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:
- 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;
- 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
- 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%
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.