Qualified Settlement Funds

A qualified settlement fund (also known as QSF or 468b fund) is a type of trust and a powerful tool that encourages and simplifies lawsuit settlements. A QSF shelters the proceeds without constructive receipt by the plaintiff, which could trigger tax consequences or public benefit ineligibility. Among other benefits, a QSF provides the plaintiff additional time to resolve any claims or subrogated interests against the proceeds; arrange long-term planning for the proceeds, including structuring the funds; or fund a disability trust for the plaintiff’s immediate needs. The general requirements for a settlement fund to qualify as a QSF are as follows:

  • Must be created by a court and be subject to continuing court supervision;
  • Must resolve claims related to the subject of the lawsuit; and
  • Must qualify as a trust under state law.

Though QSFs are extremely flexible and can be utilized to help settle a variety of cases, it has become a common mechanism used in personal injury settlements for incapacitated persons. Rule 16 of the Colorado Rules of Probate Procedure (Rule 16) is the legal authority which sets forth the process by which court approval can be sought on behalf of a minor or incapacitated/disabled adult who is expected to receive a proposed settlement, life insurance proceeds, or a distribution from a decedent’s estate.

The creation of a QSF has numerous benefits in such cases including:

  • allows the claimant to receive funds early without constructive receipt for tax purposes;
  • removes the defendant from litigation without further liability;
  • allows the defendant to take a tax deduction that otherwise would not be available until the funds are distributed to the claimant;
  • allows the claimant to make his or her own determination about distribution of funds;
  • provides practitioners with the immediate financial resources to fund future litigation against additional defendants;
  • provides time to make final determinations on the allocation of funds;
  • provides time to decide how best to preserve government entitlement benefits for the claimant;
  • provides time to establish a special needs trust; and
  • provides time to obtain financial counseling.
  • provides time to determine the appropriate role and underwriting of a structured settlement annuity
  • provides time to verify and negotiate liens and/or subrogation claims
  • can fund a special needs trust for immediate medical needs of the claimant while other issues are resolved

For a more detailed explanation of the use of qualified settlement funds in personal injury settlement cases, you may review the article authored by Sarah L. Golombek published in The Colorado Lawyer entitled “Using Qualified Settlement Funds in Personal Injury Settlements for Protected Persons.”

Sarah L. Golombek has assisted numerous personal injury counsel settling cases on behalf of minors and incapacitated person in the drafting and creation of qualified settlement funds. If you think that a qualified settlement fund is a mechanism that would be useful in your particular legal matter, The Law Office of Sarah L. Golombek, LLC is more than happy to assist you.

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