Qualified settlement funds

Qualified settlement funds are accounts into which defendants and their insurers can deposit settlement proceeds. The funds are creatures of the Internal Revenue Code of 1986, i.e., the regulations under section 468B of the Code. Funds were created in 1986 to fix a tax rule that permitted defendants to deduct settlement payments only if the payments were made to plaintiffs. That rule limiting deductions to the year in which payments were made to plaintiffs was, in turn, a Congressional fix of an abuse in which defendants took current deductions for structured settlement liabilities due far into the future, thereby distorting defendant’s current income. If you are involved in a business dispute then hire a business dispute attorney who protects you.

In 1986, IRS and Congress realized that large lawsuits were sometimes settled before all plaintiffs had been identified or before identified plaintiffs had proved their product usage or damages. Thus, the parties to litigation needed a fund to which settlement amounts could be paid so that defendants could deduct those amounts and simultaneously be released.

Plaintiff benefits in smaller cases

There are several situations that suggest that a fund will benefit a plaintiff even in cases with a small number of plaintiffs. Potential insolvency of the defendant or one of the insurers is such a situation. Most recently, the General Motors bankruptcy filing presented such a situation. Product-liability lawsuits were to be left in the “old GM,” along with most other pre-filing liabilities and bad assets. Old GM might not be able to pay such lawsuit liabilities. Thus, if plaintiff’s counsel and GM had agreed on the settlement number prior to the bankruptcy filing, creating a fund permitted the settlement amount to be paid immediately. We saw several funds created during the weeks prior to the GM filing.

Where the risk of insolvency of the defendant or insurer is not present, getting the money into a fund makes sense for the interest to be earned. The interest earned by the fund goes to the plaintiffs. Letting the money sit with the defendants or insurer gives the interest to the defendant or insurer. Defendants or insurers may be earning a 20 percent return on investment. That high return is a strong financial incentive to slow payment to plaintiffs for the maximum time possible.

Getting the money out of the hands of the defendant or insurer permits the plaintiffs to take their time in planning for structured settlement, fhc Internal Revenue Service has issued a Revenue Procedure treating the fund as the defendant for purposes of entering into a structured settlement with the plaintiff. 

Similarly, if the plaintiffs want to create a special needs trust, those require a 30-day statutory notice period to the State of California, payment of liens and a court hearing. Those all mean a delay of at least 45 days to create a special needs trust. With the settlement proceeds in a qualified settlement fund, those delays do not prejudice the plaintiffs. The appointment of a conservator or a guardian also consumes substantial time, as does the approval for the allocation of wrongful-death proceeds among the beneficiaries. All of those can be done while the plaintiff’s settlement proceeds are in a qualified setdement fund.

Where the risk of insolvency of the defendant or insurer is not present, getting the money into a fund makes sense for the interest to be earned. The interest earned by the fund goes to the plaintiffs. Letting the money sit with the defendants or insurer gives the interest to the defendant or insurer. Defendants or insurers may be earning a 20 percent return on investment. That high return is a strong financial incentive to slow payment to plaintiffs for the maximum time possible.

Getting the money out of the hands of the defendant or insurer permits the plaintiffs to take their time in planning for structured settlement, fhc Internal Revenue Service has issued a Revenue Procedure treating the fund as the defendant for purposes of entering into a structured settlement with the plaintiff.

In 1986, IRS and Congress realized that large lawsuits were sometimes settled before all plaintiffs had been identified or before identified plaintiffs had proved their product usage or damages. Thus, the parties to litigation needed a fund to which settlement amounts could be paid so that defendants could deduct those amounts and simultaneously be released.