treasury regulation §468B-1:
qualified settlement fund

A Qualified Settlement Fund, or QSF, is a fund, account, or trust under applicable state law created to hold settlement proceeds.

The QSF is a useful settlement tool that can help ensure that proper client counseling can occur before or during—and even after—settlement. The QSF uniquely introduces a degree of valuable breathing space that allows for the allocation of settlement proceeds among various claimants, the ability to verify and negotiate liens and/or subrogation claims and the ability to address other post-settlement related issues.

The QSF extends the settlement planning window past the release of the defendant(s) from the litigation, which allows more time to determine the appropriate role and underwriting of a structured settlement annuity and evaluate the need to preserve government benefits such as Medicaid and Social Security Income (e.g. the need for the establishment of a Special Needs Trust). It also enables a host of other post-settlement related decisions to be made without the pressure associated with litigation.

This breathing space is made available due to the doctrine of novation. Put simply, novation means that the QSF becomes the substitute defendant following the release of the original defendants in exchange for their payment of money into the QSF. While the settlement money is temporarily parked in the QSF, the assets are not constructivelyThere is substantial debate over whether or not a payment made into a single claimant qualified settlement fund constitutes constructive receipt by the single claimant. Therefore, for the purposes of this paragraph Forge Consulting assumes that there are multiple parties that maintain a claim against the settlement money being deposited into the qualified settlement fund. If you would like further information regarding the single claimant issue please refer to the library section of this website or contact us at received by any claimant or attorney, as that doctrine is set forth in Treasury Regulation Section 1.451.2. Avoiding constructive receipt of the settlement money helps preserve the ability to protect a client’s government benefits that are predicated on income and asset tests, as well as the ability to execute qualified assignments for the proper establishment of a structured settlement annuity.

Given the valid concerns of some attorneys about adding unreasonable delay or expense to the transfer of settlement money to clients, a QSF may be created and administered:

  • To facilitate placement of a structured settlement annuity, ensuring settlement options are maximized;
  • To resolve and satisfy any and all government agencies that may maintain a right to reimbursement or a lien against a claimant's settlement money;
  • To fast track the payment of settlement proceeds to those clients who determine quickly that they are not interested in any form of settlement options aside from the receipt of their money in a lump sum payment;
  • To address any tax liability that might arise as a result of the receipt of emotional distress, contractual or punitive damages; and
  • To properly evaluate the need for and/or the allocation of settlement money to be placed in a Medicare Set-Aside.

The primary reasons that a defendant would participate in the creation of a QSF are (1) obtain a full release of claims that arose from a specific cause of action (Pay and walk away); (2) receive a current year tax deduction in return for their payment of money into a QSF; and (3) in certain cases receive indemnity from any and all health care lien resolution liability that might exist.

The defendant makes payment into the QSF in exchange for a release from both present claimant(s) and any possible future claimants. Once payment is made into the QSF, the litigation process ceases for the defendant, thereby reducing legal costs and freeing up the resources being used in litigation.

It also allows the defendant to deduct their payment to the QSF the same as if the defendant paid the plaintiffs directly or paid into some other irrevocable and unconditional fund established to receive payments for the benefit of the claimants, thereby permitting a current income tax deduction, if available.

If you are unfamiliar with the QSF allow Forge to help you establish your first. If you experienced with QSFs, then you will be impressed with how easy the establishment and administrative processes are when Forge is involved. Call today, toll-free, at 866-68-FORGE (866-683-6743).

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