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Qualified Settlement Fund (PIA) PDF Print E-mail

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Don’t play “Beat the Clock” when it’s better to “Stop the Clock.”

When a settlement has finally been obtained after years of litigation, you may feel pressured to tie up loose ends fast. Sometimes the pressure comes from the defendant, who makes an offer contingent upon settling quickly. Or it comes from feeling that your client is losing potential income each day the distribution is delayed.

You know it will take months before any Medicare and/or Medicaid lien information is updated. You also want time to sufficiently evaluate the pros and cons of alternative forms of distribution, such as structured settlement annuities or a special needs trust.

If you rush to finalize the settlement, important planning opportunities could be easily missed.

An advantageous Settlement Fund that even lets the dust settle.

Creating a Qualified Settlement Fund (QSF) trust – also called a §468B settlement fund after its Internal Revenue Code Section – allows one or more defendants to pay into a tax-qualified (non-taxable) trust specifically designed to receive proceeds from a lawsuit settlement. It’s an important tool for you as a trial attorney.

You’re now able to take a careful and deliberate approach in evaluating your client’s options in distributing settlement funds, because all defendants are released quickly, upon payment to the trustee. The attorneys’ fees (and all other litigation costs) can be paid immediately upon the funding of the trust. While the Medicare and Medicaid liens are tabulated and negotiated to lower amounts, your client enjoys unparalleled tax benefits.

The qualified settlement fund services Kearns & Kearns provides personal injury attorneys includes:

  • Advice on the suitability of a QSF
  • Drafting of the QSF and all of the pleadings and the order
  • Ability to serve as the QSF Administrator/Trustee

Think your client will need a qualified settlement fund? We’re ready to help. Click here to contact Kearns & Kearns now.


Frequently Asked Questions about Qualified Settlement Funds:

(Click on a question to see the answer. Click again to close.)

Until 1986, settlement trusts did not appeal to defendants because the payments into these trusts weren’t deductible until the year the trustee made the distribution(s) to the beneficiary(ies). In 1986, Congress enacted Internal Revenue Code §468B which created Designated Settlement Funds (DSFs) to equally satisfy the needs of the plaintiff(s) and defendant(s).

In 1994, the Treasury Department expanded DSFs to include Qualified Settlement Funds (QSFs). QSFs expanded the range of claims that could be considered, such as tort, environmental, breach-of-contract, violation-of-law, and other claims designated by the IRS. The QSF must be approved by a court or a governmental agency in a trust format under state law.

Yes, this type of trust is ideal for those circumstances. In fact, large, multi-million and -billion dollar class action lawsuits and mass tort cases – such as those created for the Exxon Valdez, People v. Philip Morris, Inc., the Nasdaq Market-Makers antitrust, and the Austrian and German Bank Holocaust litigation – had their settlements placed in §468B trusts for their plaintiffs. But §468B trusts are not just for mass tort actions: They can and should be used to settle cases of any value involving multiple plaintiffs or a personal injury victim with a derivatively injured spouse, child or parent.

No, a QSF can’t be created for liabilities under a Worker’s Compensation Act claim under a self-insured health plan.

No, you do not have custody of the fund. An independent Administrator/Trustee owns the fund. This arrangement avoids the plaintiff’s “constructive receipt” of the money and preserves the use of the structured settlement annuity option.

QSFs hold many advantages for plaintiffs. The two greatest benefits are: 1) they have time to evaluate the best method to receive their distribution – whether as a structured settlement annuity, lump sum payment or special needs trust; and 2) they receive interest income from the funds inside a §468B fund – even if other issues about the settlement still need to be resolved. Imagine, your client could easily earn thousands of dollars more – per day – on a multi-million dollar settlement.

Additionally, with class action lawsuits and mass tort cases, QSFs could also aid in the apportionment of shares among the group of claimants – especially when they’re not in agreement. With a QSF, the administrator can negotiate with claimants and their attorneys 1:1 to resolve everyone’s issues.

Finally, if the defendant or the insurer is financially unstable, a QSF allows for a quick transfer of funds, even before the remainder of the settlement details have been ironed out. You protect your client from the risk of the defendant becoming bankrupt.

Yes! Since the defendant(s) can “pay and walk” once a trustee for the fund is appointed and the defendant funds the §468B trust, they are removed from the litigation and no longer involved in the case. The settlement payment to the trustee satisfies the economic performance test.

The defendant is removed from the allocation of the settlement amounts between any and all plaintiffs. You, as plaintiff attorney, do not have to negotiate with the defense counsel about distribution of funds between the injured parties or the derivative claim for loss of consortium.

Time is no longer a pressing factor for the lien negotiations, allocations, and probate proceedings. The settlement can be placed in the QSF while you take care of other matters, such as wait for the final figures for the Medicare claim and Medicaid lien, determine allocations between plaintiffs, and decide on a method of payment. You also now have additional time to apply for and obtain a Conservator or Guardian in the local Connecticut probate court, and establish a special needs trust, if appropriate.

A key advantage for you as the attorney is that your fees and other expenses can be paid immediately from a §468B fund, without waiting until every settlement detail is resolved.

QSFs are treated as corporations for tax reporting purposes, and are liable for taxes on their modified adjusted gross income. They must use the calendar year and the accrual method of accounting.

Still have a question?

We invite you to make an appointment for a personalized answer.

Simply click here to Contact Us now or call 860.233.1281 (Monday through Thursday, 8:30 a.m. to 5:00 p.m.), Friday (8:00 a.m. - 4:30 p.m.)

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Kearns & Kearns
1121 New Britain Avenue
West Hartford, CT 06110
Phone: 860.233.1281
Fax: 860.523.5774
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