A qualified settlement fund (QSF) is an important tool when dealing with claims or estates that contain multiple claimants, allowing funds to be held securely in a temporary location until the claim can be resolved.
But just what is settlement fund in practice, and how can it help? We took a closer look at the details, and put together all you need to know to make smart, informed decisions on your settlements and planning issues.
What Is Settlement Fund?
The notion of a qualified settlement fund originally rose from lawsuits, and was first used by lawyers to protect their clients’ interests during litigation, and to simplify lawsuits during a settlement – the purpose is to receive the proceeds of a settlement from a defendant, or a group of defendants, and to allocate the money to claimants depending on the outcome of a court order or settlement.
Essentially, a QSF is a type of trust that allows for the safekeeping of funds while they are being distributed to claimants.
It is usually set up as part of a lawsuit, where it is known as a “settlement fund”, but it can also be created outside a lawsuit, such as when there is no lawsuit pending.
The notion of a Qualified Settlement Fund first emerged in 1993, when the United States Treasury issued the required legislation, and has been a well-used principle ever since.
Three elements must be met, and according to legislation the QSF must:
- Be created by a court, and be subject to continuing court supervision;
- Resolve claims related to the subject of the lawsuit; and
- Qualify as a trust under state law.
How Does A Qualified Settlement Fund Work?
To understand how a QSF works, you need to know how a standard settlement works.
When a party agrees to settle a lawsuit, there is usually an exchange of money between the two parties.
In the case of a QSF, the money is deposited into a special account, which is managed by a trustee. The trustee holds the money in trust until the court approves the distribution of the fund.
At this point, the trustee distributes the money according to the terms set out in the settlement agreement.
A QSF differs from a standard settlement in that there will be multiple claimants involved, and the money will be held in trust for those claimants until the court approves the final distribution of the funds.
Once the court has approved the distribution of the funds, the trustee will distribute the money to the individual claimants.
What Are The Advantages Of A Qualified Settlement Fund For Defendants?
Qualified settlement funds provide several advantages for both parties involved in a dispute. Defendants can enjoy benefits such as:
- Pay And Walk Away With Full Release
This is one of the main appeals of a QSF for many defendants; if the case goes to trial, the defendant will have to pay the plaintiff’s legal fees and other costs associated with the proceedings.
If the case settles, however, the defendant may walk away without having to pay anything else.
This means that a defendant who enters into a settlement agreement with a claimant will not have to worry about paying any legal fees or costs associated with the matter.
- Settlements Can Be Easier To Reach
If a defendant does not want to go through the hassle of a lengthy trial, then a QSF could be a good option.
By using a QSF, the defendant can avoid the risk of losing the entire amount of the settlement, which would result in them having to pay the plaintiff’s legal fees and costs.
- There Can Be Tax Advantages
The implementation of a QSF can result in tax deductions for the defendant, as claimants are not taxed on funds that are held in trust until they are distributed, meaning tax is only applicable on income earned in the initial deposit of money.
This offers the chance for defendants to pay in funds without worrying about tax implications
What Are The Advantages of A Qualified Settlement Fund For Plaintiffs?
Plaintiffs can also benefit from a QFS, including:
- Litigation Can Settle Now
When a case is settled, the plaintiffs can get paid immediately.
They do not have to wait until the end of the trial before receiving payment, which means that they can start spending the money they receive right away, and do not have to face lengthy, possible traumatic litigation proceedings.
- Useful To Administer Mass Tort Cases
Mass tort cases often involve multiple claims against multiple defendants, and this makes it difficult to administer.
A QSF can help to make sure that all the claims are properly administered, and that each claimant receives what he/she is entitled to.
- Eliminates The Risk Of Insolvency
Insurance companies often refuse to cover settlements made by defendants, and this is due to a risk that defendants will become insolvent.
However, a QSF eliminates this problem, as the insurance company cannot touch the money in the QSF.
- There Are Tax Benefits
The tax benefits we mentioned earlier are also applicable to plaintiffs, who will have more time to put a tax arrangement in place before receiving their payment.
Are There Any Disadvantages To A Qualified Settlement Fund?
The main disadvantage of a QSF is that there are strict requirements that must be met in order to allow the fund to be used. These include:
- The defendant must agree to the terms of the settlement
- The defendant must sign an affidavit stating that he understands the terms of the settlement and agrees to abide by them
- The defendant must provide proof that he has sufficient assets to satisfy his obligations under the settlement
A qualified settlement fund is therefore only available to those defendants who meet these criteria.
QSFs offer a way for both parties to reach a settlement without going through the stress and expense of a long-drawn-out court process and can take some of the stress out of a tort litigation situation for all parties involved.
Always consult with a legal professional if you are considering a QSF.
Frequently Asked Questions
What Is A QSF?
A QSF is a type of structured settlement that is used in cases involving multiple claimants.
It allows a person or business to set up a fund where money is deposited into the account, simplifying the process for all parties.
Who Uses QSFs?
QSFs are most commonly used by individuals and businesses who need to settle personal injury claims.
Why Use A QSF?
Using a QSF can save you time and money when settling a claim, and offers benefits for both defendants and claimants.
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.