Structured Settlement Factoring — Excise Tax and Consumer Protections (§ 5891)

A structured settlement is an arrangement where a person who has suffered a personal physical injury or illness receives compensation as a series of periodic payments over time rather than a lump sum — typically funded by an annuity purchased by the defendant's insurer. The payments are tax-free to the recipient under § 104 of the IRC. For the broader rules on annuity taxation, see that page. Structured settlement factoring occurs when a company (a "factoring company") offers to buy the recipient's future payment rights for a lump sum — usually at a steep discount. Congress enacted 26 U.S.C. § 5891 (Chapter 55 of the IRC) to discourage abusive factoring transactions: a 40% excise tax applies to the discounted present value of any structured settlement payment rights transferred without a qualified court order. The tax — paid by the factoring company — is so large that it effectively prohibits factoring transactions that circumvent state court approval requirements. All 50 states have enacted structured settlement protection acts requiring court approval before factoring transactions can proceed; § 5891 backs up these state requirements with a federal excise tax hammer.

Current Law (2026)

Legal Authority

• 26 U.S.C. § 5891(a) — Imposes a 40% excise tax on any person who acquires directly or indirectly structured settlement payment rights without first obtaining a "qualified order"; the tax is measured on the gross value of the structured settlement factoring transaction — the discounted present value of the payment rights transferred
• 26 U.S.C. § 5891(b)(1) — Defines "qualified order": a final order, judgment, or decree issued by a state court under applicable state structured settlement protection law that expressly approves the transfer after finding: (i) the transfer is in the payee's best interest, taking into account the welfare and support of the payee's dependents; and (ii) the payee has been advised in writing by the transferee (factoring company) to seek independent professional advice regarding the transfer
• 26 U.S.C. § 5891(b)(2) — Defines "structured settlement": an arrangement established by a suit or agreement for the periodic payment of damages excludable from the gross income of a recipient under § 104(a)(1) or (2) — i.e., compensatory damages for personal physical injury
• 26 U.S.C. § 5891(c) — Scope: a "structured settlement factoring transaction" is any direct or indirect transfer of structured settlement payment rights for consideration, other than a transfer by the payee directly to the obligor, to a qualified assignee, or to an immediate family member
• 26 U.S.C. § 130 — Qualified assignment rules: the original tax-free treatment of structured settlement payments requires a "qualified assignment" to an assignment company that holds a qualified funding asset (annuity or U.S. government obligation); § 5891 is designed to protect the integrity of this tax-favored structure

Implementing Regulations

The IRS regulations implementing the structured settlement factoring excise tax are at 26 CFR Part 157 — Excise Tax on Structured Settlement Factoring Transactions (21 sections). Key provisions:

• § 157.5891-1 — Imposition and measurement: the 40% excise is imposed on "any person who acquires, directly or indirectly, structured settlement payment rights in a structured settlement factoring transaction"; the tax base is the gross value of the factoring transaction — the discounted present value of the payment rights being transferred; the acquirer (factoring company) bears the tax, not the payee; no § 5891 tax applies if the transfer is pursuant to a qualified order (state court approval under an applicable state structured settlement protection act)
• § 157.6011-1 — Return requirement: every factoring company liable for the excise must file a return with the IRS on Form 8876 (Excise Tax on Structured Settlement Factoring Transactions)
• § 157.6071-1 — Return due date: returns must be filed within 90 days of receipt of the structured settlement payment rights; the 90-day clock starts on the date the factoring company acquires the payment rights under the factoring agreement
• § 157.6081-1 — Automatic 6-month extension: a factoring company may obtain an automatic 6-month extension by filing for the extension before the 90-day deadline; interest accrues on any unpaid tax during the extension period even though no penalty applies
• § 157.6001-1 — Records requirement: factoring companies must maintain complete and detailed records sufficient to enable IRS to verify the tax base — copies of the factoring agreement, court approval orders (if any), present-value calculations, and payment schedules; records must be retained as required by general IRS rules

Recent rulemakings: The core regulations have been stable since the excise was enacted in 2002 (Victims of Terrorism Tax Relief Act of 2001). The IRS has not issued major amendments to Part 157; practical enforcement focuses on audits of Form 8876 filings and information matching with state court approval records.

How It Works

In personal injury litigation, defendants (or more commonly their insurers) agree to pay plaintiffs a stream of future payments funded by an annuity purchased from a life insurance company held by a qualified assignment company. Periodic payments compensating for personal physical injury are entirely excluded from gross income under § 104(a)(2) — making structured settlements both income-certain and tax-free. But recipients sometimes want cash now — to pay medical bills, buy a home, or handle emergencies — and factoring companies offer lump-sum payments in exchange for the future payment stream, typically at steep discounts: a recipient might get $50,000 cash today in exchange for $120,000 in future payments over 10 years (effective rates of 10–15% or more are common). Factoring companies have historically targeted vulnerable people with poor financial literacy. The § 5891 excise addresses this not by prohibiting factoring, but by requiring court approval: if a factoring company obtains a "qualified order" from a state court finding the transaction is in the payee's best interest, no excise applies. Without that order, the 40% tax on the discounted present value of transferred payments makes the transaction economically impossible — a company paying $50,000 for $120,000 in future rights would owe $40,000+ in excise tax, eliminating any profit.

Every state has also enacted a Structured Settlement Protection Act (SSPA) requiring courts to independently assess: the payee's financial situation and reasons for wanting the lump sum; fairness of the terms (effective interest rate and comparison to alternatives); impact on the payee's dependents; and whether the payee received independent advice. Judges have become increasingly scrutinizing of factoring transactions, and some have become known for denying approval in transactions they find predatory. The § 5891 excise protects the § 104 exclusion: if a payee transfers rights without court approval, the excise falls on the factoring company, not the payee. However, a payee who receives a lump sum (even with court approval) has converted future tax-free payments into a cash payment — the tax treatment of that lump sum for the payee can be complex and requires specific legal and tax guidance.

How It Affects You

If you receive structured settlement payments and are considering selling them: This decision deserves extremely careful consideration. You are selling tax-free, guaranteed future income for a discounted, taxable lump sum. The effective interest rate charged by factoring companies typically runs 10–20% annually — far higher than you could borrow elsewhere. Before proceeding, you must go through state court approval, and you should consult an attorney or financial advisor who is not affiliated with the factoring company. Consider alternatives: personal loans, home equity, or negotiating with creditors may be cheaper. Some states have enacted additional protections including mandatory waiting periods and rights of rescission.

If you're negotiating an injury settlement: Consider carefully whether a lump sum or structured settlement better suits your long-term needs. Structured settlements provide certainty and tax-free income, while lump sums provide flexibility but require disciplined investment and are fully taxable. Financial modeling should compare after-tax returns of both options at realistic investment rates. Plaintiffs who know they have poor impulse control or who are in unstable financial situations often do better with structured settlements precisely because factoring transactions are difficult (expensive and court-supervised) — the structure provides protection against your future self.

If you're an attorney or financial advisor representing injury victims: The § 5891 court approval requirement and the state SSPA process are protective structures that your client benefits from — factoring companies cannot quickly extract a one-sided agreement from a vulnerable client without judicial oversight. When advising on whether to approve a factoring transaction in a court proceeding, request full financial disclosure from the factoring company, have an independent financial expert analyze the effective cost, and assess alternatives. Courts in some jurisdictions have become increasingly skeptical of serial factoring (payees who return to court multiple times to sell off more payments) and of transactions that leave the payee financially exposed.

State Variations

All 50 states have enacted structured settlement protection acts, but the specific requirements vary:

• Court type: Some states require approval from a specific court type (probate, circuit, etc.); others allow general civil courts.
• Notice requirements: Most states require advance notice to the annuity issuer and obligor before the court hearing.
• Waiting periods: Some states impose mandatory waiting periods between approval and closing.
• Rescission rights: A minority of states give payees a right to cancel a factoring transaction after court approval.
• Disclosure requirements: Most states require written disclosure of the effective interest rate (the equivalent annual interest rate the payee is paying) in plain language.

Pending Legislation

• SSPA uniformity: Proposals for a uniform federal structured settlement protection act have been introduced but not enacted; state laws vary enough that some factoring companies shop for more permissive state courts.
• Enhanced disclosure rules: Legislation to require standardized disclosures (APR-equivalent disclosure similar to Truth in Lending Act) for factoring transactions has been proposed to make comparison easier for payees.

Recent Developments

• CFPB studied structured settlement factoring as a consumer harm — then CFPB was gutted (2025): The Consumer Financial Protection Bureau studied structured settlement factoring as a consumer financial product, publishing research on the effective interest rates charged (often 15–25% annually) and the vulnerability of typical payees (personal injury victims, often with disabilities, limited financial literacy, or ongoing medical costs). Under the Trump administration's DOGE-influenced restructuring in early 2025, the CFPB's rulemaking and enforcement capacity was dramatically reduced. The regulatory gap raised concerns about reduced federal oversight of factoring company practices, though the § 5891 excise tax backstop and state court approval requirements remain in place regardless of CFPB activity.
• Courts increasingly scrutinizing serial factoring: In multiple state jurisdictions, family court and civil court judges have begun denying structured settlement factoring petitions — particularly "serial" factoring applications where a payee returns multiple times to sell additional payment tranches from a shrinking stream. Courts in New York, Florida, and California have denied approval where judges found the transactions left payees unable to cover ongoing medical or living expenses. Some jurisdictions have developed specialized procedures for evaluating factoring petitions, including requiring the payee to appear in person and demonstrate understanding of the transaction's full cost.
• State SSPAs strengthened with enhanced disclosure requirements: Several states have amended their Structured Settlement Protection Acts since 2020 to require more robust disclosure: written advisement of the effective interest rate expressed as an annual percentage rate (APR-equivalent), mandatory waiting periods between application and court hearing, and rights of rescission after approval. The NASP (industry trade group) has supported some disclosure improvements while opposing measures that would require independent financial counseling for payees, arguing that costs would be passed through to payees in lower prices for their payment rights.
• Minors' structured settlements under heightened protection: Courts have become especially protective of structured settlements established for minors. Settlement proceeds from childhood injuries are typically placed in structured settlements to provide income through adulthood. Factoring companies attempting to purchase payment rights from payees who received settlements as minors face particularly stringent judicial review in most jurisdictions, with some courts having standing orders requiring additional scrutiny for formerly minor payees.