As the National Structured Settlement Trade Association (NSSTA) prepares to recognize its own 35th Anniversary during its upcoming 2021 virtual Annual Conference, it is also appropriate to note another important settlement planning development that occurred in 1986: the enactment of IRC 468B – with important regulations and revenue procedures added in 1993.
What are Qualified Settlement Funds?
IRC Section 468B qualified settlement funds (QSFs) provide an exception to the general rule that defendants (or their liability insurers) must purchase structured settlements. Defendants who utilize a QSF can obtain a full release from liability and obtain an immediate tax deduction.
Generally used in complex cases with multiple claimants, the primary purpose of a QSF is to marshal assets and to determine which claimants and plaintiff attorneys will receive which amounts of settlement dollars. With the defendant(s) out of the case, the claimants and their counsel have unlimited time to address settlement planning issues including taxation, government benefits and funding options. Rev Proc 93-34 specifically allows a QSF (in place of a defendant) to fund one or more structured settlements using qualified assignments. Once the QSFs make distributions to appropriate recipients, they go out of existence.
Increased Use of Qualified Settlement Funds
At least among structured settlement and personal injury settlement planning professionals, there does not appear to be anyone who keeps track of the number of qualified settlement funds being utilized to settle cases – with or without structured settlements.
Based upon informal and anecdotal evidence, however, it would appear that both numbers have increased significantly since 1986 – with the possible exception of the general downturn in case activity due to the COVID pandemic during 2020.
Greater awareness of the complexity of personal injury settlement planning plus the related risks of professional liability represent two reasons which favor the use of QSFs. In addition, QSFs have become a standard “best practice” for resolving mass tort cases which also appear to have proliferated.
SSP QSF Panel
One of the featured presentations during the recent Society of Settlement Planners virtual 2021 Annual Conference was titled “QSFs and Practical Use Cases.” Moderated by Andy Cook, with panelists Glen Armand, their discussion represented a non-controversial “back to basics” discussion of QSFs that has been missing from recent industry conferences – SSP and NSSTA included.
Last year’s SSP Annual Conference actually did include a QSF panel. Unfortunately, that panel got sidetracked discussing the “single claimant” issue. A predictable, structured settlement “teapot tempest” resulted including dueling articles by attorneys Robert Wood and Stephen Harris rivalling some of the best country and western “answer songs.”
By comparison, this year’s SSP panel provided Joe Friday “Just the Facts” responses to a well-considered list of QSF questions starting with the most basic, but confirming the industry’s ongoing QSF educational needs:
- What is a QSF and how are they established?
- Who should administer a QSF and who should serve as custodian of QSF funds?
- What investment options are appropriate?
- What fees and costs are associated with QSFs?
- How can settlement planners implement QSFs into the settlement planning process?
- What should settlement planners know about 1099 reporting of QSF settlements?
- Are QSFs useful for small cases?
- Are UCC and bankruptcy liens involved with QSFs?
- What are the differences between QSFs and IOLTAs?
- What are contingent QSFs?
Obviously, the 2021 SSP panel could not address all possible QSF issues in one hour. For example, structured settlement were never mentioned. Therefore, issues related to Rev Proc 93-34 were not discussed.
Significantly, however, the panel filled a current industry QSF educational void – which has existed since Evolve Bank and Trust stopped hosting its “invitation only” QSF Symposium in 2017 and NSSTA’s most recent QSF “Best Practice” presentation in 2016.
QSF Tax Issues
Despite, and probably because of, their proliferation, QSFs are now raising tax issues in addition to the “single claimant” question(s). In a recent article titled “Is Borrowing from Qualified Settlement Funds Taxable?” (available for download on Robert Wood’s website), Wood and co-author, Donald Board, attribute this problem, in part, to the “less than comprehensive” IRC 468B regulations which the IRS published in 1993.
In their article, Wood and Board consider several ways in which a plaintiff, or plaintiff’s attorney, might borrow against funds in a QSF. The issues discussed under each alternative are whether they can do so without triggering a taxable event or disqualifying the QSF under the regulations.
In addition to “borrowing against QSF funds”, Wood and Board identify other topics arising amidst a “veritable explosion in the use of QSFs” that the regulations don’t specifically address:
- “Can a QSF have merely one claimant and one claim?
- “Can a QSF exist for 50 years?
- “Can a QSF formed for one event and claim be added to later to also resolve other unrelated claims?
- Can a QSF operate a trade or business – say, one in bankruptcy?”
QSFs represent a fundamental structured settlement and settlement planning case resolution methodology – supported by the internal revenue code, IRS regulations and Rev-Proc 93-34. Regardless of whether QSF issues exist – in fact, because they exist – SSP and NSSTA each have an obligation to provide their members with comprehensive QSF education. SSP’s 2021 QSF Panel, which is still accessible to SSP conference attendees in video format, represents both a positive contribution and a challenge for further inquiry and analysis.