Qualified Settlement Funds (QSFs) provide flexibility, administrative efficiency, and tax advantages to distribute settlement and judicial award proceeds. Understanding what a QSF is and how it is for the mutual benefit of the defendants, plaintiffs, and the administration challenges involved is essential for all parties involved in a lawsuit settlement or judicial award.
WHAT IS A QUALIFIED SETTLEMENT FUND (QSF)?
A Qualified Settlement Fund is a tax construct used to manage and distribute money from legal settlements or judicial awards. In essence, it enables the transfer of settlement funds from the defendant into the QSF, which is distributable to the claimants. QSFs prove helpful in situations where secondary disputes, third-party liens, claims on the funds exist, or other issues regarding fund distribution are present.
HOW QUALIFIED SETTLEMENT FUND BENEFITS BOTH DEFENDANTS AND PLAINTIFFS
QSFs provide numerous benefits to the defendant(s) and lawsuit plaintiffs, including, but not limited to:
•Immediate Tax Benefits for the Defendant: By establishing a QSF, the defendant can resolve the matter and receive an immediate tax deduction in the year of the settlement or judicial award.
•Immediate Tax Benefits for the Plaintiff: Plaintiffs can defer taxation until the funds are disbursed from the QSF.
•Simplification: A Qualified Settlement account simplifies the settlement process by facilitating administration and ensuring a fair and unbiased outcome.
•Flexibility: QSFs provide the advantage of time – for the plaintiffs to resolve liens and contractual obligations and the QSF administrator to finalize allocation and distribute settlement funds. The flexibility of time allows for unhurried and thorough planning.
QSF CHALLENGES
Despite all of their benefits, managing a Qualified Settlement Fund can be very challenging due to the following reasons;
Compliance: QSFs need to comply with IRS regulations, and which failing to do so could lead to adverse tax implications. It takes tax expertise and experience to navigate through these complexities.
FDIC Insured Investments: Handling a QSF involves ensuring that the entire settlement is FDIC-insured and that no adverse investment risks are present to preserve capital for disbursements.
Communication and Reporting: Transparent communication with all the parties in interest, providing timely and accurate reports on the QSF account status, is crucial for maintaining confidence and ensuring compliance.
Tax Reporting: The administration of a QSF requires handling intricacies of ongoing tax reporting responsibilities, meticulous accounting practices, and accurate tax identification of the distribution of funds.
Role of a QSF Administrator
A QSF administrator oversees the management and allocation of settlement funds held within a QSF. Their role involves acting as a trustee, prioritizing the interests of the claimants, and ensuring adherence to regulatory standards.
QSF ADMINISTRATION SERVICES
Experienced QSF administrators provide turnkey QSF account creation and administration services. The most comprehensive solutions offer turnkey online platforms to ensure the seamless creation and operation of the fund.
Most importantly, a QSF administrator should have no “conflicts of interest” and not be involved in selling or offering the claimant’s investment or insurance products.
Finally, not all QSF administrators are licensed; a licensed provider necessarily provides a higher level of service than a provider without a government license. Ask to see the trust or fiduciary license of the QSF provider you are considering.
Summary
In summary, understanding Qualified Settlement Funds and their management is crucial for all parties engaged in the settlement procedure. Tested solutions such as QSF 360 from Eastern Point Trust Company, a leading Qualified Settlement Fund account provider, make available a turnkey online process that facilitates the creation of a QSF in as little as one business day, along with a fully integrated administration suite of Qualified Settlement Fund services.
