Qualified Settlement Funds and Section 468B (Portfolio 738)
At a glance
I. Overview
II. Establishing a QSF
III. Drafting the Trust Agreement
IV. Administration of a QSF
V. Defendant Transfers and Deductions
VI. Determining QSF Income and Deductions
VII. Distributions and Structured Settlements
VIII. Tax Filing, Payments, and Penalties
IX. Tax Reporting Issues
X. Trustee and Administrator Duties and Powers
XI. Terminating a QSF
XII. Designated Settlement Funds and Non-QSF Funds
Abstract
Bloomberg Tax Portfolio, Qualified Settlement Funds and Section 468B, No. 738, describes the nature, uses, mechanics and pitfalls of using these funds for dispute resolution. They are authorized by Internal Revenue Code §468B. Since that section was added to the Code in 1986, and especially since the Treasury Department expanded the concept materially in regulations issued in 1993, these dispute resolution mechanisms have literally exploded in growth.
This Portfolio examines the uses of Qualified Settlement Funds, and their key tax benefits: (1) a deduction to the defendant upon contributing to the fund, even though the plaintiffs may not receive their distributions for months or years; and (2) the QSF being taxed as an entity only on its investment return, not on the contributions it receives from defendants.
The Portfolio gives drafting and practice guidance, from the genesis to the termination of a QSF. It considers the perspective of both plaintiff and defense counsel, as well as the trust administration, accounting and compliance duties that maintaining a QSF requires.