Structured Settlements

Qualified Settlement Funds (468B-1)

In 1993, the Treasury Secretary introduced regulations governing the treatment of designated settlement funds (DSF) (26 C.F.R. §§1.468B-1 through 1.468B-5). Under these regulations, the Secretary provided for the creation and use of "qualified settlement funds" (QSF). Although QSF’s are not specifically mentioned in the IRC §1.468B-1, they are clearly intended to meet the definition of a DSF.

The QSF was originally enacted to simplify the settlement of mass tort cases, but has also found popularity as a vehicle to settle cases involving the multiple claims of a single claimant. When a QSF is established, it assumes the tort liability from the defendant before the settlement is made, at which time the defendant is dismissed with prejudice. The QSF then stands in the shoes of the defendant with the plaintiff until all negotiations are concluded with the plaintiff(s), their healthcare providers with enforceable liens, their legal (and other) experts' fees and costs, and any others, including government entities with a possible claim on the potential proceeds. Moreover, it is also at this time that the negotiations and design for the structured settlement (for both the plaintiffs and attorney fees) and special needs trust are concluded, if applicable.

The proceeds of a personal injury settlement used to fund a QSF continue to receive favorable tax treatment under IRC §104(a)(2), but income earned on the proceeds are taxable to the QSF for so long as the QSF continues to hold the funds.  Under 26 C.F.R. §1.468B-2, QSF's are taxed at the maximum rate applicable to trusts, but are otherwise treated as corporations under the IRC.

Plaintiff Attorneys Favor the QSF

Best Cases for QSF or DSF

The Sequence of the QSF

The QSF process begins at the moment when the plaintiff(s) have extracted maximum value from the defendant(s) and both parties are ready to settle all claims for one settlement amount. The processing of the qualified settlement fund can appear to require more work and documents than the average settlement. While this is a typical sequence of events, facts and circumstances of a particular case may dictate otherwise:

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