468 B

Qualified Settlement Fund

Treasury issued regulations in 1993 expanding Internal Revenue Code 468B and created the "Qualified Settlement Fund" or "QSF", 26 CFR 1.468B-1. A QSF is a trust or separate account to hold settlement proceeds for distribution. The QSF preserves all of the plaintiff's tax benefits and allows the defendant a full tax deduction at the time of deposit. When a QSF is established and settlement funds are deposited, it becomes the entity legally responsible to allocate and disburse the proceeds among the eligible claimants. The defendant and/or its insurer is completely released at this point and the suit dismissed. The QSF may enter into a Settlement Agreement with the plaintiff(s) and can enter into a Qualified Assignment, pursuant to IRS Rev. Proc. 93-34".

Aside from advantage of simplicity to the defendant, there are a number of advantages to plaintiffs in arranging a funding agreement in this way - control, flexibility, and security. The ability to obtain competitive annuity pricing is enhanced significantly without restrictions or limitations often imposed by the defendant or insurer. By avoiding protracted delays in the litigation process and securing the settlement funds sooner, the plaintiff also eliminates the risk of insolvency of the defendant or its insurer and allows time to develop an agreement on allocation and negotiation of lien claims, if any.

A QSF should be considered in tort, class action, or environmental (CERCLA) lawsuits involving one or more contested claims.

The QSF must meet three criteria in order to exist:

  • court order or approval by a government agency and subject to it's continuing supervision;
  • established to resolve or satisfy one or more contested claims that have resulted or may result from an event that has occurred giving rise to at least one claim asserting liability arising out of a tort, breach of contract, or violation of law and:
  • the fund, account, or trust is a trust under applicable state law or its assets are segregated from other assets of the transferor (and related persons)

As long as these criteria exist as specifically outlined in the regulations, upon petition from counsel representing any settling party, the court can order that the defendant pay the agreed settlement amount into a "QSF or DSF within the meaning of the 468B-1 of the Treasury Regulations".

Summary of the Qualified Settlement Fund Process

  1. Either party petitions the Court seeking an order approving the creation of a Qualified Settlement Fund (QSF) and Administrator under Internal Revenue Code section 468B.
  2. The QSF is established and overseen by the Court appointed Administrator.
    • Administrator obtains QSF tax identification number
  3. The defendant(s) pays the agreed compensation into the QSF and is released from liability.
    • General release executed naming QSF as payee
    • Defendant(s) removed from the process
  4. The QSF assumes the liability of the defendant(s) and settles the claims with the individual claimants.
    • Collaborative communications between plaintiff counsel and Administrator
    • Settlement can include both cash and purchase of tax-exempt structured annuities pursuant to Internal Revenue Code section 130
    • Court Orders obtained where necessary
    • Attorney fees are also distributed from the QSF
    • Settlement Agreement and Qualified Assignment executed
  5. Once the QSF distributions are complete, the QSF is dissolved and the Administrator files a return (SF-1120) with the IRS.

For more information on the advantages, applications, and mechanics of the QSF, please contact us.