There has been a lot of talk, articles and news over the last week on the appointment of Kenneth Feinberg as the pick to manage the $20 billion settlement fund set up to pay claims and provide relief to Gulf coast residents. We have had Attorney Rick Kuykendall on to discuss this and will have him back again this week end to provide greater detail, but one of the issues yet to be mentioned in the press reports is whether or not this fund will be set up to conform to IRC code 468b, or as a Qualified Settlement fund.
Why is this important you might ask?
Simply because the vast majority of the funds to be paid out of this BP Oil Spill fund will be as compensation for lost income, wages, business revenue or property loss. In short, these distributions will be taxable to those who receive them and the legal fee's of the attorneys involved will in most cases not be tax deductible, further adding insult to injury.
Fox News covered the story earlier this week on the shock of residents to find out these funds are going to be taxable damages.
The value of setting up the BP Oil Spill fund as a 468b trust is that it would allow the trustee, Kenneth Feinberg, to have the authority to sign off on non-qualified structured settlements that would allow claimants from the Gulf Coast area to take their payments over a period of time, thus smoothing out the cash flow and reducing the tax hit from being pushed into the highest tax brackets as a result of a one time check.
The other value is that if this is set up as a 468b it will allow BP Oil to get a full and complete deduction for their funds, as they would have no control over the administration or management of the account by law, thus insuring their deduction as well as removing the threat of their interference in the reimbursement process.
I will be doing a series on the why this fund must be set up to comply with 468b, which is standard of practice now in taxable damage cases, to allow the vast number of clients to plan their payment options and determine if structuring their funds over time makes sense.
Lets hope the legal and settlement community don't whiff on this opportunity.