Treasury Regulation 1.468B-1 provides a framework for Qualified Settlement Funds (QSF). It was originally enacted to simplify the settlement of mass tort cases. It has also found popularity as a vehicle to settle cases involving a single claimant and 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 proceeds of settlement. The increased use of the QSF for single claimant cases has been a source of much discussion and debate. While there is still some uncertainty the IRS in a revenue ruling has specifically stated that a QSF may be used for single claimant cases.
How it works
After a settlement or judgment is reached either the plaintiff or the defendant may petition the court to establish a QSF. The court approves the creation of the QSF and the full amount of the judgment/settlement is paid by the defendant/insurer into the QSF, thereby qualifying for economic performance and releasing the defendant from litigation and any further liability. Hence, the reason for its creation- to allow the defendant or insurer to be removed from expensive litigation, lengthy payment decisions, or complications between multiple claimants. A structured settlement can still be negotiated between the QSF administrator, who now steps in the shoes of the defendant, and the claimant(s). The QSF pays no tax on the settlement funds placed in it (other than the growth), and yet preserves the ability to structure payments to claimants and their attorneys.
Why attorneys should consider a QSF?
- Plaintiff takes more control over their payment vehicle and can take more time to consider their choices.
- Allows more time for parties to negotiate liens
- Plaintiff can receive interest income from QSF.
- Alleviates concern over financially unstable defendants.
- Constructive receipt is not triggered for the plaintiff or attorney.
- Attorney’s fees and other expenses can be paid immediately from QSF.
- Attorneys can structure their fees.
There are some legitimate concerns in using a QSF. A QSF does involve more people and takes extra work to set up. In addition, while attorney’s fees can be paid immediately from the QSF, it does take more time than if the check were sent directly from the defendant or insurer.
How does a QSF benefit the defendant?
- Defendant disengages from litigation and qualifies for economic performance
- Defendant receives a release from liability and case dismissed with prejudice
A QSF is a great tool that can benefit the needs for both plaintiff(s) and defendant(s). However, it is not something that is appropriate for all cases. A QSF can be ideal for cases involving, single or multiple claimants, defendants that want to move forward quickly, and cases where a defendant is being difficult about how the claimant can use the settlement funds.