Qualified Settlement Funds What It Is and How It Can Be Used by

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

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

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)

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

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

Where is the Law? Statutorily Created Entity Internal Rev. Code - 26 USC §468B Treas Regs - 26 CFR §§1.468B-11.468B-9 Rob Wood’s book “Qualified Settlement Funds and Section 468B”

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

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)

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

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

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

QSF Issues Relation Back Doctrine Single Claimant or One Plaintiff Controversy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank You Kevin Urbatsch Special Needs Planning Attorney 100 Spear Street, Suite 1430 San Francisco, CA 94105 [email protected] www.MyersUrbatsch.com