Higgins Qualified Settlement Funds is a division of the tax-law firm of Higgins Settlement Law, L.L.P. Higgins Qualified Settlement Funds serves as tax counsel to the largest qualified settlement fund in the United States with more than $3 billion in assets. We continuously form, advise and administer funds throughout the U.S. totaling over $500,000,000 in the most recent year.
A qualified settlement fund (a “QSF”) is an account approved by a Court that holds settlement proceeds in a case involving a tort, contract or another qualified claim. The settlement proceeds held in a QSF are segregated from the assets of the defendant and held on behalf of the plaintiff(s), including interest earned on those proceeds.
A QSF is defined in Treasury Regulations section 1.468B-1, which also provides the requirements for the formation of a QSF. Higgins Qualified Settlement Funds can assist you in determining whether a QSF would benefit the parties in your case as well as in obtaining certain required governmental approvals for establishing a QSF.
When should you consider a QSF?
- your defendant is insolvent and might declare bankruptcy;
- your client has agreed on the amount of settlement, but needs time to consider whether to enter into a structured settlement or do Medicaid planning, e.g. a special needs trust;
- you need time to satisfy the aggregate-settlement ethics rules (informed written consent by each claimant, etc.);
- your clients have not yet agreed on an allocation of settlement proceeds among themselves;
- you need time for a minor’s compromise or wrongful-death allocations; or
- you think the defendant should not be earning interest on the settlement proceeds during any of the above.
What are the benefits of a QSF?
How do you form a QSF?
The regulations require that a Court (or an arbitrator or governmental agency) approve the establishment of a QSF. To obtain Court approval, an attorney must file a petition and a trust agreement and lodge an order with the Court, all of which Higgins Qualified Settlement Funds can do for you. Higgins Qualified Settlement Funds drafted the QSF formation documents now widely used in the industry and has formed several hundred QSFs.
Who administers a QSF and how?
A QSF is administered by a court-appointed settlement administrator, such as Higgins Qualified Settlement Funds. Once the Court has approved a QSF, we obtain a Taxpayer Identification Number and await the settlement check payable to the QSF. When the settlement check is received, we deposit the funds to the QSF bank account and await allocation distribution instructions. We can also create any required special needs trusts, conservatorships or guardianships, negotiate any liens and provide structured settlements. Once all settlement proceeds have been distributed, the fund terminates and Higgins Qualified Settlement Funds prepares the final income tax return, pays the tax on the income earned on the QSF’s bank deposits and distributes the remaining interest to the plaintiffs.
How are distributions from the QSF to the plaintiffs treated for tax purposes?
Distributions from the QSF to the plaintiffs are treated for tax purposes in the same way as payments made by the defendant directly to the plaintiffs. The Internal Revenue Service (Rev. Proc. 93-34) also permits structured settlements to be paid to plaintiffs from the QSF. After the QSF has paid tax on the income earned on the settlement proceeds, the net interest is paid to the plaintiffs and treated for tax purposes in the same way as the settlement proceeds. Thus, if the damages were physical, personal-injury damages not subject to tax to the plaintiffs under I.R.C. section 104(a)(2), then the net interest will also be free of tax.
How is the defendant treated?
The defendant receives a tax deduction for the transfer of settlement proceeds to the QSF as if the defendant had paid the settlement proceeds to the plaintiffs. If the defendant is transferring property (such as stock) to the QSF, then the transfer is treated as a sale of the property at fair market value by the defendant. Those rules are found in Treasury Regulation section 1.468B-3. The regulations prohibit a deduction for amounts that might revert from the QSF to the defendant and for insurance proceeds contributed to the QSF that were not included in the transferor’s income when received.
How is a QSF taxed?
A QSF is taxed separately as its own “person” under the law. The QSF pays tax only on the interest or other income that it earns, and not on the settlement proceeds contributed to the QSF, at a rate applicable to trusts. Claims administration expenses, trustee fees and legal and accounting fees are deductible from the income for taxation purposes. The QSF must obtain a Taxpayer Identification Number, pay estimated income taxes quarterly and file a federal income tax return and appropriate state income tax returns.
What if the Defendants are still disputing their liability?
If the Defendants are disputing liability you may have a Disputed Ownership Fund rather than a QSF. The results will be the same as if you had a QSF, with slightly more flexibility. Higgins Qualified Settlement Funds can help you determine whether a QSF or a Disputed Ownership Fund is applicable in your case.