September 19, 2017

Qualified Settlement Funds

Qualified Settlement Funds (QSFs), enacted under Section 468B of the Internal Revenue Code, allow for the settlement of multi-plaintiff lawsuits before there is an agreement on the allocation of settlement amounts. Plaintiff attorneys usually favor these types of funds because they allow for greater control of the way in which settlement funds may be disbursed. The court may order that the defendant (usually insurance companies) pay the agreed amount of the settlement into a Qualified Settlement Fund. These proceeds will remain in the fund account and be subject to the jurisdiction of the court until the lawsuit is resolved. Once resolved, the court will approve the allocations, the account will be closed and funds will be disbursed to the appropriate party.

Qualified Settlement Funds should be considered for cases involving tort claims, class action or those falling under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). Also, in cases where there is more than one claim and the defendant would be willing to comply in exchange for a complete general release by the plaintiff.

Three requirements must be met before a Qualified Settlement Fund can be used in a settlement:

  1. The Qualified Settlement Fund must be any fund, bank account or trust that is determined to meet the criteria set forth by the court. If using a trust, the trust must fall under applicable state law.
  2. Assets to fund the trust must be separate of other assets held by the transferor.
  3. The claim must be eligible for a QSF (i.e. torts, damages, class action).

Defendants, usually insurance companies, are allowed to either pay their policy limits to plaintiffs or negotiate a future settlement, leaving them in litigation. The person administering the QSF must make sure the account is funded for the amount previously agreed upon by all parties involved. Once the account is funded, the liability of paying for the claims is transferred from the defendant to the Qualified Settlement Fund, in what is known as a novation. A novation places the obligation of the original defendant to make periodic payments to the designated new party (the QSF).

Qualified Settlement Funds are usually established to meet short-term needs, as they are of short duration. Once the settlement funds are paid out from the QSF, the trust closes and the administrator will file a final tax return. Qualified assignment established by the QSF declares the settlement reward for the plaintiff as qualified; therefore making the disbursement tax-free once it is paid out to the plaintiff in accordance with the Internal Revenue Code.

To learn more about Qualified Settlement Funds and ask if they are appropriate for your case please contact one of our consultants at Vega Settlement Group today.


LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.