but not after the settlement has concluded..
- On the right case with multiple plaintiffs, may have more flexibility in making appropriate choices for distribution of the settlement in cash, in structured settlements that can provide a secure income stream, and/or a Settlement Preservation Trust, and/or in a Special Needs Trust to preserve Medicaid and Supplemental Security Income (SSI), and can benefit from interest accumulation of funds, in the Qualified Settlement Fund (QSF), if the distributions are not immediate.
- Widens the options for structured attorney fees for plaintiff lawyers. Some insurers like Travelers, will not participate in structured attorney fees and a few others will only structure attorney fees if the plaintiff is structuring as well.
When Can a Qualified Settlement Fund Be Considered?
A Qualified Settlement Fund (QSF) should be considered in tort, class action, or environmental (CERCLA), breach of contract cases, or violation of law involving multiple claims and the Respondent(s), Defendant(s) or insurance carrier(s) is (are) willing to comply in exchange for a complete General Release from the Claimants or Plaintiffs.
Mechanics of Setting up a Qualified Settlement Fund
A Qualified Settlement Fund, or QSF, is a fund, account, or trust established under applicable state law. A court can order that the defendant (or insurer) pay the agreed settlement amount into a Qualified Settlement Fund "within the meaning of 468B-1 of the Treasury Regulations". This can be a simple checking account or a more complex trust agreement using a bank trust department. An experienced trustee or administrator is important as certain formalities must be followed. The settlement proceeds remain in the Qualified Settlement Fund subject to the continuing jurisdiction of the court. After the dispute is resolved, the court approves the allocation and orders the payment of settlement proceeds and the fund may be closed.
Can A Single Claimant Qualified Settlement Fund in Be Used To Set Up a Structured Settlement?
While this was possible at one time, insurers now are reluctant to have their assignment companies accept a qualified assignment from a single claimant qualified settlement fund. Some settlement planners use a single claimant qualified settlement fund as part of a strategy to establish a trust that will buy structured settlement derivatives, which are not annuities despite being marketed in some cases by licensed insurance people and using misleading terms like "secondary market annuities", "SMIA", or "SMA".
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