Sell a Structured Settlement

Written by Jovan Johnson
Last revised: September 25, 2020

What is a Structured Settlement?

Structured settlement annuities are financial instruments that are normally used to provide regular, tax free payments to personal injury victims over a long period of time. Instead of facing unexpected stress and management issues that come with receiving a lump sum of money, the recipient is protected from unfortunate circumstances that could result in spending a large portion of the money that he or she needs to manage a lifetime of injury related expenses. 

How to sell a structured settlement.

  • Make the decision to sell | Do you have a valid reason for wanting to sell your payment rights? Will the sale of your payments have any effects on your future financial needs? A judge will have to confirm–more on this shortly.
  • Contact companies that buy structured settlements | You will do best if it is important that you work with a funding company that is reputable and has your best interests in mind, makes you feel comfortable, is experienced in completing the court ordered transfer process, et al.
  • Choose the company you like best and start the sales process | you must begin the paperwork process. After you submit the proper paperwork (your annuity policy, settlement agreement or benefit’s letter so the transfer company can verify your payments, application, ID), all materials are reviewed to ensure they are complete and accurate.
  • Have your sale approved by a judge | once the relevant documents are returned and they are fully signed, a local attorney files them with court and after that the court will schedule a hearing. This is the beginning of the waiting period. In the court you will be required to justify why the money is needed and you should be in a position to show that you are not putting your and your family’s financial future in jeopardy. Unless there are any problems with your request of transfer, the judges mostly approve the transfer at this stage.
  • Get your money | Once approved, the judge will sign the order approving your transaction and the order is sent over to the insurance company to wire funds.

California is one of a majority of states requiring that a judge sign off before someone selling a structured settlement completes their transaction.
California's Senate Bill 510 requires judicial approval before someone selling a structured settlement can complete a deal.

Texas also requires that a judge sign approves a structured settlement sale.
Texas' Structured Settlement Protection Act definitions.

People in New York selling a settlement must obtain judicial approval.
New York requires court approval for the sale of structured settlement payment rights.

Sell structured settlement payments:
How long does it take?

After you’ve signed the contract, on average it takes about 45 days to receive your money. However, keep in mind that every structured settlement purchase transaction is different due to each state’s laws regulating such purchase transactions. In addition, you may qualify for an immediate cash advance to help you through a particularly tough time.

What percentage do structured settlement companies take?

The percentage structured settlement companies take is based upon the discount rate applied to the transaction and negotiation.

If you are considering selling your structured settlement annuity payment rights, you need to be sure that the offers you are getting are reasonable and fair as you’ll have to get the lump sum reduced by a factor of the projected interest earnings, known as the discount rate. The exact discount rate that you will need to give in order to sell your structured settlement will depend upon the total amount of your settlement payments, the number of payments you have remaining, the date those payments are due to arrive, the number of payments you wish to sell etc. The longer people have to wait to receive their payments, the greater the discount rate will need to be. Discount rates from factoring companies to consumers can range anywhere between 8% up to over 18% but usually average somewhere in the middle. An average discount rate of 12% should be reasonable but some companies may want to take as much as 30% discount.

Do you have to pay taxes when selling structured settlement annuity payment rights?

The money you receive from selling your structured settlement payment rights will have the same tax treatment as the payments you receive from your structured settlement annuity.

Periodic Settlement Act of 1982, page 1

The Periodic Payment Settlement Act of 1982 (Public Law 97-473) formally recognized and encouraged the use of structured settlements in physical injury cases by designating payments from a structured settlement as tax-free.

Breadth of Internal Revenue Code with regards to structured settlements.
Section 104(a)(2) of the Internal Revenue Code, table of contents.

Section 104(a)(2) of the Internal Revenue Code clarifies that the full amount of the structured settlement payments, including the acceleration when, for example, Funding Company purchases your annuity, is tax-free to the victim.

The Internal Revenue Service has ruled that where a claimant assigns periodic payments due to be received under a settlement agreement in exchange for a lump sum, the lump sum remains tax-free.

Overview of the Tax Relief Act.
H.R.1836 - Economic Growth and Tax Relief Reconciliation Act of 2001, overview.

As part of the Tax Relief Act of 2001 signed by President George W. Bush on January 22, 2002, individuals who must sell their structured settlement payments to meet unplanned financial needs are protected. This legislation made it mandatory for individuals to seek court approval when they sell their structured settlement payments, and works in conjunction with state laws directing how these types of transactions will be completed. In addition to benefiting and protecting the individuals, it also makes clear that annuity providers will suffer no tax consequences as a result of these transactions. The legislation states that annuity owners and providers do not now owe, nor have they ever owed, taxes as a result of these transactions.

Though, most likely you will have to pay taxes on any money that you have won, such as lottery winnings or casino earnings. These things are taxed as any other income. If you paid your taxes on the entire lump sum up front then you will not pay taxes again when you sell your payments. However, if taxes are deducted regularly, when payments are made, then you may be responsible for paying a lump sum of taxes if you sell these periodic payments

Annuity payments rights and anti-assignment: What is an anti-assignment provision?

The goal of an “anti-assignment” provision is to ensure that the two contracting parties will not be able to transfer their obligations under the agreement to someone else without first getting permission from the other party. One of the boilerplate clauses found in most commercial contracts looks something like “Neither this Agreement nor any of the rights, interests or obligations under the Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either party without the prior written consent of the other party.”

The Law Office of Henry Parker’s overview of anti-assignment clauses.
Law firm's overview of anti-assignment clauses.

There are three variations of anti-assignment clauses that can be used in a contract: a standard anti-assignment clause barring any assignment or delegation, the second one is used when the parties want to prohibit assignments except if they transfer the agreement to new owners or affiliate companies (and don’t want to ask for permission), and the third type is similar to the second one except it requires permission for such an assignment. But it should be noted that only prevent “voluntary” assignments van be prevented; you cannot prevent assignments that are ordered by a court or that are mandatory under law—for example in a bankruptcy proceeding.