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Qualified Settlement Funds: Avoiding Delays & Preserving Benefits

Author – Bryan Driscoll is a legal writer and Forbes Contributor, often writing on personal injury and employment law. He is also a non-practicing lawyer turned consultant.

Qualified Settlement Funds (QSFs) occupy a pivotal role in resolving lawsuits, offering significant benefits to both plaintiffs and defendants. The unique financial arrangement provides flexibility and efficiency in the settlement process. Its relevance in today’s complex legal and financial landscape is undeniable, making them an essential tool for lawyers, financial advisors, and public benefits consultants.

Understanding Qualified Settlement Funds

The QSF is a unique government-approved arrangement designed to handle the financial aspects of legal settlements. Early on they were typically used in mass tort and class action lawsuits involving many claimants. They were particularly useful because defendants could make payment and exit a case long before the claimants decided amongst themselves the amount to which each was entitled.

But QSFs have also proved effective, and increasingly popular, in small cases. They serve as a holding vehicle for settlement dollars until the firms and plaintiffs involved are ready for distribution, or more importantly, other strategies (e.g., structured settlement payouts).

QSFs are governed by Section 468B of the Internal Revenue Code. This section provides the legal framework and guidelines for establishing and managing these funds. It outlines the requirements that must be met for a fund to be considered a QSF, including being subject to the continuing jurisdiction a court or government agency.

Benefits of QSFs for Plaintiffs

One of the most significant benefits of QSFs for plaintiffs lies in reduced taxation. Funds paid by a defendant to a plaintiff, or a plaintiff’s lawyer, cannot be deferred for tax purposes. At that point, it’s too late to obtain the tax subsidy benefits of deferred payments, sometimes called a “structured settlement.” But if funds are instead received by a QSF, a separate taxable entity, structured settlement options are preserved.

According to Eastern Point Trust Company’s Chief Trust Officer, Rachel McCrocklin, “A QSF can entirely postpone a plaintiff’s need to decide on structured settlement options, lien obligations, and allocations.”

This can be a substantial advantage, especially in large settlements where the tax implications are significant. Since defendants are often anxious to make payment, plaintiffs can be forced to receive funds before they’re ready to decide whether to use a structured settlement.

Besides the tax benefits, QSFs also provide plaintiffs with valuable time to address (and reduce) liens asserted by Medicare and private creditors. Medicare’s reach can be particularly worrisome since it can even result in liability for plaintiffs’ lawyers. By temporarily placing funds in a QSF, plaintiffs can escape defendants’ control without giving their creditors immediate access or claims.

QSFs also allow time to address a variety of other issues. For example, “QSFs regularly provide the solution we need to maximize our clients’ access to public benefits,” says national special needs expert Michele Fuller. They also allow plaintiffs time to consult with financial advisors, understand their options, and make decisions that best suit their individual circumstances and long-term financial goals. This is especially beneficial in cases involving sizable sums of money, where rushed decisions can lead to lost opportunities.

Another key advantage of QSFs is the protection they offer plaintiffs from potential bankruptcy of a defendant. Once the settlement funds are transferred into the QSF, they are insulated from the defendant’s creditors. Even if the defendant faces financial difficulties or bankruptcy after the transfer, it wouldn’t impact the plaintiffs’ recovery. The funds are securely held in the QSF until they can be distributed to the plaintiffs.

Advantages for Defendants

The most immediate benefit for defendants is the tax deduction. As soon as the defendant pays the settlement amount into a QSF, they are eligible for an immediate tax deduction. This is because the payment into the QSF is treated as a payment to the plaintiff for tax purposes, even though the funds are still held within the QSF. This immediate tax deduction can be extremely beneficial for defendants, particularly in high-value settlements, and particularly when plaintiffs have a number of decisions to make before they could agree to sign a settlement agreement addressing all issues (e.g., tax treatment, allocations, public benefits).

Another major advantage for defendants is obtaining an immediate release from liability. Says McCrocklin, a national QSF expert, “Defendants typically highly value their deduction and closing of a case, which plaintiffs can provide by using a QSF.”

Once the settlement amount is transferred into the QSF, the defendant’s liability to the plaintiff is extinguished. The defendant is no longer involved in the settlement’s distribution or any disputes that may arise later. The QSF’s administrator takes on the responsibility of distributing the funds to the plaintiffs, ensuring a fair and prompt resolution of claims.

Using a QSF streamlines the settlement process itself. In cases involving multiple claimants, coordinating individual settlements can be a logistical nightmare for the defendant. With a QSF, the defendant only needs to negotiate and agree on a total settlement amount. Once this amount is paid into the QSF, the fund’s administrator handles the distribution of the settlement among the claimants. This makes the settlement process much simpler and more efficient for the defendant.

QSFs as a Solution for Complex Litigation

QSFs allow for all plaintiffs to settle under different terms, including payout schedules, without the defense and plaintiffs needing to agree. Since defendants and plaintiffs are rarely on good terms, this can make resolution far more likely, and much faster.

“As QSF Administrator we regular step in the shoes of defendant,” says McCrocklin, “but acting in the plaintiffs’ best interests.” Eastern Point is the nation’s leading QSF Administrator, regularly handling large actions against name brands like BP, Chevron, and Lyft, and individual cases in most every state.

Embracing the Value of QSFs

QSFs provide flexibility, efficiency, and financial security to both plaintiffs and defendants. By enabling strategic tax planning, simplifying the settlement process, and offering protection from potential financial risks, QSFs serve as a powerful tool in resolving class actions, mass torts, and individual claims. Understanding and leveraging the value of QSFs can significantly enhance one’s approach toward managing complex legal settlements.

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