Single-claimant qualified settlement funds (SCQSFs) represent one of the two most politically divisive issues within the structured settlement industry - with the National Structured Settlement Trade Association (NSSTA) opposing and the Society of Settlement Planners (SSP) promoting SCQSF use.
Tax expert Robert W. Wood , a prolific author, whose specialties include structured settlements and personal injury settlement planning, has published a new article in the June 23, 2014 of "Tax Notes" titled "Reprising Single-Claimant Qualified Settlement Funds".
QSFs, or section 468B funds, as explained in Wood's article, are designed to resolve litigation. "Their primary objective is to gather and administer cash or assets and determine the amounts and exact nature of payments that the plaintiffs, attorneys, and other claimants will receive..... QSFs benefit both plaintiffs and defendants alike. They are separate entities for federal income tax purposes and are flexible and easy to establish."
The benefits of QSFs are summarized in Section 3.08B of "Structured Settlements and Periodic Payment Judgments" (S2P2J): "defendants obtain a binding release from liability by making a currently-deductible payment into a court or government-approved Fund; while claimants, who have no tax consequence as a result of this payment into a Fund, are then afforded as much time as they need to sort out important issues of their own, such as allocating settlement shares, obtaining court approvals for minors or other legally-disabled claimants, resolving liens (which sometimes involve complex pay-back and set-aside issues as to Medicaid and Medicare), and deciding on forms of distribution (whether cash, structured settlements, or special needs trusts that may be used to preserve eligibility for certain government benefits)."
Wood has previously addressed SCQSF issues in multiple articles and conference presentations and, most significantly, in his 2009 legal textbook titled "Qualified Settlement Funds and Section 468B" . For background concerning Wood's views on SCQSFs, see these prior S2KM blog posts;
Having surveyed the debate and framed the issues five years ago, at which time Wood concluded the proponents of SCQSFs had the better argument, Wood prefaces his new article by asking: "Has Anything Changed?"
Wood's new article:
- Reviews the legal background and arguments favoring and opposing SCQSFs as well as the requirements and advantages of QSFs.
- Confirms Wood's opinion favoring proponents' arguments for SCQSFs - while cautioning taxpayers to try to set up QSFs with multiple claimants:
- "The language of the tax code and regulations suggests there should be no controversy."
- "Reg. section 1.468B-1(c)(2) suggests the possibility of a single claim, mentioning 'one or more contested or uncontested claims' and an event giving rise to 'at least one claim asserting liability.'
- "With the focus on the claim or claims, not the claimant or claimants, a plurality of claimants seems to be unimportant."
- "Congress appears to have intended QSFs to operate as a statutory exception to both the economic benefit and constructive receipt doctrines."
- Highlights removal of the SCQSF issue (without IRS explanation) from the IRS priority guidance plan in 2009.
- Predicts the IRS is more likely to "establish some sort of antiabuse rule addressing the inappropriate use of QSFs to defer income rather than establishing a minimum number of plaintiffs or claimants."
Has Anything Changed?
Beyond removal of the issue from the IRS priority guidance plan, however, Wood's new article does not directly address his primary question: "Has Anything Changed" since 2009 that impacts the utilization of SCQSFs?
The answer is "Yes". Most significantly, unlike 2009, no structured settlement annuity providers currently accept SCQSFs. They have effectively shut down this strategic personal injury settlement planning opportunity for a wide scope of actual and/or potential structured settlement cases.
Prudential, for example, sent a communication to its structured settlement agents dated March 19, 2012 stating, in part:
- "Prudential recently reviewed its underwriting criteria with respect to single claimant QSF cases. As a result, effective immediately, we will no longer write cases stemming from a single claimant QSF."
- "Prudential defines a single claimant QSF as a fund either established for the benefit of a single claimant or, for multiple claimants who do not have “competing interests” (e.g., plaintiff family members). Prudential will not provide for “derivative” claims from the injured party, i.e., a loss of consortium or an emotional distress claim by the parents and/or siblings for the personal injury victim."
- "It is Prudential’s position that when the funds are deposited into a QSF for a single claimant, and there are no other factors to be negotiated under the settlement, the claimant has received economic benefit of the assets. Prudential does not consider lien holders or other non-claimant creditors (attorneys, medical providers, Medicare or Medicaid) as substantial additional obligations to be satisfied prior to the claimant’s ownership of the assets transferred to the QSF."
Despite the current closure of the SCQSF structured settlement market, SCQSF analysis and debate has expanded since 2009 - thanks significantly to Wood's SCQSF writing and speaking. Examples:
- Jeremy Babener's QSF Paper: "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History". See:
- Martin Jacobson's QSF Presentation titled "The Ins and Outs of 468B Funds" at the NSSTA 2011 Annual Meeting wherein Jacobson identified what he termed "the real SCQSF questions":
- Does a single claimant have economic benefit of the funds placed in the QSF?
- Does the single claimant have "unqualified availability" of those funds?
- Has IRC Section 130(c) been satisfied?
- Is there going to be an IRS ruling applicable to single claimant QSFs?
- In the continuing absence of such an IRS ruling, Jacobson quoted Robert Wood to "avoid the single claimant controversy" by establishing QSFs with multiple claimants.
- The Qualified Settlement Fund Symposium - For S2KM's reporting from the 2012 QSF Symposium, see these prior blog posts:
Why do opponents object to SCQSFs - and why do they continue to broaden the scope of SCQSFs to encompass arguably multiple claims by family members, plaintiff attorneys, lien holders and creditors?
- Without more definitive tax clarification, structured settlement annuity providers are concerned about the original legislative intent of IRC section 468B, related economic benefit issues, and the potential litigation impact from lawsuits that could arise if SCQSFs are ruled invalid.
- Defendants and their insurers view structured settlements as valuable "needs analysis" and "bridge-the-gap" negotiating tools they would lose if single event personal injury cases were routinely resolved using QSFs.
- Defense brokers argue that SCQSFs will: 1) reduce the structured settlement market by eliminating defense incentive to promote structured settlements; and 2) eliminate defense broker commissions.
Although Robert Wood's most recent SCQSF article does not attempt to resolve these SCQSF objections (and they may not be resolvable), his SCQSF "reprising" hopefully will help motivate structured settlement and settlement planning stakeholders to better identify shared SCQSF interests and to seek further SCQSF tax clarification including what constitutes multiple claimants for purposes of IRC section 468B.