What is a Qualified Settlement Fund?

A Qualified Settlement Fund (QSF) is one type of settlement that transfers tort liability from one party (the original defendant) to a court-approved entity before the settlement is processed. When this occurs, the original defendant is dismissed with prejudice. The QSF takes the place of the original defendant party (or parties) and enters into a settlement agreement with the plaintiff(s). According to Rev. Proc. 93-34, the plaintiff can then enter a qualified assignment to procure their funds pursuant to the tax qualification of the settlement fund. This settlement device can benefit defendants or plaintiffs depending on how it is utilized, but understanding the intricacies and uses for a QSF is not easy without a settlement planner from Synergy Settlements assisting you with the settlement planning process.

The Beginning of QSFs

In 1993, the United States Treasury issued regulations under 26 CFR 1.468B1 with the intent to give defendants the ability to deduct expenditures used to settle class action lawsuits with multiple plaintiffs. QSFs are occasionally referred to as a 468B Settlement Fund or 468B Settlement Trust. The first rendition of the QSF occured in 1986 when the concept of a “designated settlement fund” was introduced. Unfortunately, this only paved the way for collective settlements with a singular value instead of calculating the individual rewards.

How do QSFs Assist Defendants?

A QSF gives defendants the opportunity to payoff their settlement and move on with as few interruptions as possible. More importantly, it allows for a lucrative tax deduction as the defendant (or insurer) can speed up the tax deduction to fall on the date when the settlement amount is paid off to the QSF. This is significantly faster than waiting for each plaintiff to individually sign their settlement contract and receive payment. When the time comes for end of year financial planning, an established QSF can help the defendant establish a paid loss.

How do QSFs Assist Plaintiffs

In many cases, a QSF is preferred by the plaintiffs’ attorneys because litigation is minimal and a constructive receipt can be eschewed giving the client more options for proceeding. Also, it affords the client the opportunity to attain proper counseling for determining distribution amounts. Moreover, it helps eliminate the risk of insolvency as it provides extra time for the negotiation of lien claims. This is especially important in cases where multiple defendants are pooling money into the settlement. If distributions are not assessed in a timely fashion, the plaintiff(s) will benefit from the accumulation of interest on the due funds. Finally, it gives the plaintiffs more options for dealing with attorney fees.

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Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

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