Selling lottery annuity payments: how it works and what it costs
If you chose the annuity and later need a large sum of money, you may be able to sell some or all of your future payments to a company in exchange for cash now. It can solve a real problem, but it is expensive. This guide explains how it works and what to check before signing anything.
How a sale works
A buyer (often called a factoring company) agrees to pay you a lump sum now. In exchange, the lottery sends some or all of your future payments to the buyer instead of you. You can usually choose to sell:
- all remaining payments,
- a set number of payments (for example the next five), or
- part of each payment (for example half of each payment for ten years).
Why the price is lower than the payments
Money in the future is worth less than money today. The buyer applies a discount rate to each future payment to work out what it is worth now. The higher the discount rate, the less you receive. Buyers' rates are usually well above what a bank pays on savings, because the buyer takes on costs and wants a profit.
For example, a payment of $1 million due in ten years is worth about $614,000 today at a 5% discount rate, but only about $386,000 at 10%. Small changes in the rate make a big difference over long periods.
Court approval
Many states only allow lottery payments to be transferred with a court order. A judge reviews the sale, may ask whether you received independent advice, and may check that the deal is fair and in your interest. Expect paperwork, a hearing and some weeks of waiting. Some states do not allow lottery payments to be sold at all.
Taxes when you sell
Selling future payments does not remove the tax on them; it changes the timing. The money you receive can be taxable in the year of the sale, which can push you into a higher bracket that year. The exact treatment depends on your situation, so ask a tax professional before you agree to sell, and set aside the tax from the proceeds.
Alternatives to consider first
- A loan secured on your payments, where allowed, may cost less than a sale.
- Selling only part of your payments keeps a guaranteed income for later years.
- Adjusting your budget for a year or two may be cheaper than losing a large share of future value.
Questions to ask any buyer
- What discount rate are you using, and what is the total of the payments I am giving up?
- What fees will be taken from the lump sum, including legal costs?
- Will you pay for my independent advice, as some state rules require?
- How long will court approval take, and what happens if it is refused?
- Can I cancel, and until when?
Get at least three written offers and compare the amount you receive for the same payments. Be wary of pressure, upfront fees or offers that seem too good.
Is the annuity still the right choice?
If you are still deciding how to take a prize, read lump sum vs annuity first, and see both options in the calculator. Choosing the annuity and selling later almost always gives less than taking the lump sum at the start.
This guide is general information, not financial, legal or tax advice. LotteryTaxHub does not buy or broker annuity payments and receives nothing from companies that do.