Qualified Settlement Funds (468B Trusts): An Attorney’s Guide to Buying Time

The Bottom Line

A Qualified Settlement Fund (QSF) is a court-supervised trust under IRC §468B and Treas. Reg. §1.468B-1 that lets a defendant pay the agreed settlement, take an immediate tax deduction, and exit the case — while plaintiffs gain months or years to allocate proceeds, resolve liens, set up special needs trusts, and decide on structured settlements and fee deferral before anyone is in constructive receipt. It is most powerful in mass-tort and multi-claimant settlements. The single-claimant QSF, by contrast, remains genuinely debated, and we treat it conservatively.

What a QSF Is and Where It Comes From

A QSF — also called a 468B trust — is "a fund, account, or trust that satisfies the requirements" of Treas. Reg. §1.468B-1. Congress enacted §468B in the Tax Reform Act of 1986 (the narrower "designated settlement fund"); Treasury's 1992 regulations (T.D. 8459) created the broader, more flexible QSF.

To qualify, §1.468B-1(c) requires that the fund:

1. is established or approved by a court (or other governmental authority) "and is subject to the continuing jurisdiction of that governmental authority";
2. is established to resolve claims arising out of "a tort, breach of contract, or violation of law" (or CERCLA); and
3. is a trust under applicable state law, or its assets are otherwise segregated from the transferor's other assets.

Treasury confirmed in T.D. 8459 that "even a single claim satisfies the requirement," and that a finding of liability is not required. Certain liabilities are expressly excluded under §1.468B-1(g) — notably workers' compensation and self-insured health-plan obligations.

The Tax and Timing Engine

This is why attorneys use QSFs.

For the defendant. Transfer to a QSF satisfies the economic-performance requirement of §461(h). Per §1.468B-3(c), "economic performance occurs… to the extent the transferor makes a transfer to a qualified settlement fund." The defendant gets a current deduction and a complete release, and can walk away even though distributions to claimants may take years.

For the claimants. The transfer does not trigger constructive receipt. Claimants do not own or control the fund — the trustee holds title, and a claimant has only a contingent future expectation. That gap in time is the entire value proposition. It lets counsel and claimants:

• allocate proceeds among multiple claimants (and satisfy aggregate-settlement ethics rules);
• resolve and negotiate liens — Medicare, Medicaid, ERISA, hospital, and private subrogation — before money moves, which matters because personal liability can attach to the attorney for unpaid government liens;
• establish special needs trusts to preserve Medicaid/SSI eligibility, and consider Medicare Set-Asides;
• evaluate structured settlements that, for physical-injury claims, pay out income-tax-free under §104(a)(2); and
• elect attorney-fee deferral under Childs v. Commissioner, 103 T.C. 634 (1994), aff'd, 89 F.3d 856 (11th Cir. 1996), by directing fees from the QSF to an assignment company.

A QSF can also make a qualified assignment of the periodic-payment obligation under §130: Rev. Proc. 93-34 treats a QSF as "a party to the suit or agreement" for §130(c)(1) purposes, enabling tax-advantaged structures funded out of the fund.

Why QSFs Shine in Mass-Tort and Multi-Claimant Cases

The QSF was built for exactly this. A single aggregate payment from one or more defendants resolves the claims of many plaintiffs at once; the global settlement closes and the defendant is dismissed while allocation is worked out afterward. Allocation is commonly handled by a special master or allocation neutral — often appointed by the same court that established the QSF — applying point-based or matrix methodologies so similarly situated claimants are treated equitably. Administrators may pay claimants with no outstanding issues immediately while others wait for lien or probate resolution, and the fund protects claimants against a defendant's later insolvency.

How the QSF Itself Is Taxed

A QSF "is a United States person and is subject to tax on its modified gross income… at a rate equal to the maximum rate in effect" under §1(e) — currently 37% (§1.468B-2(a)). But "modified gross income" excludes the settlement amounts transferred in (§1.468B-2(b)(1)) — it captures essentially the interest and dividend income the fund earns, reduced by administrative costs. The settlement dollars themselves are not taxed. The administrator files Form 1120-SF annually and obtains a separate EIN. Distributions keep their character: a physical-injury distribution is excludable under §104(a)(2), while a distribution for taxable interest is includible (§1.468B-4).

The Single-Claimant Debate — and Why We're Cautious

The single-claimant QSF is genuinely unresolved. Treasury listed guidance on the question on its Priority Guidance Plans from 2004–2005 through 2008–2009, then dropped it — per industry commentator John Darer, "the issue was removed from Treasury's priority guidance list in November 2009" — without ever issuing guidance. The two camps:

• Valid (Robert W. Wood, Tax Notes Federal, Feb. 2020): the regulation speaks of "one or more contested or uncontested claims" and "at least one claim asserting liability" — putting the focus on the claim, not the claimant.
• May not be valid (NSSTA-aligned view): §468B and its legislative history targeted multi-claimant cases; where funds are set aside for one claimant with no material contingencies, the economic-benefit doctrine may apply.

There's also a practical constraint: most life carriers will not accept a §130 qualified assignment from a single-claimant QSF, which limits structuring options. We characterize this as an open debate rather than asserting a settled answer, and we reserve single-claimant QSFs for situations with a defensible rationale — confirming a willing assignment carrier before relying on a structure.

When to Use a QSF — and When to Skip It

Use a QSF when two or more of these are present:

• Multiple claimants whose individual allocations aren't finalized
• Mass tort, class action, or multi-defendant settlement needing a global close
• Unresolved Medicare / Medicaid / ERISA / hospital / subrogation liens
• A claimant on needs-based benefits who may need an SNT or MSA
• A minor, incapacitated adult, or wrongful-death estate requiring court approval
• Plaintiffs considering structured settlements
• Attorneys wanting to defer contingent fees (Childs-compliant)
• Defendant solvency risk, or year-end timing where the deduction is needed now

Probably skip it for a clean single-plaintiff case with no liens, no benefits issues, and no structure or fee-deferral plans, and small settlements where administration cost outweighs the benefit — structure directly instead. (A QSF carries setup, trustee, court, and tax-prep costs; full-service setup is sometimes quoted around $5,000, though interest earned on the fund often covers the tax return.)

Choosing the Administrator

This is the law firm's most consequential QSF decision. Use a licensed, bonded, independent fiduciary with QSF tax experience (Form 1120-SF, §130 assignments), strong banking partners, and no product-driven conflicts. The ABA flags two threshold traps: a fund lacking genuine continuing governmental authority, and a "trustee" without legally conferred trust powers — either can disqualify the fund and unwind the deduction and the claimants' deferral.

We coordinate QSF establishment, lien resolution, trust funding, and structured/fee-deferral strategy as an independent fiduciary. Talk to us before mediation or refer a case.

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This is a general legal/tax explainer, not advice for a specific matter. QSF qualification and tax outcomes are fact-specific and state law varies (some states tax QSF income at high rates). The single-claimant question is unresolved.