Answering the question: What would you do with your lottery winnings?
Did you hit the Powerball jackpot? If so, follow these tips to protect your windfall.
It’s a question that we ask each other from the time we’re in middle school: What would you do if you won the lottery? After all, it’s the ultimate dream of many people to win the lottery and be rewarded for simply spending $2 on a piece of paper with numbers printed on it. If you’re fortunate enough to hold the winning Powerball ticket, then you might just have a couple million reasons to make sure you’ve followed these six tips for lottery winners.
1. Utilize your best John Hancock.
If you didn’t sign the ticket at the point of purchase, then you should sign it immediately. Lottery tickets are bearer instruments; therefore, signing the ticket indicates ownership.
2. Create a dream team of advisors.
Jackpot winners should consult with an attorney, certified public accountant (CPA), and financial advisor before the ticket is redeemed. Select professionals with which you are comfortable and require them to work together on your behalf.
3. Claim that prize anonymously, if your state laws permit it.
After winning a large sum, jackpot winners often become very in-demand in their communities. Some winners may have a hard time dealing with constant requests for financial assistance. This difficult situation can be avoided by anonymously claiming winnings, if your state permits it.
In many states, a trust or limited liability company (LLC) can be set-up to receive the winnings. “Trusts and LLC’s are excellent tax efficient vehicles to hold investments while maintaining certain levels of anonymity,” said Kristofer Hoffman, CPA, CSEP, and Tax Services Line Leader for Carr, Riggs & Ingram, LLC.
Your attorney and CPA can advise you about rules specific to your state. Since most states allow between five and 12 months to claim the prize, there is plenty of time to plan for anonymity.
4. Plan for paying the taxman.
Jackpot winnings are typically distributed per the winner’s choice of periodic payments or a lump sum payout. Winnings are subject to state and federal income taxes, so it’s important to consult a CPA before the ticket is redeemed. A CPA can go through the various tax scenarios – including those involving estate taxes – and help the winner determine the best payout option.
5. Sorry, but that private jet purchase should wait.
Winning the lottery is a life changing experience. Avoid making any sudden luxury purchases or drastic lifestyle changes. Changing your lifestyle far more drastically than your winnings will support can result in the depletion of what once seemed to be a vast, unending fortune. Developing a budget and financial game plan with your advisor team will help to ensure future financial security.
6. Consider gift and estate planning.
With great wealth also comes great responsibility. It’s important to establish an estate plan that minimizes tax liability while distributing assets to the next generation. The current estate tax exclusion amount is $5.25 million (indexed for inflation) for individuals and $10.5 million for married couples. The Powerball jackpot sometimes far exceeds those estate tax exclusions and the excess amount could be taxed as high as 40 percent.
“With proper gift and estate planning, you can maximize the amount of wealth that you pass along to future generations,” Hoffman said. “Without proper planning, the bulk of your winning could go to Uncle Sam.”
So what’s the bottom line? We hope that you can now answer the question of what you’d do if you won the lottery by beginning with developing a financial plan. While it’s not necessarily the most fun answer, it will likely allow you the best opportunity for enjoying the windfall for many years ahead
About Carr Riggs & Ingram, LLC: CRI is ranked as 28th largest accounting firm nationally and third regionally in the South. Today, CRI has more than 800 employees in 31 offices throughout Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, Tennessee and Texas and is recognized as one of the fastest growing CPA firms in the United States. CRI’s industry specializations include construction companies, governmental entities, financial institutions, healthcare entities, insurance companies, not-for-profit organizations, and manufacturing and distribution companies. CRI also offers specialized services including forensic accounting, employee benefit plan (EBP) audits, service organization control (SOC) reporting, and IT audits. For details regarding our service and industry specialties, please visit CRIcpa.com or our accounting blog available from blog.CRIcpa.com