What is a Qualified Settlement Fund?

What is a Qualified Settlement Fund?

IRC 468B Qualified Settlement Funds (QSFs) provide plaintiff attorneys and their clients with important advantages as a settlement technique for complex personal injury cases. Almost always utilized in mass tort cases, QSFs are also applicable to, and represent the preferred method for settling, many complex single event tort cases.

What are QSFs?

QSFs are trusts under state law for the temporary administration of settlement proceeds. Defendants obtain a binding release from liability by making a tax-deductible payment into a court or government-approved fund. Claimants, who have no tax consequence as a result of this payment, then have as much time as necessary to address their own important issues without defense interference – issues such as: allocating settlement shares, obtaining court approvals for minors or other legally-disabled claimants, resolving liens, and deciding on forms of distribution (whether cash, structured settlements, or special needs trusts that may be used to qualify or preserve eligibility for certain government benefits).

What is the Statutory and Regulatory Background?

The term “Designated Settlement Fund” (DSF) was introduced in 1986 when Congress passed legislation adding new IRC Section 468B. Treasury issued regulations in 1993 for QSFs, a new type of 468B fund. In practice, QSFs are used more frequently than DSFs and have broader application. A QSF may be used to resolve any claim “[a]rising out of a tort, breach of contract, or violation of law.” If there is going to be a structured settlement between a QSF and any particular claimant, then additional rules apply to assure that the QSF will be treated as a “party to the suit or agreement” in compliance with IRC 130. This issue was addressed and resolved In Revenue Procedure 93-34 where the IRS determined that a QSF to which settlement proceeds are transferred from a defendant in satisfaction of the defendant’s liability, is considered “a party to the suit or agreement” for purposes a qualified assignment under IRC Section 130.

When and Why are QSFs Used?

The original impetus for using QSFs was to help defendants and their liability insurers solve tax and related financial problems in settling large class action tort cases. Increasingly, however, QSFs are also being used in single event cases at the request of plaintiffs and their counsel who recognize the value of these Funds as a settlement planning tool. QSFs provide a neutral space that benefits both sides simultaneously:

  • Efficient dispute resolution for each settling defendant, who pay an agreed amount into the Fund in exchange for a binding, court-approved release.
  • A safe harbor for claimants with unlimited time to resolve their own issues before any form of distribution is decided upon and before tax and other financial results are locked in place determining “receipt” of settlement proceeds.

Meanwhile, the court (or governmental authority) establishing the QSF retains supervisory control but does not need to become involved in Fund administration.