468(b) QUALIFIED SETTLEMENT FUNDS

A Qualified Settlement Fund (QSF) is a trust or separate account created to hold settlement proceeds. The QSF is created by filing a Petition with the Court. The Petition is accompanied by a copy of the trust instrument that governs the QSF, and by an Order to be entered by the Court authorizing the establishment of the fund. The rules describing the definitional and operational requirements for a QSF are in the Treasury regulations accompanying Code section 468B.

The QSF removes settlement funds from the custody and control of the defendant. Earnings on the fund can be used to pay settlement expenses, accounting and legal fees. The QSF also terminates any liquidity or solvency risk presented by some defendants. The QSF can be used in cases involving one or more plaintiffs. In cases involving many plaintiffs, the QSF can hold and invest the settlement proceeds while plaintiff’s counsel identifies all potential plaintiffs, determines their damages under a grid or prove-up system, and interviews plaintiffs for payment with a lump sum, a Structured Settlement or a Special Needs Trust. A Special Needs Trust is used to preserve Medicaid and Supplemental Security Income benefits for eligible plaintiffs. Special Needs Trusts can be created for plaintiffs from the QSF.

The QSF preserves all of the plaintiffs’ tax benefits, including the exclusion for physical personal injury damages of section 104(a)(2) of the Internal Revenue Code of 1986, as amended (“Code”). The trustee of the QSF can enter into Structured Settlement agreements with plaintiffs as if the trustee were the defendant. When the QSF is funded by the defendant, the QSF permits the defendant to deduct the settlement amount and to receive a full tort release terminating the defense costs and litigation risks as to that defendant. Those results occur even though the defendant has not paid any plaintiffs directly. If a QSF is not used, then the defendant cannot deduct the settlement payments until they are actually paid to a plaintiff under the “economic-performance” rules of Code section 461(h)(2)(C) and the defendant’s defense costs and litigation risks continue.