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