Using Qualified Settlement Funds in Personal Injury Settlements for Protected Persons
| Jurisdiction | Colorado,United States |
| Citation | Vol. 38 No. 7 Pg. 99 |
| Pages | 99 |
| Publication year | 2009 |
2009, July, Pg. 99. Using Qualified Settlement Funds in Personal Injury Settlements for Protected Persons
July 2009
Vol. 38, No. 7 [Page 99]
Trust and Estate articles are sponsored by the CBA Trust and Estate Section. Topics include trust and estate planning and administration, probate litigation, guardianships and conservatorships, and tax planning.
Coordinating Editors
David W. Kirch, of David W. Kirch, P.C., Aurora--(303) 671-7726, dkirch@dwkpc.net; Constance D. Smith, of Rothgerber Johnson & Lyons LLP--(303) 623-9000, csmith@rothgerber.com
About the Author
Sarah L. Golombek is an associate with the law firm of Solem, Mack & Steinhoff, P.C. She created the Personal Injury Settlement Packet for Lawyers, accessible on the Denver Probate Court's website, and specializes in assisting practitioners in protective proceedings, including drafting and obtaining court approval of Rule 16 petitions, special needs trusts, and qualified settlement funds, as well as negotiating Medicaid liens. The author thanks R. Eric Solem; her colleagues at Solem, Mack & Steinhoff, P.C.; and Hon. C. Jean Stewart for providing their encouragement and insights on the topic.
Qualified settlement funds have become a common mechanism used in personal injury settlements for protected persons. This article provides an overview of the process of using qualified settlement funds and the advantages of doing so.
Rule 16 of the Colorado Rules of Probate Procedure (Rule 16) provides the structure for seeking court approval of a settlement of a claim for a protected person.(fn1) Most often, a Rule 16 petition is brought on behalf of a minor or an incapacitated or disabled adult to settle a claim in a personal injury, wrongful death, or medical malpractice case; or in receiving life insurance proceeds or a distribution from a decedent's estate.(fn2) One tool that has become extremely useful to practitioners in these cases is a qualified settlement fund (QSF).(fn3)
As many practitioners handling Rule 16 cases may have experienced, obtaining court approval of a settlement often can be delayed by factors such as unresolved liens or subrogation claims, or when additional time is needed to contemplate a financial plan or to apply for government benefits. Using QSFs provides the opportunity to resolve or set aside many of these issues, ultimately allowing practitioners to obtain court approval of the settlement in a speedier and more efficient manner.
Additionally, a QSF enables the protected person (referred to as the claimant or plaintiff in this article) to receive his or her settlement proceeds immediately. These proceeds can be used to fund a special needs trust or a structured settlement. A QSF also benefits the insurance company paying out the proceeds, because on payment, the insurer is released from any further liability in the matter. A QSF further provides practitioners with the immediate financial resources to fund future litigation against additional defendants on behalf of their clients.
QSFs at a Glance
A QSF:
* 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
* 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.(fn1)
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1. Pursuant to CRS § 25.5-4-301(4), 10 C.C.R. 2505-10, § 8.100.7.E.6.b.i.f, the Colorado Department of Health Care Policy and Financing will not approve the funding of a special needs trust until any Medicaid liens against the settlement proceeds have been resolved.
What is a QSF?
A QSF is a type of trust account that can be used by a plaintiff or multiple plaintiffs settling a claim to protect the settlement proceeds. A QSF shelters the proceeds without constructive receipt by the plaintiff, which could trigger tax consequences or public benefit ineligibility.(fn4) 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.
According to some practitioners, a QSF provides breathing space after settlement that is valuable for determining several key factors without the pressure associated with the litigation itself.(fn5) Others describe a QSF as a means of transferring control of the settlement process from the defendant to the claimant.(fn6)
The general requirements for a settlement fund to qualify as a QSF are as follows:
1. The fund is established pursuant to an order of, or is approved by, the United States (or agency thereunder, including a court of law), and is subject to the continuing jurisdiction of that governmental authority.
2. The fund is established to resolve or satisfy one or more...
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