Tax Implications for Qualified Settlement Funds

 Bethany Palmer Recht has served as an attorney for more than 15 years. She began her career at Weil, Gotshal & Manges, LLP, and now serves as a partner at Keating Muething & Klekamp PLL, as well as chair of the firm’s diversity committee. At this firm, Bethany Recht represents trustees of both settlement trusts and qualified settlement funds (QSFs).

A QSF, also known as a Section 468B trust, is a trust set up for settlement proceeds. Its purpose is providing funds deposited into the trust to various claimants according to an agreement set up via court order or among the parties involved. Once the funds have all been distributed, the QSF no longer exists, since it’s only a temporary trust.

While QSFs receive special treatment when it comes to taxes, they are not wholly exempt from taxation. Typically, a QSF is viewed as a distinct tax-paying entity and required to make annual tax filings and tax payments. State taxation varies based on the location of the QSF, but federal tax for a QSF’s income is 35 percent.

In addition, QSFs must adhere to different tax liabilities depending on how they operate and how they are set up based on legal documents. In the event the fund pays wages to a beneficiary, it is viewed as an employer and must pay taxes accordingly. For distributions that are not regarded as wages, the QSF has additional tax implications, like reporting the amount of these distributions on its annual tax forms.