Qualified Settlement Funds

1. Qualified Settlement Funds • What It Is and How It Can Be Used by Settlement Planners • By Kevin UrbatschMyers Urbatsch, P.C

2. What is a QSF? • QSF Created by IRC §468B • Allows for immediate payment of settlement/judgment from Defendant • Defendant gets deduction • Plaintiff does not yet receive funds for tax planning purposes

3. Why Use a QSF? • Removes Defendant from Case • Immediate Payment/ Receipt of Cash • Creates Time for Planning and Negotiation • Financial (e.g., Preserves Ability to Pay for Tax-Free Structure) • Legal (Establish SNT or MSA) • Administrative (Negotiate Liens)

4. Avoids Constructive Receipt • Use of QSF avoids Constructive Receipt of Settlement • Both Plaintiff and Plaintiff’s Counsel • Allows for use of structured settlement annuity • Allows for deferred compensation

5. Any Downside? • Requires Court Approval • Some Additional Costs • May Create Objection from Defendant

6. Where is the Law? • Statutorily Created Entity • Internal Rev. Code - 26 USC §468B • Treas Regs - 26 CFR §§1.468B-1-1.468B-9 • Rob Wood’s book “Qualified Settlement Funds and Section 468B”

7. What are Legal Requirements • Approval Requirement: Established by Order of Government Entity (i.e., Court) • Resolve Claim: Must Resolve or Satisfy One or More Contested or Uncontested Claims that has Given Rise to Liability • State Law: Fund Must be Trust or Segregated Account Under State Law

8. Approval Requirement • QSF Must be Established • By Government Entity, usually Court (does not have to be Court where case is being heard) • At Time of Court Order and Not Before (unless Relation Back Doctrine Applies)

9. Resolve Claim Requirement • QSF Must be Established to Resolve One or More Claims Giving Rise to Liability including claims for: • Tort, breach of contract, or violation of law; • CERCLA - Environmental Matters • Any other claim in Treasury Regs

10. Resolve Claims Requirement • Cases where QSF Cannot be Used: • Workers Comp or Self Insured Health Plans; • Refund, Repair Replacement of Products in Course of Business; • Bankruptcy; or • Any other Liability excluded by IRC

11. State Law Requirement • QSF funds must be segregated from Transferor/Defendant • QSF fund may be trust authorized by State Law • May also be a separate bank account or fund, doesn’t have to be trust • Court must have ongoing jurisdiction

12. QSF Issues • Relation Back Doctrine • Single Claimant or One Plaintiff Controversy

13. Relation Back Doctrine • Way to fix Non-Qualifying fund that has already met: • Resolve Claims Requirement and • State Law Requirement • But failed to meet QSF Approval Requirement • Relation Back allows Back Date of Court Approval of fund for QSF treatment

14. One Plaintiff/Single Claimant Issue • In doing a QSF for a single plaintiff (or claimant) a “red herring” issue arises: • Must understand how structured settlement brokers are paid • Must understand that some of the few insurance companies selling structured annuities will not issue annuity for single claimant QSF

15. Handling Defendant’s Objection • Defendant or its Insurer have no Standing to Object • Make QSF Substitute Payee in Settlement Agreement • In Court Order Establishing QSF, make it requirement that Defendant pay only to QSF • Provide only QSF tax id number to Defendant

16. Practical Steps in Establishing the QSF • Draft the Petition to Establish QSF • Draft the QSF Trust Agreement • Appoint Administrator • Consider Investments • Find Financial Institution to Hold Funds

17. Drafting Petition to Establish QSF • No formal requirements • Typically drafted under court rules where QSF is being established • Sample petition is included in materials

18. Drafting the QSF Document • Drafting QSF is Much Like Any State Law Trust • Describe Administrator/Trustee’s Duties • Describe Administrator/Trustee’s Powers • Intent of QSF is to Comply with Requirements of §468B

19. Appointing Administrator • QSF must have Administrator (usually also Trustee of QSF) • QSF Administrator is typically appointed by • court or: • designated by agreement; or • otherwise taken control of QSF’s assets

20. Selecting Administrator • Some Attorneys will serve • Some Corporate Trustees will serve • Some Private Individuals will serve • Plaintiff, Plaintiff’s Attorney, or those Responsible for Plaintiff (e.g., Guardian ad Litem) are Not good choices

21. Administrator’s Duties • Administrator’s legal duties are limited by 468B to: • Obtaining Tax Id Number • Filing QSF tax returns • Executing Relation-Back Documents • However, if QSF is trustee, Administrator has all Fiduciary Obligations of Trustee

22. Paying the Administrator • QSF May Generate Enough Earnings to Pay • Principal May be Used to Pay Difference • Structured Settlement Producer may pay • check state ethical rules if attorney • Plaintiff’s attorney may pay

23. QSF Timeline • Phase One - Initial Steps • Phase Two - QSF Administration • Phase Three - QSF Taxation • Phase Four - QSF Termination

24. Phase One: Initial Steps • Phase One - Initial Steps: • Establish QSF by Court Order • Administrator Obtains Tax Id Number • Plaintiff Signs Release to Defendant • Defendant Funds QSF Directly • Administrator Invests Funds as Authorized by QSF

25. Phase Two: QSF Administration • Phase Two - QSF Administration • Disbursement Made Through Agreements between Plaintiff/Attorneys and QSF Administrator or By Court Order • May Include Purchase of Structured Settlement Annuities • May Need Court Approval (But is Not Required) • File Tax Returns

26. Phase Three: QSF Taxation • Phase Three - QSF Taxation • Must pay taxes and file returns • QSF taxed as C Corporation for Payment and Filing of Taxes • Must pay estimated taxes if QSF lasts longer than year • Increased Reporting Responsibilities • Tax Traps: State and Federal law may be vary

27. Phase Four: QSF Termination • Phase Four - Termination • Terminates when it either fails to satisfy Establishment requirements or no longer has assets • Administrator file final tax return • Consider obtaining court order

28. How Long Does QSF Last? • No limit in law. Can stay open as long as needed.

29. How Is QSF Used with MSA or SNT? • QSF is utilized to accept immediate payment of funds from defendant. • Allows time to consider if MSA is necessary and prepare allocation • Allows time to consider if SNT is necessary and to establish SNT without interfering with SSI or Medicaid

30. Case Study • Mark and Sarah have accepted a personal injury settlement of $1,500,000. No allocation has been made between them. • He is 56 years old, disabled and is receiving SSI, SSDI, Medicare and Medicaid. • She is 35 with no disability. • His needs include a new wheelchair van, therapy costs, and possibly new home • There are existing Medicare, Medicaid and other liens that need to be resolved • Defendant s insurance company refuses to participate in structured settlement

31. Settlement Plan • Establish QSF • Gets Defendant Out of Process • Allows Time to Negotiate Liens • Allows Time to Allocate Settlement Among Plaintiffs • Allows Time to Consider Financial Plans

32. Settlement Plan • During QSF Administration • Allocation can be done between Plaintiffs • Plaintiff’s Attorneys Fees and Costs can be Immediately Paid (or preserved for structured settlement) • Sarah’s Share of Settlement can be Immediately Paid (or preserved for structured settlement) • Establish MSA for

33. Settlement Plan • Develop Financial Plan for Mark and Sarah • Consider Medicare’s Future Interest with MSA for Mark • Preserve Eligibility for Medicaid with first party SNT

34. Thank You Kevin UrbatschSpecial Needs Planning Attorney 100 Spear Street, Suite 1430San Francisco, CA 94105 Kevin@Urbatsch.comwww.MyersUrbatsch.com