qualified settlement funds what it is and how it can be used by settlement planners by kevin...

Qualified Settlement Funds

What It Is and How It Can Be Used by Settlement Planners

By Kevin UrbatschMyers Urbatsch, P.C

What is a QSF?

QSF Created by IRC §468B

Allows for immediate payment of settlement/judgment from Defendant

Defendant gets deduction

Plaintiff does not yet receive funds for tax planning purposes

Why Use a QSF?

Removes Defendant from Case

Immediate Payment/ Receipt of Cash

Creates Time for Planning and Negotiation

Financial (e.g., Preserves Ability to Pay for Tax-Free Structure)

Legal (Establish SNT or MSA)

Administrative (Negotiate Liens)

Avoids Constructive Receipt

Use of QSF avoids Constructive Receipt of Settlement

Both Plaintiff and Plaintiff’s Counsel

Allows for use of structured settlement annuity

Allows for deferred compensation

Any Downside?

Requires Court Approval

Some Additional Costs

May Create Objection from Defendant

Where is the Law?

Statutorily Created Entity

Internal Rev. Code - 26 USC §468B

Treas Regs - 26 CFR §§1.468B-1-1.468B-9

Rob Wood’s book “Qualified Settlement Funds and Section 468B”

What are Legal Requirements

Approval Requirement: Established by Order of Government Entity (i.e., Court)

Resolve Claim: Must Resolve or Satisfy One or More Contested or Uncontested Claims that has Given Rise to Liability

State Law: Fund Must be Trust or Segregated Account Under State Law

Approval Requirement

QSF Must be Established

By Government Entity, usually Court (does not have to be Court where case is being heard)

At Time of Court Order and Not Before (unless Relation Back Doctrine Applies)

Resolve Claim Requirement

QSF Must be Established to Resolve One or More Claims Giving Rise to Liability including claims for:

Tort, breach of contract, or violation of law;

CERCLA - Environmental Matters

Any other claim in Treasury Regs

Resolve Claims Requirement

Cases where QSF Cannot be Used:

Workers Comp or Self Insured Health Plans;

Refund, Repair Replacement of Products in Course of Business;

Bankruptcy; or

Any other Liability excluded by IRC

State Law Requirement

QSF funds must be segregated from Transferor/Defendant

QSF fund may be trust authorized by State Law

May also be a separate bank account or fund, doesn’t have to be trust

Court must have ongoing jurisdiction

QSF Issues

Relation Back Doctrine

Single Claimant or One Plaintiff Controversy

Relation Back Doctrine

Way to fix Non-Qualifying fund that has already met:

Resolve Claims Requirement and

State Law Requirement

But failed to meet QSF Approval Requirement

Relation Back allows Back Date of Court Approval of fund for QSF treatment

One Plaintiff/Single Claimant Issue

In doing a QSF for a single plaintiff (or claimant) a “red herring” issue arises:

Must understand how structured settlement brokers are paid

Must understand that some of the few insurance companies selling structured annuities will not issue annuity for single claimant QSF

Handling Defendant’s Objection

Defendant or its Insurer have no Standing to Object

Make QSF Substitute Payee in Settlement Agreement

In Court Order Establishing QSF, make it requirement that Defendant pay only to QSF

Provide only QSF tax id number to Defendant

Practical Steps in Establishing the QSF

Draft the Petition to Establish QSF

Draft the QSF Trust Agreement

Appoint Administrator

Consider Investments

Find Financial Institution to Hold Funds

Drafting Petition to Establish QSF

No formal requirements

Typically drafted under court rules where QSF is being established

Sample petition is included in materials

Drafting the QSF Document

Drafting QSF is Much Like Any State Law Trust

Describe Administrator/Trustee’s Duties

Describe Administrator/Trustee’s Powers

Intent of QSF is to Comply with Requirements of §468B

Appointing Administrator

QSF must have Administrator (usually also Trustee of QSF)

QSF Administrator is typically appointed by

court or:

designated by agreement; or

otherwise taken control of QSF’s assets

Selecting Administrator

Some Attorneys will serve

Some Corporate Trustees will serve

Some Private Individuals will serve

Plaintiff, Plaintiff’s Attorney, or those Responsible for Plaintiff (e.g., Guardian ad Litem) are Not good choices

Administrator’s Duties

Administrator’s legal duties are limited by 468B to:

Obtaining Tax Id Number

Filing QSF tax returns

Executing Relation-Back Documents

However, if QSF is trustee, Administrator has all Fiduciary Obligations of Trustee

Paying the Administrator

QSF May Generate Enough Earnings to Pay

Principal May be Used to Pay Difference

Structured Settlement Producer may pay

check state ethical rules if attorney

Plaintiff’s attorney may pay

QSF Timeline

Phase One - Initial Steps

Phase Two - QSF Administration

Phase Three - QSF Taxation

Phase Four - QSF Termination

Phase One: Initial Steps

Phase One - Initial Steps:

Establish QSF by Court Order

Administrator Obtains Tax Id Number

Plaintiff Signs Release to Defendant

Defendant Funds QSF Directly

Administrator Invests Funds as Authorized by QSF

Phase Two: QSF Administration

Phase Two - QSF Administration

Disbursement Made Through Agreements between Plaintiff/Attorneys and QSF Administrator or By Court Order

May Include Purchase of Structured Settlement Annuities

May Need Court Approval (But is Not Required)

File Tax Returns

Phase Three: QSF Taxation

Phase Three - QSF Taxation

Must pay taxes and file returns

QSF taxed as C Corporation for Payment and Filing of Taxes

Must pay estimated taxes if QSF lasts longer than year

Increased Reporting Responsibilities

Tax Traps: State and Federal law may be vary

Phase Four: QSF Termination

Phase Four - Termination

Terminates when it either fails to satisfy Establishment requirements or no longer has assets

Administrator file final tax return

Consider obtaining court order

How Long Does QSF Last?

No limit in law. Can stay open as long as needed.

How Is QSF Used with MSA or SNT?

QSF is utilized to accept immediate payment of funds from defendant.

Allows time to consider if MSA is necessary and prepare allocation

Allows time to consider if SNT is necessary and to establish SNT without interfering with SSI or Medicaid

Case Study

Mark and Sarah have accepted a personal injury settlement of $1,500,000. No allocation has been made between them.

He is 56 years old, disabled and is receiving SSI, SSDI, Medicare and Medicaid.

She is 35 with no disability.

His needs include a new wheelchair van, therapy costs, and possibly new home

There are existing Medicare, Medicaid and other liens that need to be resolved

Defendant s insurance company refuses to participate in structured settlement

Settlement Plan

Establish QSF

Gets Defendant Out of Process

Allows Time to Negotiate Liens

Allows Time to Allocate Settlement Among Plaintiffs

Allows Time to Consider Financial Plans

Settlement Plan

During QSF Administration

Allocation can be done between Plaintiffs

Plaintiff’s Attorneys Fees and Costs can be Immediately Paid (or preserved for structured settlement)

Sarah’s Share of Settlement can be Immediately Paid (or preserved for structured settlement)

Establish MSA for

Settlement Plan

Develop Financial Plan for Mark and Sarah

Consider Medicare’s Future Interest with MSA for Mark

Preserve Eligibility for Medicaid with first party SNT

Thank You

Kevin UrbatschSpecial Needs Planning Attorney

100 Spear Street, Suite 1430San Francisco, CA 94105

Kevin@Urbatsch.comwww.MyersUrbatsch.com