Published in The American Bar Association’s Professional Lawyer, Summer 2002
“I’m a trial lawyer . . . I can’t offer financial advice.” — Many lawyers
What is the proper scope of client counseling? Model Rule of Professional Conduct 1.2 (or its counterpart in the Model Code ) is a logical starting point for discussion. It states that the lawyer is required to “abide by the client’s decisions concerning the objectives of the representation” and to “consult with the client as to the means by which they are to be pursued.” The rule also states that “a lawyer shall abide by a client’s decision whether to settle a matter.” In this author’s experience, and contrary to admonitions to abide by a client’s decision, many attorneys do not consult their clients about one very critical aspect of representation: the “form” of settlement (as opposed to the “substance” or dollar amount).
Hundreds of thousands of civil cases are filed each year in America, but 97.1% of them never go to trial. The percentage of bodily injury cases settled out of court is even more staggering. If settlement is the principal method of resolving civil litigation in our country, the bargaining process is arguably the paramount facet of law in action. Since an attorney must know his client’s preferences to bargain effectively, client-counseling skills are some of the most important a lawyer can develop.
Communication with the client tends to break down in two areas of discussion: 1) structured settlements and, 2) the impact of accepting settlement proceeds on the client’s eligibility for government benefits like Medicaid, which have strict financial eligibility limits. Lawyers often presume these topics cross the line between “legal” advice and “financial” advice. In fact, structured settlements and special needs trusts (to preserve government benefit eligibility) are “of the law” (Sections 104(a)(2) and 130 of the Internal Revenue Code and 42 U.S.C. § 1396p(d)(4)(A)).
Because these subjects are “of the law,” a lawyer’s silence can run afoul of Model Rule 1.4, which states, “[a] lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation” and “shall reasonably consult with the client about the means by which the client’s objectives are to be accomplished.” When a client takes constructive receipt of settlement proceeds, his options regarding structured settlements and government benefit eligibility are often eliminated or severely complicated, so if it is not the lawyer’s role to discuss these subjects with the client, then whose is it?
Other ethics statements that support client counseling on structured settlements and special needs trusts are Model Rule 1.3, which speaks to “diligence” in handling interests of the client that can be adversely affected by the passage of time, and the commentary to Rule 2.1 (Advisor), which suggests that the duty to communicate with the client under Rule 1.4 may require a lawyer to act when the client’s course of action is likely to result in substantial adverse legal consequences. (While not squarely on point, this commentary does suggest a duty to “speak up” when remaining silent may harm the client’s interests)
Much has been written about lawyers providing financial planning services to clients within the context of the hotly debated Multidisciplinary Practice (MDP), or by way of fee-for-referral arrangements with financial professionals. Fee-for-referral arrangements are allowed in many states if done with appropriate disclosure and client consent . The analysis, pro and con, tends to focus on Model Rules 1.7(b) (Conflict of Interest: Current Clients); 1.8(a) (Conflict of Interest: Current Client: Specific Rules); 2.1 (Advisor); 5.4 (Professional Independence of a Lawyer); and 5.7 (Responsibilities Regarding Law-Related Services). Each of these rules cautions attorneys to exercise independent professional judgment. The assumption is that MDP or referral arrangements can impair the lawyer/client relationship or the lawyer’s professional judgment.
The ethics of MDP’s or cooperative business arrangements are not the subject of this article. However, we can draw two conclusions from the commentary concerning these arrangements. First, the questions concerning the boundaries of the practice of law are not confined to structured settlement or special needs trust issues. Second, an eventual affirmation of the MDP concept would lead to new and revised Model Rules.
In short, the rules of the game are changing and the practitioner must take steps to ensure that he understands the impact of those changes across all aspects of his practice.
It is the author’s opinion that the “hands-off” approach historically taken by attorneys is not what is called for in the Model Rules. This article reviews the themes of various complaints filed against attorneys for alleged malpractice concerning structured settlements and government benefits. It then introduces the reader to a model approach to client counseling on those topics. Finally, it discusses the practicality of the 468B Qualified Settlement Fund for ensuring proper client counseling, communication, and diligence.
The Lawsuits
The American Bar Association Standing Committee on Lawyers’ Professional Liability recently studied twenty-five practice areas and found that fully one-fourth of legal malpractice claims were filed against plaintiffs’ attorneys, for the alleged mishandling of personal injury cases. Fourteen types of legal activities were investigated. The highest rate of claims was related to procedural aspects of the personal injury case, but alarmingly, when the number of claims related to “advice” and “settlement/negotiation” are combined, they become the second highest area of vulnerability for attorneys.
Themes of “advice” and “settlement/negotiation” complaints revolve around not offering information or advice regarding structured settlements and/or special needs trusts; improper documentation to preserve tax-free benefits; improper calculation of fees; misrepresentation of the present value of the settlement offer; and improper information regarding the taxation of damages.
The Model Rules, as originally adopted in 1983, were not intended as a basis for civil liability. However, the Ethics 2000 Commission proposed, and the House of Delegates adopted, a modification to the portion of the Scope section that discusses the effect of a rule violation on a lawyer’s substantive legal duty. This change was in recognition of the weight of judicial opinion in malpractice litigation that a violation of the rules may be admissible as evidence of a breach of the duty of care. As exemplified below, most malpractice complaints filed against attorneys do allege some form of negligent breach of the standard of care owed by the attorney to the client.
1. Texas (Not reported, TX 2001): Complaint filed against the plaintiff attorney for not offering client information on a structured settlement annuity or special needs trust after underlying personal injury claim settled for $2.5 million.
Plaintiff was given cash proceeds and instructions to place the money in a Section 142 Trust to buy annuities that were not tax-free. A lawsuit was filed against the plaintiff attorney for “negligence, gross negligence and deceptive trade practices, as those terms are understood in the law and because of defendants’ fraud, breach of fiduciary duty and breach of contract.” This claim was settled for $1.6 million. A settlement was also reached with the court-appointed guardian ad-litem for an additional $2.5 million.
2. Ohio (Not reported, OH 2000): Complaint alleging failure to advise, filed against plaintiff attorney after dissipation of settlement proceeds. Claimant alleged such failure violated the standard of care required of attorneys practicing law in Ohio.
Claimant would have been eligible for Medicaid if the proceeds of his settlement ($618,322.30 net) had been placed in a Special Needs Trust. The guardian in the case repeatedly questioned the plaintiff’s attorney about the use of a trust to obtain government benefits, but was rebuffed until only $200,000 of the settlement remained. Thereupon the attorney stated he had received permission to establish such a trust, but only if it was established for $200,000. The trust was established and the claimant began receiving government benefits the same month.
3. Illinois (Naqvi v. Rossiello, 321 Ill. App.3d 143 (Ill. App. 1 Dist. 2001)): Complaint filed against the former attorney and law firm when the claimant was charged substantial taxes, interest, and penalties on his settlement proceeds from a retaliatory discharge action against his employer. Claimant alleged his attorney negligently gave erroneous tax advice.
The attorney told his client the settlement would be tax-free. The fact as to whether all of it would be tax-free is in dispute. The attorney said the client was being taxed based on the 1995 change in the tax code and his settlement would have been tax-free based on the 1989 rulings. The trial court agreed with the attorney, but the appellate court did not. The appellate court stated that the differences in the tax code only pertained to punitive damages, which were not taxable in a personal injury case until 1995, and while that may be an issue in this case; the problem was with the written language of the settlement agreement. The summary judgment in favor of the attorney was reversed and the case remanded back to the circuit court.
4. Many States: There is a group of cases pertaining to the calculation of attorneys’ fees when a structured settlement is used. In most instances, the defense provided the annuity and did/would not give information pertaining to the cost.
In Ratcliff v. Boydell, 674 So.2d 272 (La. App. 4 Cir. 1996), the trial court stated that there were only three ways to correctly value the contingent fee associated with a structured settlement: 1) the actual cost, 2) the present value of the annuity, or 3) the actual amount paid with payments going to the attorney in periodic payments. The court said the best way to determine the amount would be the actual cost and it should be determined using an economist, actuaries, or other structured settlement brokers. The court made the point that it should be someone with knowledge of structured settlements.
The attorney made his own determination of the cost associated with the structured settlement ($112,000) and obtained an interest rate from his CPA, who would make the present value of the annuity the figure he wanted. The court stated that the CPA did not have any knowledge of the interest rates or actuarial tables used. Accordingly, the CPA’s figure was determined to be inaccurate. The cost was eventually shown to be $45,465, not $112,000. The attorney’s fees were recalculated using the lower amount and adding interest.
5. New York (Lyons v. Medical Malpractice Ins. Ass'n, 730 N.Y.S.2d 345 (N.Y.A.D. 2 Dept. 2001)): Complaint filed against both the plaintiff and defense attorneys as well as the insurance company alleging fraudulent, intentional, or negligent misrepresentation.
A structured settlement was offered and accep ted based on the valuations given by the defense. The claimant was an injured three year old child who had been given a rated age of fifty-four by at least one life insurance company. The present value of the annuity (approximately. $675,000) was determined using a Normal Life Expectancy of 80 years. With the child’s reduced life expectancy, however, the present value of the annuity would only be $410,000 (approximately $265,000 difference from the original present value of the annuity). The defense’s misrepresentation was not disputed at trial. In dispute was whether the defense had fraudulently, intentionally, or negligently misrepresented the cost and whether plaintiffs’ reliance was reasonable. The court determined the misrepresented proposal was to be used for a particular purpose and the plaintiffs were known parties who would rely on the misrepresentation. Judgment was granted giving the plaintiffs the difference between the actual present value and the proposed present value.
Judgment was also obtained against the plaintiff attorney for fees associated with the annuity. The difference in the fee that was calculated, as opposed to what it should be, was over $88,000.
A Model Approach To Client Counseling
Although other scholars have described the client counseling process, Professors Binder and Price present the model that is most “Model Rule” comprehensive and universally accepted. Their “client-centered” model provides the analytical foundation for current law school curriculum on interviewing and counseling processes. It stresses that until the lawyer effectively “counsels” the client, the lawyer cannot know which settlement scenario (or form thereof) will provide maximum benefit, because the lawyer does not yet understand the client’s unique value system.
However, Binder and Price also say that clients frequently find it difficult or impossible to quantify and articulate their preferences, and attorneys have difficulty ascertaining the importance the client places on each alternative. For instance, would the client trade the loss of control, the possibility of audit by agencies, and the limitations of distributions inherent in a special needs trust for the mechanism’s ability to preserve Medicaid eligibility when the cost of future care exceeds the settlement.
Proper client counseling, according to Binder and Price, has the following characteristics:
1. Lawyer and client work together to identify all possible alternative solutions to the client’s problem.
2. Lawyer and client then consider all consequences of each alternative. The lawyer has primary responsibility for predicting the “legal” consequences of each proposed course of action; the client takes the lead, in response to the lawyer’s prompting, in identifying the economic, social, and psychological consequences of each alternative.
3. Lawyer articulates these identified consequences into “advantages” and “disadvantages” so client can better weigh the available alternatives. (Binder and Price expressly warn the lawyer to remain neutral when describing available alternatives)
4. Lawyer asks client to evaluate each alternative, a process that needs to be freed as much as possible from emotion, optimism and bias in order to reach a decision.
Despite its widespread acceptance, the Binder and Price model is intentionally simplified for teaching purposes and does not offer the personal injury practitioner much guidance for counseling clients regarding the quality of result they may be seeking from a settlement. The quality of result (i.e., lifestyle) ideally optimizes the advantages and disadvantages of devices such as structured settlements and special needs trusts. To achieve such effective counseling in personal injury cases, assistance may be required from attorneys/professionals experienced with 468B Fund creation and administration, trusts to preserve government benefit eligibility, the taxation of damages, structured settlement brokerage, and, in some instances, modeling the probability of various settlement options for meeting the future cash flow requirements called for in a life care plan.
The lawyer must envision a role for an “advocate” that goes beyond proving liability and damages, preparing for trial and/or negotiating settlement. Quite simply, the lawyer may need his/her own advocate.
Introducing Your Advocate
“A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”—Model Rule 1.1 (Competence)
Claimants are confronted with many complex issues during litigation, and people who have sustained catastrophic injuries already feel overwhelmed with questions. Personal injury lawyers quickly realize that for their clients, confusion and frustration burden the litigation process. This author has conducted extensive interviews and focus groups with injured people, caregivers, and attorneys to better understand their frustrations. In broad generalizations, the interviews and focus groups revealed that injured persons want:
• A way to resolve immediate post-injury concerns, such as paying for medical bills, understanding health insurance and government benefits, modifying the home, special equipment needs, transportation;
• A process that addresses all the issues brought about by the injury (physical, psychological, social, legal and financial);
• A relationship with advisors they trust, one that extends to some degree beyond the settlement;
• Personal autonomy and empowerment.
In light of the Model Rules, malpractice themes, and the typical client’s disposition, lawyers representing the critically injured should start with the fundamental assumption that they have a duty to secure advice for their clients regarding government benefits, structured settlements, and taxation of damages. This is not just the author’s opinion; an Ohio ethics opinion goes so far as to declare that a lawyer has a fiduciary duty to refer a client to appropriate resources when the lawyer ascertains that a client needs financial services.
When introducing an advocate, the client should be told expressly that his/her plaintiff lawyer will not provide financial advice, but is instead simply introducing an advisor to ensure that the client is receiving proper education regarding all options available. The client is free and encouraged to speak with other advisors. It is imperative, however, that the advocate be introduced prior to settlement, because many options are eliminated upon constructive receipt of settlement proceeds.
For many attorneys, the notion of a “plaintiff advocate” for structured settlement purposes requires a paradigm shift from sole reliance on the defense’s liability insurance carrier. Many plaintiff lawyers have traditionally relied on the broker introduced by the defense to draft the release language and additional documentation required for a valid structured settlement. Lawyers should rethink this reliance. The defense’s first priority is a full and final release that is created and maintained by a validly executed settlement agreement and release, and, with structured settlements, a qualified assignment pursuant to section 130. An advocate for the plaintiff lawyer can certainly protect these interests. And given the changing landscape, plaintiff attorneys now have more at stake than the defense in this transaction.
Since most malpractice complaints allege some negligent breach of the standard of care owed to the client, the financial professional brought in as advocate/educator should be associated with a financial services firm that requires a standardized approach to planning for injured individuals. Hence the attorney is not introducing the client to an individual; he is introducing the client to a process, executed by an individual, which is overseen by some corporate or fiduciary authority and is the same in all parts of the country.
Lawyers should also memorialize the educational process by requiring clients to sign acknowledgements declaring that they were presented (and understood) the advantages and disadvantages of structured settlements and special needs trusts.
468B Settlement Funds: Bringing Order to Chaos
Designated Settlement Funds (DSFs) and Qualified Settlement Funds (QSFs) are useful for ensuring proper client counseling before, during, and even after settlement. They introduce a degree of breathing space after settlement that is valuable for determining several key factors: allocation of funds; the appropriate role of a structured settlement annuity; the need to preserve governmental entitlement benefits; the need for the establishment of a special needs trust; and a host of other decisions that can best be made without the pressure associated with the litigation itself. 468B funds are the only vehicles that facilitate placement of a structured settlement annuity without requiring the signature/participation of the defense.
Creation of DSFs and QSFs
DSFs were created when the U.S. Tax Reform Act of 1986 inserted §468B into the U.S. Internal Revenue Code. It established a safe harbor by spelling out terms under which the defendant in a tort claim can make qualified payments into a designated settlement fund and be certain that the Internal Revenue Service would deem economic performance to have occurred. This is important to the defendant and his insurers because the payment cannot be deducted until there has been economic performance.
QSFs were created by Regulations relating to §468B, which became effective on January 1, 1993. Unlike a DSF, a QSF is not restricted to tort claims. Although there are some other differences between a DSF and a QSF, they operate very similarly. Generally speaking, the Regulations issued under 468B apply the 468B Statute to a broader range of settlement funds. Henceforth, this article will refer generically to a “468B Fund.”
Since their creation, 468B Funds have been a useful tool in resolving present and future claims arising out of personal injury, death, or property damage. They have been used in settlements ranging from mass torts like asbestos or Fen Phen to cases involving a personally injured claimant with a derivatively injured spouse, child, or parent.
Advantages of a 468B Fund
The main reason an alleged tortfeasor would request the creation of a 468B Fund is to disengage from the litigation and qualify for economic performance. Payment is made by the alleged tortfeasor in exchange for a release from the present claimant(s) and possible future claimants. Once payment has been made to the 468B Fund, the litigation process ceases for the tortfeasor, thereby reducing legal costs and freeing resources tied up in litigation.
There are also major advantages to the claimants. The 468B mechanism provides a temporary shelter for the assets that eventually will be distributed to the claimants. While temporarily held in the 468B, the assets are not “constructively received” by any claimant, as that doctrine is set forth in Treasury Regulation Section 1.451.2. This kind of “breathing space” is valuable to the claimants and their advisors in making a final determination on the allocation of the award. The time can be used to decide how best to preserve government entitlement benefits; the need for the establishment of a special needs trust; spousal al location of funds; and a host of other decisions.
Another advantage to claimants is that the tortfeasor is removed from the process. Often a degree of acrimony has built up during the litigation. The administrator is now responsible for making the payments out of the 468B Fund. Furthermore, monies are available to settle claims and are not subject to the tortfeasor’s creditors. This is a particular advantage if the defendant’s or his insurer’s financial position is unstable.
468B Funds provide another important advantage to the litigating parties. The claimant may elect to settle the claim with a structured settlement, without losing the tax advantages associated with structures, provided of course that the requirements of Revenue Procedure 93-34 are satisfied.
Conclusion
This article has attempted to outline a client counseling approach, consistent with the Model Rules, that contemplates the “form” as well as the “substance” (or dollar amount) of settlement. The objective was to explore and better understand our duty as lawyers to provide counseling on such topics as structured settlements and special needs trusts. More succinctly, to better understand the line between advice that is “legal” and that which is “financial.” Such understanding is needed to improve client-lawyer dialogue about settlement options.
More finely honed client counseling skills would enable many lawyers to comprehend not only the client’s desire to settle (the immediacy of the here and now), but also the client’s fundamental concerns for the future (a settlement inadequate for all future care, the need for government benefits, etc.). To accomplish this enhanced kind of counseling, lawyers may find it necessary to form relationships with advocates who have the appropriate qualitative and quantitative skills: attorneys and/or professionals experienced with 468B Fund creation and administration, trusts to preserve government benefit eligibility, the taxation of damages, structured settlement brokerage, and, in some instances, modeling the probability of various settlement options for meeting the future cash flow requirements called for in a life care plan.
Given the themes of many malpractice complaints being filed by disgruntled, uninformed clients, it is only logical for lawyers to re-examine their approach to educating their clients about certain settlement options that are “of the law.”
Paragraph (a) of Rule 1.2 has no counterpart in the Disciplinary Rules of the Model Code. EC 7-7 stated: “In certain areas of legal representation not affecting the merits of the cause or substantially prejudicing the rights of a client, a lawyer is entitled to make decisions on his own. But otherwise the authority to make decisions is exclusively that of the client . . ..”
MODEL RULES OF PROFESSIONAL CONDUCT Rule 1.2 (2002) (emphasis added).
Id. (emphasis added)
See Marc Galanter & Mia Cahill, Most Cases Settle: Judicial Promotion and Regulation of Settlement, 46 Stan. L. Rev. 1339 (1994).
Samuel Issacharoff et al., Bargaining Impediments and Settlement Behavior, in THE ECONOMICS OF LEGAL RELATIONSHIPS 51, 62 (Nicholas Mercuro ed., 1996). A 1994 insurance industry report states that only about six-tenths of 1 percent of all bodily injury claims are decided by a judge or jury.
“Structured settlement” describes compensation for a personal injury claim where at least part of the settlement is paid over time, rather than with a single lump sum. The claimant receives a promise from some entity to make future payments according to an agreed upon schedule. The hallmark of structured settlements is their treatment under 104(a)(2) of the Internal Revenue Code, which designates structured settlement payments and any income they produce as tax-free.
A Special Needs (Medicaid Payback) Trust is a trust arrangement that allows an individual with disabilities to have funds available for his or her needs without the funds counting as a financial asset for benefit eligibility purposes.
A series of Revenue Rulings established that a personal injury claimant could receive a future stream of payments and appreciate the same tax-exempt status afforded lump sum settlements of personal injury claims under Section 104(a)(2) of the Internal Revenue Code, provided certain criteria were met, including that the claimant has no control over the investment that secures the obligation to make the future payments (a.k.a., Constructive Receipt).
MODEL RULES OF PROFESSIONAL CONDUCT Rule 1.2 (2002). Rule 1.4 has no direct counterpart in the Disciplinary Rules of the Model Code. DR 6-101(A)(3) provided that a lawyer shall not neglect a legal matter entrusted to him. EC 7-8 stated that a lawyer should exert his best efforts to insure that decisions of his client are made only after the client has been informed of relevant considerations.
Treasury Regulation Section 1.451.2 states that income, “although not actually reduced to a taxpayer’s possession, is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could draw upon it during the taxable year if notice of intention to withdraw had been given.”
The Model Code’s comparable sections include: DR 6-101(A)(3), which required that a lawyer not neglect a legal matter entrusted to him and EC 6-4, which stated that a lawyer should give appropriate attention to his legal work. Canon 7 stated that a lawyer should represent a client zealously within the bounds of the law. DR 7-101(A)(1) provided that a lawyer shall not intentionally…fail to seek the lawful objectives of his client through reasonably available means permitted by law and the Disciplinary Rules…DR 7-101(A)(3) provided that a lawyer shall not intentionally…prejudice or damage his client during the course of the relationship…
Large accounting firms want to offer “one-stop-shopping” for legal, financial and other professional services. Debate centers on lawyers splitting fees with non-lawyers within these MDP’s. Critics fear business/profit motives will conflict with the core professional values of the legal profession, and that MDP arrangements may encourage the unauthorized practice of law.
For a summary of the state and local bar association ethics opinions on these arrangements, see Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio, Opinion 2000-1 (2/11/00).
The American Bar Association established the Commission on Evaluation of the Rules of Professional Conduct (“Ethics 2000 Commission”) to examine ethical precepts in light of the developments since the Model Rules’ adoption in 1983. The Commission reported its recommendations in 2000.
American Bar Association Standing Committee on Lawyers’ Professional Liability, PROFILE OF LEGAL MALPRACTICE CLAIMS (2000).
MODEL RULES OF PROFESSIONAL CONDUCT (2002), Scope, Comment [20]..
Donald G. Gifford, The Synthesis of Legal Counseling and Negotiation Models: Preserving Client-Centered Advocacy In The Negotiation Context, 34 UCLA L. Rev. 811, 813 (1987)..
D. BINDER & S. PRICE, LEGAL INTERVIEWING AND COUNSELING: A CLIENT-CENTERED APPROACH, pp. 148 – 150 (1972).
See id.
Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio, Opinion 2000-1 (2/11/00).
IRC Sec 130 describes the qualified assignment process, wherein the settling defendant (or its liability insurance carrier) transfers the obligation of future payments to a third party assignment company. Thus the defendant’s (or carrier’s) tort liability, and its obligation to make the periodic payments, is terminated.
The lawyer should request a letter to this effect.
IRC §461(h)
Reg. §1.468B-1. Only three requirements for QSFs are listed.
“A fund, account, or trust satisfies the requirements of this paragraph (c) if—
1. It is established pursuant to an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
2. It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability –
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law, or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
3. The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related parties).”
Reg. §1.468B-1(c)
“The term DSF means any fund -
(A) which is established pursuant to a court order and which extinguishes completely the taxpayer’s tort liability with respect to claims described in subparagraph (D),
(B) with respect to which no amounts may be transferred other than in the form of qualified payments,
(C) which is administered by persons a majority of whom are independent of the taxpayer,
(D) which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage,
(E) under the terms of which the taxpayer (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and
(F) with respect to which an election is made under this section by the taxpayer.”
Neither a DSF nor a QSF can be used in relation to Workers Compensation claims.
Creating 468B funds is not complicated. The mechanics are as follows:
1. Either litigating party petitions the Court seeking an order approving the setting up of a 468B Fund.
2. The 468B Fund is established and then overseen by a court appointed Administrator.
3, The tortfeasor pays the agreed compensation into the 468B Fund and is released from the liability associated with the particular action.
4. The 468B Fund assumes the liability for the action and settles the claims with the individual claimants. Settlement can include cash as well as structured settlements with qualified assignments pursuant to IRC Section 130.
5. Once the 468B Funds have been exhausted, the 468B Fund is dissolved.
The requirements are:
1. The claimant must agree in writing to the qualified assignment.
2. The assignment is made with respect to a claim involving a physical, personal injury or sickness for which the Fund has been established.
3. Each qualified funding asset purchased by the assignee relates to the liability of a single claimant.
4. The assignee is not related to the transferor to the Fund.
5. The assignee is neither controlled by, nor controls, directly or indirectly, the Fund.
6. All the other requirements of section 130 are met.
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