Feeling lucky? Our Six Tips On What To Do If You Win The Lottery – Part 3
By: Eric R. Kaplan, Esq
As you may have likely noticed, the jackpot for the upcoming Mega Millions drawing exceeds $1 billion. While obtaining such a fortune may seem like a dream come true, such an unfathomable amount of money also comes with an overwhelming level of responsibility. In order to best handle your new fortune, and not fall victim to it, focus on the following items:
The first step is to secure the winning Mega Millions ticket either in a safe deposit box or other location where you retain your most valuable items. Next, resist the tempt
1. If permitted by your state’s law, consider claiming the lottery ticket in a trust or limited liability company in order to preserve your individual anonymity.
If you create a trust or limited liability company to claim your winning ticket, your identity will be preserved because the trust/limited liability company (as opposed to you) will be identified in public records as being the winner. Achieving this goal may depend upon the laws of the state in which you reside, as some states require an individual to claim the prize.
Assuming your home state allows collection of winnings by either a trust or limited liability company, you may need to assign the winning Mega Millions ticket into the trust or limited liability company before claiming the prize. This step can assist in avoiding a substantial estate or gift tax bill.
Create an estate plan!
If you don’t already have an estate plan in effect, now is the time to do so in order to ensure that your heirs (and other intended beneficiaries) will be the individuals who enjoy your wealth after you pass away (as well as during your lifetime).
One advantage of creating a trust to hold your wealth is that it will avoid the probate process after your death.
If you already have an existing estate plan, now is the time to work with your attorney to properly reflect your vastly improved economic status.
Tax planning
Avoid paying almost half of your winnings in taxes by implementing creative tax planning strategies.
Explore how to minimize income taxes by maximizing deductions or creating a tax-exempt organization.
Additionally, discuss with your attorney how to avoid inheritance and generation-skipping transfer taxes, and to determine the best way to “gift” money to loved ones.
Asset preservation
Now that you have hundreds of millions of dollars in the bank, you are now more susceptible to lawsuits (whether they be legitimate or frivolous)!
People who you thought were your friends may not be so friendly anymore. However, that will likely be offset by plenty of unknown people who will be lining up around the block to be your new “friend.”
If you are married, tread carefully so your spouse is not given cause to disrupt your current family dynamic, such as filing for divorce. Creating a trust to hold your winnings may provide “divorce-proofing” features.
Accepting your winnings as either a lump sum or in installments
Lump sum
If you accept the winnings as a lump sum, you will immediately owe income tax on the entire amount of your winnings. Think of it as the Internal Revenue Service congratulating you on your (and now, their) good fortune.
Risks involved with a lump sum payment include: (a) higher risk of mismanagement of funds; and (b) lower overall payout.
You will also need to manage your money on a scale in which you likely aren’t familiarized with. However, if you plan wisely and seek legal, financial and tax advice, you can avoid many of the common pitfalls of winning the Mega Millions.
Installments
Each payment you receive will be individually taxed.
With this option, you do not have to worry about managing a large fortune.
If you pass away before the annuity period expires, however, your family will have to pay the estate tax on their inheritance – a large amount that they likely do not have on hand.
Additionally, this option can impact the total amount of money that you ultimately bring home.
Risks involved with installments include: (a) issues that might occur upon your death; and (b) no way to obtain the remainder of your entitled amount ahead of time.
Invest wisely
Many lottery winners eventually lose everything, usually by investing poorly or trusting bad business partners.
Meet with an experienced and trusted financial planner to assess what investments are worthwhile and which are scams.
Additionally, determine the appropriate amount of money to invest so that it doesn’t include an amount that exceeds your comfort level.
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