Structured settlement transfers explained

A structured settlement transfer is not a loan, rather it is the sale of future payment rights. When you pursue a structured settlement transfer, you’re selling the rights to some or all of your future structured settlement payments to a purchasing company in exchange for an immediate lump sum of cash.

This transaction is not a structured settlement loan, it is more accurately called a “structured settlement transfer,” “structured settlement buyout,” or “structured settlement sale.” The purchasing company becomes entitled to receive your future payments directly from the annuity issuer, and you receive a discounted lump sum immediately.

The discount applied to your payments—the difference between what you receive now and what you would have received over time—represents the purchasing company’s profit. This discount accounts for the time value of money (money now is worth more than the same amount in the future), administrative costs, and the company’s profit margin.

For example, if you’re entitled to receive $500 per month for the next ten years (totaling $60,000), a purchasing company might offer you $40,000 to $45,000 in immediate cash in exchange for those payment rights. The exact amount depends on various factors, including current interest rates, the length of time until payments are complete, and competitive market conditions.

How structured settlement transactions work

The process of selling structured settlement payments involves several steps and typically takes between 45 to 90 days to complete. Understanding this process helps set realistic expectations and prepares you for what lies ahead:

• The process begins when you contact a structured settlement purchasing company and provide information about your settlement, including payment amounts, frequency, and duration.

• The company then evaluates your settlement and provides a quote indicating how much they’ll pay for your future payments.

• If you accept the offer, you’ll sign a purchase agreement outlining the terms of the sale.

• The purchasing company will then petition the court for approval of the transfer, as required by law.

• You’ll need to appear before a judge (either in person or sometimes remotely) who will evaluate whether the transfer is in your best interest.

• During the court hearing, the judge considers several factors: whether you understand the terms of the transfer, whether you have a legitimate need for the immediate funds, whether the discount rate is reasonable, and whether the sale is in your best financial interest. Some states require that you receive independent professional advice before the transfer can be approved.

• If the judge approves the transfer, the purchasing company coordinates with the annuity issuer to redirect your future payments.

• You receive your lump sum payment, typically within a few days of court approval, and the purchasing company begins receiving your payments according to the original schedule.

Types of structured settlement transactions

There isn’t just one way to sell structured settlement payments. Several options exist, each with different implications for your financial future:

• A full sale involves selling all remaining payments from your structured settlement. This provides the maximum immediate cash but means you’ll receive no future payments from the settlement. This option might make sense if you need substantial funds for a major expense and have other sources of income to rely on.

• A partial sale allows you to sell only a portion of your future payments while retaining the rest. For instance, you might sell the next three years of payments but retain all payments after that. This provides immediate cash while preserving some long-term financial security.

• A split sale involves selling specific payments while keeping others. You might sell every other payment, sell only the payments scheduled for certain years, or create any custom arrangement that meets your needs. This flexibility can help balance immediate needs with long-term security.

• A lump sum advance involves receiving a portion of an upcoming large payment before its scheduled date. If your structured settlement includes a $50,000 payment scheduled in two years, you might receive $35,000 now in exchange for rights to that future payment.

The best option depends on your specific financial situation, the reason you need funds, and your future income prospects. Financial advisors generally recommend selling as few payments as possible to meet your immediate needs while preserving future financial security.

When might selling structured settlement payments make sense?

While financial advisors generally recommend keeping structured settlements intact when possible, certain situations may justify selling future payments:

• Medical emergencies represent one of the most compelling reasons. If you or a family member faces a serious health crisis requiring treatment not covered by insurance, immediate access to funds could be life-saving. The original settlement may have been designed to cover routine medical expenses but cannot flex to accommodate unexpected crises.

• Homeownership opportunities sometimes justify selling payments. If you have the income to afford mortgage payments but lack funds for a down payment, accessing your settlement could help you purchase a home. Homeownership can provide long-term financial benefits and stability that may outweigh the cost of selling payments.

• Business investments might make sense for entrepreneurial recipients. If you have a viable business plan and the skills to execute it, using settlement funds to start or expand a business could generate returns exceeding what you’d lose by selling payments. However, this should be approached cautiously since businesses are risky.

• Debt elimination can be worthwhile, particularly for high-interest debt. If you’re paying 20% interest on credit card balances, using your settlement to eliminate that debt might save more than you lose in the sale, especially if the discount rate is lower than your debt interest rates.

• Education funding represents an investment in your future. If returning to school could significantly increase your earning potential, using settlement funds to pay for education without taking student loans might be financially prudent.

• Major home repairs that affect health and safety might necessitate selling payments. If your home has serious issues like a failing heating system, damaged roof, or toxic mold, addressing these problems protects your family and your property investment.

When selling is probably a bad idea

Just as there are good reasons to sell structured settlement payments, many situations suggest you should keep your settlement intact:

• Wanting funds for luxury purchases rarely justifies selling. Trading guaranteed future income for a vacation, new car, or entertainment system almost never makes financial sense. The discount you accept means you’re essentially paying a premium of 20% to 40% for these items.

• You’re experiencing temporary financial difficulties, selling long-term income to solve short-term problems often creates bigger issues down the road. Exploring alternatives like personal loans, assistance programs, or budget adjustments might be more appropriate.

• You lack a clear plan for the money, selling payments is premature. Without specific goals and a concrete plan for using the funds, you risk spending the money quickly and having nothing to show for giving up future income.

• Pressure from others should never drive your decision. If family members, friends, or romantic partners are pushing you to sell your settlement to benefit them, this is a major red flag. Your settlement exists to provide for your needs.

• If you’re already struggling financially, selling your settlement might provide temporary relief but could worsen your long-term situation. The future income your settlement provides might be essential for covering basic living expenses in years to come.

• Repeatedly attempting to sell your settlement can raise concerns with courts. Judges may question whether you’re making desperate decisions, and some states prohibit “serial” transfers within certain timeframes.

The true cost of selling your payments

Understanding exactly what you’re giving up when you sell structured settlement payments is crucial for making an informed decision:

• The discount rate applied to your payments can vary significantly, typically ranging from 8% to 18%, though some transactions involve even higher effective rates.

• The longer the timeframe of payments you’re selling, the steeper the discount typically becomes. Payments scheduled 15 to 20 years in the future might be valued at only 30 to 40 cents on the dollar in today’s money. This reflects both the time value of money and the uncertainty of very long-term agreements.

• You lose more than just money. Structured settlements often provide tax-free income, depending on their source. The lump sum you receive from selling might be tax-free, but what you do with that money could have tax implications. If you invest it, your investment earnings will likely be taxable.

• You also lose the security of guaranteed payments. Your structured settlement was designed to provide long-term financial stability. Market crashes, bad investments, or poor spending decisions cannot affect guaranteed annuity payments. Once you receive a lump sum, all those risks fall on you.

The court approval process

Since all structured settlement transfers require court approval, understanding what judges consider helps prepare for this process.

• Judges evaluate whether the transfer serves your best interest by examining your stated reason for needing immediate funds, whether the discount rate is reasonable compared to industry standards, whether you understand the terms and consequences of the transfer, whether you’ve received independent advice or waived the right to receive it, and your overall financial situation and ability to meet future needs without the settlement payments.

• Courts are particularly protective of vulnerable populations. If you’re receiving disability payments, are elderly, have cognitive impairments, or face other vulnerabilities, judges scrutinize transfers more carefully. This protection exists because these individuals may be targets for exploitation.

• Some states impose additional requirements beyond federal law. These might include minimum waiting periods between signing the agreement and the court hearing, mandatory independent professional advice before proceeding, restrictions on how frequently you can sell payments, and specific findings the judge must make before approving the transfer.

• During the hearing, be prepared to clearly explain why you need immediate funds, demonstrate that you understand what you’re giving up, show that you’ve considered alternatives, and prove the transfer won’t leave you unable to meet basic needs.

• Judges can and do deny transfers they consider inappropriate. If your transfer is denied, you cannot proceed with that sale. While you can reapply later or with a different company, repeated denials suggest you should reconsider whether selling is the right choice.

Tax implications of structured settlement transfers

One advantage of many structured settlements is that payments are tax-free, particularly those arising from physical injury or physical sickness claims. Understanding how selling payments affects taxation is important:

• Generally, the lump sum you receive from selling structured settlement payments retains the same tax status as the original payments. If your structured settlement payments were tax-free, the lump sum you receive should also be tax-free. However, this isn’t automatic—specific IRS rules and regulations apply.

• Once you receive the lump sum, however, what you do with that money has tax implications. If you deposit it in a savings account, interest earned is taxable. If you invest it, capital gains and dividends are taxable. If you use it to start a business, business income is taxable.

• This contrasts with keeping your structured settlement intact. Those tax-free payments would continue without creating tax liability, regardless of how long you receive them.

• There are also potential tax implications for the purchasing company. If the company doesn’t comply with federal and state requirements for structured settlement transfers, they face a 40% excise tax on the amount paid to you. This significant penalty encourages companies to follow proper procedures, which protects you.

Consulting with a tax professional before selling your settlement is wise, particularly if you’re considering a large transfer or have complex financial circumstances. A qualified accountant or tax attorney can help you understand the specific implications for your situation.

Long-term financial implications

Selling structured settlement payments creates ripples that extend far beyond the immediate transaction. Understanding these long-term implications is crucial for making an informed decision.

• Reduced future income. If your settlement was designed to supplement Social Security, replace lost wages, or cover ongoing medical expenses, selling payments might create financial shortfalls years from now. Consider whether your income from other sources will be sufficient to cover your needs.

• Your eligibility for need-based government benefits. Programs like Supplemental Security Income (SSI), Medicaid, and subsidized housing have asset limits. A large lump sum could temporarily disqualify you from benefits, even if you quickly spend the money.

• The psychological impact shouldn’t be underestimated. Many settlement recipients experience regret after selling, particularly if the immediate need wasn’t as critical as it seemed or if the lump sum disappeared faster than expected. This regret can’t undo the transaction.

Making the right decision

Deciding whether to sell structured settlement payments is deeply personal and depends on your unique circumstances. There’s no universal right answer, but a systematic approach to the decision can help:

• Identify why you need immediate funds. Write down your specific need, the exact amount required, and when you need it. This clarity helps evaluate whether selling is truly necessary and how much you need to sell.

• Calculate the true cost of the transaction. Don’t just look at the lump sum offered—determine what discount rate is being applied and what you’re giving up. Compare this to the cost of alternatives like loans.

• Consider your future financial picture honestly. Will you be able to meet your needs without the settlement payments you’re considering selling? Factor in potential changes like retirement, increasing medical needs as you age, or other foreseeable expenses.

• Seek advice from trusted, objective sources. Talk to a financial advisor who doesn’t benefit from your decision, consult with an attorney who can explain legal implications, or speak with a credit counselor about alternatives.

• Take your time with the decision. Legitimate companies will give you space to think carefully. Anyone pressuring you to decide quickly doesn’t have your best interests at heart. This decision is too important to rush.

• If you proceed with a sale, document everything. Keep copies of all agreements, court orders, and correspondence. Understand exactly what payments you’re selling, when the company will receive them, and when you’ll receive your lump sum.

Final thoughts

Structured settlement transfers are not loans, but they do offer a way to access immediate cash by selling future payment rights. These transactions can provide valuable liquidity during genuine emergencies or important opportunities, but they come with significant costs that extend beyond the obvious discount applied to your payments.

If you’re considering selling your structured settlement payments, take the time to explore all alternatives, get multiple quotes from reputable companies, seek advice from independent professionals, and think carefully about your long-term financial needs. The few weeks or months invested in thoughtful decision-making could save you from decades of regret.

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