I settled my injury lawsuit by agreeing to a structured settlement. My circumstances have changed and I need a lump sum of money. Can I trade my annuity in for a lump sum? If not, can I sell my annuity to someone else for cash? Are there any tax consequences? Do I need court approval to sell? How do I determine what it is worth — and get the best deal?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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One of the disadvantages to a structured settlement is that you cannot make any changes in the amount you receive or in your schedule of payments. That is why it is imperative when you agree to a structure, that you try your best to anticipate what your needs will be over the period you will be receiving the payments. You will not be able to “trade” your annuity back in to the life insurance company that holds it for a lump sum of cash.

Over the last twenty years or so, many companies, referred to as “factoring companies”, began to prey on people who were receiving annuity payments and in dire need of immediate cash. They advertised that they would purchase your structured settlement for an immediate sum of money. They buy and take over receipt of your payments for a far lesser amount than the gross proceeds you would get overtime. Often, they would not tell you upfront that the cash payment is at a substantial discount. These companies are, of course, in this business to make money.

Even with some changes in the law to protect consumers, you may lose money over time if you sell to them. If you must sell, talk to as many companies as you can and try to get the best possible deal. Keep in mind that factoring companies will pay you what they say is the present value of the money, not what the total will be over the life of the structure. You will need help from a financial advisor or accountant to put an objective present value on the structured settlement.

Factoring companies are conducting a legal business. There are certain legal procedures that must be followed when these transactions are completed. You should be aware that Congress enacted a law in 2002, applicable to the sale of structured settlements, which now makes such sales safer. You will not have to pay income taxes on the cash sum, which you receive when you sell your annuity. Should you reinvest that money, however, the dividends or interest would then be taxable. The 2002 law requires that sales, assignments, or transfers of structured settlements be approved by a state court, although it is up to each state to determine whether or not they want to follow all of the requirements. The law encourages states to evaluate whether the sale is in the best interests of the seller, taking into account the welfare and support of the seller’s dependents, and violates no federal or state law or court order.

Thirty-eight states, so far, require complete court approval of the sale of structured settlements in accordance with the federal law, and more are likely to sign on. In states that require a court order, if none is obtained, the federal law compels the entity purchasing the structured settlement to be charged an excise tax of up to 40% of the total payments being purchased, thus strongly encouraging them to comply with the law.

Here is an example of how one sale might work

David, injured in a motorcycle accident, has been receiving payments every month from a structured settlement funded by a life insurance company. He has been receiving $1200 a month for the past three years, tax-free ($43,200 so far), and will continue to do so for the next 17 years. The total amount of tax-free money he will receive from the structure will be $288,000.

David has decided he wants to buy a house now and he needs money for the down payment. He wants to sell his annuity to get the cash now instead of waiting many years. One company from which he obtained a quote on the Internet said they would buy the annuity for $59,500, because that is what they say is the present value of the money. A second company said they would give him $65,000, but when his attorney checked into it, the second company is charging $8,000 in fees up front that they did not tell him about. A third company said they would give him the present day value of the money, which they claim is $45,000. All three companies acknowledge that a court order is required in their state and will do the necessary filings.

David’s attorney wisely checked with a financial advisor and learned that the first company’s estimate of present-day value is closest and is offering the best deal with no unreasonable fees. That is the one David will take. Once he gets his money, should he invest it on his own, he will now be liable for taxes on any dividends or interest the money earns.

Be sure to seek the advice of an attorney in your state before signing anything regarding the sale of your structured settlement or taking any payment from anyone. You want to make sure you are not agreeing to something that is not in your best interest. You also want to make sure everything is being done according to the law. You can have an attorney evaluate your situation free of charge by completing FreeAdvice’s case evaluation form. In addition, you may want to seek counsel from a CPA or financial advisor.

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