Selling a Structured Settlement: Court Approval, Taxes and Discounts

Selling a structured settlement means signing over some or all of your future settlement payments to a company for a lump sum now. The Federal Trade Commission calls this "factoring," and warns that "you won't get all the money you would've collected over time."

Two layers of law govern the sale. Federal law, 26 U.S.C. § 5891, imposes a 40 percent tax on the buyer unless a court approves the transfer in advance after finding it is in the seller's best interest, "taking into account the welfare and support of the payee's dependents." State structured settlement protection acts then set the disclosures the buyer must make and the findings the judge must reach.

Scope: This page covers the federal rules (26 U.S.C. §§ 5891 and 104) and, as examples, the structured settlement protection statutes of California, Florida and New York, as read on September 28, 2026. Your own state's act controls the disclosures, deadlines and hearing in your case. This is not financial advice, and RecordingLaw.com does not buy settlements or refer sellers to buyers.

To see what your payments are worth today and how a typical offer compares, try our structured settlement calculator.

What "selling" a structured settlement means

A structured settlement pays damages over time instead of in one lump sum. When you sell, a company (the "transferee" in most statutes) pays you cash now in exchange for the right to receive some or all of those future payments.

The FTC's consumer guide explains that when you sign over some or all of your structured settlement payments to a company in exchange for a lump sum, "it's called 'factoring.'" Federal law defines the transaction broadly. Under 26 U.S.C. § 5891(c)(3), a "structured settlement factoring transaction" is "a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration." A partial sale, or a loan secured by the payments, is covered too.

Federal law: the 40 percent tax and the court order

The tax on unapproved transfers

Section 5891(a) imposes "on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount."

The "factoring discount" is defined in § 5891(c)(4) as the excess of "the aggregate undiscounted amount of structured settlement payments being acquired" over "the total amount actually paid by the acquirer" to the seller. On a sale of $240,000 in future payments for $110,000, for example, the factoring discount would be $130,000, and the buyer's tax without court approval would be $52,000. (Illustrative arithmetic only.)

The exception: a qualified order

The tax "shall not apply" when the transfer "is approved in advance in a qualified order" (§ 5891(b)(1)). A qualified order is "a final order, judgment, or decree" that finds the transfer:

"(i) does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and (ii) is in the best interest of the payee, taking into account the welfare and support of the payee's dependents"

The order must be issued "under the authority of an applicable State statute by an applicable State court," or by the administrative authority with exclusive jurisdiction over the underlying case (§ 5891(b)(2)(B)).

Which state's law applies

Section 5891(b)(3) points first to the statute of "the State in which the payee of the structured settlement is domiciled." Only "if there is no statute" there does it look to the state where the settlement obligor (or its assignee) or the annuity issuer "is domiciled or has its principal place of business." In that case, a court in the payee's home state can still hear the case (§ 5891(b)(4)(B)).

The original settlement's tax treatment is protected

A sale does not unwind the tax treatment of the original deal for the parties who made it. Section 5891(d)(1) says that if the requirements of sections 72, 104(a)(1), 104(a)(2), 130 and 461(h) were met when the settlement was made, a later factoring transaction "shall not affect the application of the provisions of such sections to the parties to the structured settlement."

State structured settlement protection acts

Each state that has one sets its own procedure. The FTC's guide says almost all states require court approval of factoring: "So, before the transaction can take place, a judge must decide that it's in your best interest." The one exception the FTC names, New Hampshire, has its own act. Since October 9, 2021, RSA 408-G:3 has made a transfer ineffective "unless the transfer has been approved in advance in a final court order based on express findings" that include the payee's best interest.

Wherever you live, § 5891(b)(3) means a buyer that wants to avoid the 40 percent tax will need a qualified order under some state's statute.

The three statutes below show the common pattern and how the details vary.

California (Insurance Code §§ 10134-10139.5)

• Disclosure timing: "Ten or more days before the payee executes a transfer agreement, the transferee shall provide the payee with a separate written disclosure statement" (§ 10136).
• What it must show: among other items, the amounts and due dates of the payments sold, their aggregate amount, all expenses deducted with an itemization, the net amount you receive, the discounted present value of the payments, the federal rate used, and an effective equivalent interest rate.
• Independent advice, paid by the buyer: the disclosure must tell you that "the cost of that advice, up to one thousand five hundred dollars ($1,500), will be paid by the transferee" and that the buyer's own "accountant, counsel, or actuary may not advise you in this transaction."
• Cancellation: you may cancel "At any time before the date on which a court enters a final order approving the transfer agreement ... without cost or further obligation."
• Court findings: the court must find, among other things, that "The transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependents," and that you were advised in writing to get independent professional advice and either got it or waived it in writing (§ 10139.5).

Florida (Fla. Stat. § 626.99296)

• Disclosure timing and format: at least 10 days before the payee "first incurred an obligation with respect to the transfer," a disclosure "in bold type, no smaller than 14 points in size" (§ 626.99296).
• What it must show: the payments and due dates, their aggregate, "The discounted present value of the payments, together with the discount rate used," the gross amount payable, an itemized list of commissions and fees, the net amount, and an effective annual interest rate stated as: "you will, in effect, be paying interest to us at a rate of percent per year."
• Court findings: among others, that the transfer is in your best interests, that you received or waived in writing independent professional advice "regarding the legal, tax, and financial implications of the transfer," and that "the net amount payable to the payee is fair, just, and reasonable under the circumstances then existing."

New York (General Obligations Law §§ 5-1701 to 5-1709)

• Disclosure timing: "Not less than ten days prior to the date on which the payee signs a transfer agreement," by first class and certified mail or priority mail (§ 5-1703).
• What it must show: includes the discounted present value, the federal rate used to calculate it, and the gross advance amount with "the annual discount rate, compounded monthly, used to determine such figure."
• Cancellation: "the payee has the right to cancel the transfer agreement, without penalty or further obligation, not later than the third business day after the date the agreement is signed by the payee."
• Court findings: the court's express findings cover whether the transfer is in the payee's best interest "and whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable" (§ 5-1706).

The three side by side

Discount rates: what the numbers on the disclosure mean

A dollar paid 15 years from now is worth less than a dollar today. The "present value" of your payments is what they are worth today after discounting each one for the wait. The higher the discount rate, the lower the present value.

The state disclosures use a benchmark rate set by the IRS. California defines "discounted present value" using "the most recently published applicable federal rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service" (§ 10134), and Florida ties it to section 7520 of the Internal Revenue Code. The IRS publishes that rate monthly: "the interest rate for a particular month is the rate that is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls."

The buyer uses its own, higher rate to set the price. California's required disclosure spells out the consequence: "The purchase price payable to you is less than the present value of the future payments stated above because the discount rate of your transaction is greater than the rate utilized by the Internal Revenue Service." The gap between those two figures is the cost of getting the money early.

Taxes on your payments and on a sale

Structured payments from a physical injury case usually start out tax-free. Under 26 U.S.C. § 104(a)(2), gross income does not include damages (other than punitive damages) received "(whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness."

The tax effect of selling those payments is a separate question, and the federal statutes above do not answer it for the seller.

The FTC cautions: "Getting a big lump sum payment for the sale of your structured settlement payments might put you in a higher tax bracket, depending on the circumstances. By contrast, your regular structured settlement payments for your injury or disability are tax-free. Before you sign anything, talk it over with someone you trust or consult with a tax advisor."

Florida's statute likewise asks whether you received independent advice on the "tax" implications of the transfer.

Before you sign: a checklist

• Get every number in writing. The FTC says: "Get all costs and fees in writing. Ask for the percentage or discount rate that the buyer will take to provide you with the lump sum amount."
• Compare the net amount to the present value. Your state's disclosure should show both. Our calculator can give you a rough independent estimate first.
• Know your cancellation window. It ranges from three business days after signing (New York) to the court's final order (California). The FTC suggests getting "a written copy of the factoring company's cancellation policy."
• Get independent advice. Several states require the court to find you were advised to, and California makes the buyer pay up to $1,500 of the cost.
• Consider selling less. Federal law expressly covers transfers of "portions of structured settlement payments," so a partial sale is possible.
• Treat any offer to skip court as a red flag. The FTC warns: "If a factoring company offers quick cash for your payments and ways to avoid the court process, they may be luring you into a scam and the lump sum payment may not be real."

How our calculator estimates value

The structured settlement calculator is an estimator, not an offer or a quote. You enter the payment amount, how often it is paid (monthly, quarterly, every six months or yearly), how many years it runs, any annual cost-of-living increase, how many years until payments start, and an optional future lump sum.

It then shows four figures:

1. Total future payments, undiscounted.
2. Present value at the discount rate you choose. The default is 4.5 percent, and a slider runs from 1 to 20 percent. To approximate what a state disclosure would show, you can set the slider to the value closest to the current IRS section 7520 rate from the IRS page linked above (the slider moves in half-point steps).
3. A typical buyer offer, computed at an assumed 12 percent effective rate, with a range from 9 percent to 18 percent. Those rates are the calculator's modeling assumptions, not published market data or a legal standard; your actual offer will be on your disclosure statement.
4. The value you would give up, meaning the present value at your chosen rate minus the typical offer. This is not the same as the federal "factoring discount," which compares the buyer's price to the undiscounted total.

The math treats each payment as arriving at the end of its period and applies any increase once a year, so a real annuity with a different step-up date will differ somewhat. If you are weighing a sale that arose from an injury claim, our personal injury settlement calculator and our guide to wrongful death laws by state cover how such settlements are reached in the first place.

Disclaimer: This page provides general legal information about federal law and the structured settlement protection statutes of California, Florida and New York as of September 28, 2026. It is not legal, tax or financial advice, and it is not an offer to buy payments. The rules in your state may differ. Before selling any settlement payments, consult an independent attorney and a tax or financial professional who is not connected to the buyer.

Frequently Asked Questions

Do I need court approval to sell my structured settlement?

In practice, yes. Federal law taxes the buyer 40 percent of the factoring discount unless a court approves the transfer in advance in a qualified order (26 U.S.C. § 5891), and state protection acts require a judge to find the sale is in your best interest. The FTC says almost all states require court approval, and New Hampshire, the one exception it names, adopted a court-approval law in 2021.

Who pays the 40 percent federal tax?

The buyer. Section 5891(a) imposes the tax on any person who acquires structured settlement payment rights in a factoring transaction, and it applies only if the transfer was not approved in advance in a qualified order.

How much will I get if I sell?

Less than the total of your payments and less than their present value at the IRS rate used in state disclosures. California's required disclosure states the price is lower because the transaction's discount rate is greater than the IRS rate. Your disclosure statement will show the net amount, the present value and an effective interest rate; compare them before signing.

Can I back out after I sign?

Often, for a limited time. California lets you cancel any time before the court's final order, and New York until the third business day after you sign. Check your state's act and the buyer's written cancellation policy.

Is the money from selling my structured settlement taxable?

The periodic payments from a personal physical injury settlement are excluded from income under 26 U.S.C. § 104(a)(2). The federal statutes reviewed here do not say how a seller's lump sum is taxed, and the FTC warns it might put you in a higher tax bracket depending on the circumstances. Get tax advice before you sign.

Can I sell only part of my payments?

Yes, the federal definition of a factoring transaction covers transfers of portions of payments, and a partial sale can leave some income in place. The same court approval rules apply.