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Qualified Settlement Fund | "A Tax Free Way Station" for Attorney Fees?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What is a Qualified Settlement Fund?

A Qualified Settlement Fund is a fund, account or trust authorized by Treasury Regulation 1.468B-1(c). Under the regulation, each QSF must:

1. Be established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
   
2. It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability; and
3. The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).

A Tax-Free Way Station?

It has been said that "A qualified settlement funds are a great tool in litigation to 'park' money or create a tax free way station", which conjures up that at least quarter of a century old dilemma once pondered by 1990s slackers Wayne and Garth.  [Jeopardy question for readers born after 1985, "What is Wayne's World?"]  #mikemyersbeforeaustinpowers

According to Chris Lordan CPA, whose Minnesota firm administers qualified settlement funds,  "an independent, qualified trustee, often an accountant or a lawyer, is appointed to handle the trust. The trustee manages the funds, handles ongoing claim resolution, and works with the plaintiffs to determine the trust’s payout structure.The trustee also assures strict compliance with 468B and other regulations: without constant and careful oversight, the benefits of the qualified settlement fund may not be fully realized or even disallowed".

If it's a trust under state law, wouldn't any income and gains generated  by the investment of the assets in the trust be subject to tax on a state or federal level? Even money markets aren't paying zero these days.

As of October 31, 2018

CIBC Bank USA 2.16% APY

HSBC  2.01% APY

Goldman Sachs Marcus 2.05%

Source:  Bestrates.com

One of the duties of a QSF administrator is to file tax returns for the QSF. For a New York QSF, this might include a Federal return, as well as fiduciary tax forms for New York state and other applicable taxing authorities.

So it seems a bit far fetched to call a qualified settlement fund "a tax free way station", in my opinion.  But that's just me. How about § 1.468B-2 Taxation of qualified settlement funds and related administrative requirements?  No way?  Way.

 

The Single Claimant QSF | Potential For Abuse of Qualified Settlement Funds Observed by Leading Settlement Tax Authority

by John Darer CLU ChFC MSSC RSP CLTC

The Single Claimant QSF horse has been dead for half a decade.  It made a lot of people very successful while it lasted and it's presence was one factor that helped bring the structured settlement industry closer together, in my opinion.

Most significantly, unlike the decade from 2000-2009, no structured settlement annuity providers currently accept Single Claimant QSFs.  Pat Hindert, in his review of a recent article by San Francisco tax attorney Robert Wood observes on his blog,  "they have effectively shut down this strategic personal injury settlement planning opportunity for a wide scope of actual and/or potential structured settlement cases". First of all "Get over it!"  

Misplaced Blame

Then it's time for a fact check.   A number of structured settlement annuity issuers who did accept qualified assignments from single claimant QSFs left the market place, such as John Hancock and Aviva. Were "they" responsible for that corporate decision?

Adapt, improvise and overcome. Why continue to fight yesterday's wars in an industry that enjoys a greater degree of civility than it did 5 years ago and a far greater degree than it did 10-15 years ago?

Potential Abuse of Qualified Settlement Funds Observed by Leading Settlement Tax Authority

In closing I may as well saddle up old "Pepper" for a short "trail ride" and reminisce.  Robert Wood observes the potential for abuse in qualified settlement funds. Wood "chucks" out this "acorn":

"QSFs allow plaintiffs and attorneys to defer the receipt of payments or the recognition of income until distribution. To some, that may seem to be an enticing proposition. Indeed, there is no antii-abuse rule in the statute or regulations, nor do there appear to be any rulings or cases that test the bounds of the concept. Thus, one might debate the potential risk that an aggressive plaintiff or aggressive counsel might use a QSF as an incorporated pocketbook. With no express time limit on the existence of a QSF, a plaintiff or his attorney might use a QSF to defer paying tax on a recovery indefinitely, letting the money sit in the QSF to earn interest and dividends, then doling it out when needed"

Indeed,  in QSF Symposium 2012-2, Hindert appeared to advocate the following as an advantage of QSFs. QSF's were touted as part of the "settlement planning standard"

"Plaintiffs can conduct their settlement planning with a sum certain, using their own advisers, free from the pressures of litigation, with unlimited time to analyze and address tax, investment and government benefit issues"

I questioned Hindert on October 3, 2012 with Do Qualified Settlement Funds Offer "Unlimited" Time to Address Investments?.  Never got a response.

The "trail ride" is over.  Goodnight "Pepper".

Image 1: Wikipedia

Images 2 and 3 : Dreamstime

Robert Wood  article from Tax Notes June 23, 2014

Postscript:  The qualified assignment company for Independent Life Insurance Company, which entered the market in 2018 will take assignments on Single Claimant QSFs.