10 Things To Do When You Win The Lottery
Gallery: 10 Steps To Take When You Win A Lottery Jackpot
Editor’s note: This post was updated on January 12th, 2016, to reflect the current $1.5 billion Powerball jackpot and the 2016 lifetime exemption from estate and gift taxes.
The jackpot for tomorrow’s Powerball drawing has hit $1.5 billion. If you win it, you won’t ever have to worry about money again–right?
With good money management you–and your heirs–could live handsomely for many, many years. But from the moment that you claim that prize, you will be descended upon by vultures who want a hefty helping of those winnings. And if you didn’t have smart money habits up until now, you could easily turn out to be your own worst enemy by quickly squandering the fortune. (See my post, “Thieves And Forgers Rush In Where Big Spenders Dare To Tread.”)
The first precautionary step you should take between now and the drawing is to sign the back of the ticket, says Carolyn Hapeman, a spokeswoman for The New York Lottery. A lottery ticket is a bearer instrument, she explains, meaning that whoever signs the ticket and presents a photo ID can claim the prize. So if you haven’t signed the ticket and it blows out of your hand while you are waiting for a bus, or if you show it to a buddy in a bar and accidentally leave it on the counter, you’ve lost the loot.
Here are some steps to help you steer clear of additional risks. Most of them work well for other windfalls too–for example with sudden wealth that comes from an inheritance or the sale of a business.
1. Remain anonymous if your state rules permit it. Once people know you’re suddenly wealthy, you’ll be badgered by requests for handouts from everyone from charities to long-lost friends and relatives–not to mention all the financial “experts” who will be vying for your business. So check state rules to see whether you can dodge them all by remaining anonymous.
Rules on winner publicity vary by state. In New York, for example, winners’ names are a public record. Elsewhere it may be possible to maintain your anonymity by setting up a trust or limited liability company to receive the winnings, says Beth C. Gamel, a CPA with Pillar Financial Advisors in Waltham, MA. A client of Gamel’s who won a past lottery did that, and had a lawyer claim the prize on behalf of of the trust. In South Carolina, it’s also possible to remain anonymous.
Depending on where you bought the ticket, prize winners have between 180 days and one year from the date of the drawing to claim their prize. So find out what the state rules are and plot a course.
2. See a tax pro before you cash the ticket. You have the choice between taking the prize money all at once or having it paid out in 30 installments over 29 years in the form of an annuity. With a lump sum payment, you must immediately pay tax on the entire amount, says Michael A. Kirsh, a financial planner in New York. With an annuity, you are taxed only as you receive the payments. People who have trouble controlling their spending might prefer the discipline of receiving the money as an annuity. But this payout form has other drawbacks, Kirsh notes. You will want to compare the effective yield of the annuity with what you could earn by taking the money as a lump sum, paying the taxes and investing the proceeds.
Another issue to consider is whether taking an annuity will leave your family without the cash they need to pay estate tax if you die before the 30-year period is up, Kirsh says. In such situations people typically buy life insurance policies to cover the estate tax bill. (Powerball also says in its FAQs that it will cash out an annuity prize for an estate.)
You have 60 days from the time you claim your lottery prize to weigh the pros and cons. During this time, ask advisors to crunch the numbers and help you decide which type of payment suits you best.
3. Avoid sudden lifestyle changes. For the first six months after you win the lottery, don’t do anything drastic, like quitting your job, buying a home in Europe, trading up for a luxury car or building a collection of Birkin handbags. Meanwhile, set aside a fixed amount for splurges—it’s only natural to want to celebrate your windfall.
Save the big purchases for later. For example, you could rent a house in the neighborhood where you were thinking of moving, before you make any commitments, says Guerdon Ely, a financial planner in Chico, Calif. If you need a new car, buy a budget model for now.
4. Pay off all your debts. As I wrote in my post, “The Best Investment Advice I Ever Received,” there is no better investment than paying off debts. Whether it is credit card debt or a mortgage, your rate of return equals the interest rate on the loan. With today’s abysmal yields on relatively secure investments like CDs and Treasurys, that’s especially true. When you’ve paid down a dollar of debt, that’s a dollar you no longer owe. When you invest a dollar, you can’t be sure whether it will grow or shrink.
5. Assemble a team of legal and financial advisers. In situations like this it’s very hard to know “who’s trying to help you and who’s trying to use you,” says Ely. Rather than signing on to a group of advisors that someone else has put together, he recommends handpicking your own lawyer, accountant and investment advisor, and requiring them to work together.
Carefully vet each advisor before discussing your situation. Check broker records at the Financial Industry Regulatory Authority. For attorneys and insurance agents, see whether there have been any complaints filed with state disciplinary authorities.
If you live in a small community and don’t want lawyers there to know your business, seek out a professional in the nearest large city. Names can be found on martindale.com, the nationwide lawyers’ directory that you can search by location and area of practice, and on the Web site of the American College of Trust and Estate Counsel, a group of trust and estate lawyers.
In effect, the team you put together will function as your board of directors, Ely says. You can start by having a fee-only advisor put together a long-term financial plan and running it by the group for comment. Once you’ve decided on a plan, they can provide checks and balances on each other. You can ask one of them to serve as quarterback, coordinating the group effort. That person can also play the “bad guy,” declining requests from people or organizations for gifts that you don’t want to make.
6. Invest prudently. Ely recommends putting the money in safe, short-term investments and not even touching it for the first six months. Then ask your advisors is to put together an investment portfolio divided half-and-half between equities (such as stocks) and fixed income (like bonds). Don’t fall for investments that you don’t understand or that sound too good to be true.
7. Live within a budget. Especially if you’re not accustomed to having a lot of money, it may take some discipline to preserve your winnings and not go on a wild spending spree. One way to restrain yourself is to only spend income–not principal. Especially in today’s investment world, “It takes a lot of principal to generate income and once you start spending principal, the principal quickly dissipates,” says Dennis I. Belcher, a lawyer with McGuireWoods in Richmond VA.
8. Take steps to protect assets. People who are worth a lot of money need to guard against losing assets to creditors. They include everyone from disgruntled spouses and ex-spouses to people who win lawsuits against you. If people think you have deep pockets they may look for reasons to sue. “If you win the Powerball, everyone’s going to be laying in front of your car so you can run over them so they can sue you,” says Ely. It’s prudent to ensure you are not an easy target.
The best defense is to erect a variety of roadblocks that make it difficult, if not impossible, for creditors to reach your money and property. These asset protection strategies, as they are called, can range from relying on state-law exemptions to creating multiple barriers through the use of trusts and family limited partnerships or limited liability companies. It may be possible to rely on a variety of strategies, either separately or in combination with each other.
9. Plan charitable gifts. You can offset one of the additional income from your lottery winnings (or the annuity payments if you take it that way) with an annual charitable deduction. For gifts to a public charity, donors are entitled to an income tax deduction for up to 50% of adjusted gross income (AGI) for cash contributions and up to 30% for donations of other appreciated assets held more than 12 months.
If you are take the $1.5 billion prize in a $930 million lump sum, and are unable to decide between now and year-end which charities to support, it may be worth considering a donor-advised fund. With a donor-advised fund, you can make a charitable donation this year and claim a federal tax deduction for your irrevocable contribution but postpone recommendations about which charities should receive grants from the account until some time in the future. If you don’t want to be badgered by requests, see my post, “How To Stay Anonymous When You Give To Charity.”
10. Review your estate plan. If your winnings have made you suddenly wealthy, this may be the first time that you need to plan for estate tax. The 2012 tax law offers more flexibility than ever before. As of 2016, each person has a $5.45 million limit on tax-free transfers, which can be applied during life, when you die or some combination of the two. So if you want to share some of your largess with family and friends, this is the ideal time to do that. For details, see my posts, “6 Ways To Give Family And Friends Financial Aid” and “Give Your Estate Plan a Checkup.”
I’m a financial journalist and author with experience as a lawyer, speaker and entrepreneur. As a senior editor at Forbes, I have covered the broad range of topics that…
I’m a financial journalist and author with experience as a lawyer, speaker and entrepreneur. As a senior editor at Forbes, I have covered the broad range of topics that affect boomers as they approach retirement age. That means everything from financial strategies and investment scams to working and living better as we get older. My most recent book is Estate Planning Smarts — a guide for baby boomers and their parents. If you have story ideas or tips, please e-mail me at: deborah [at] estateplanningsmarts [dot] com. You can also follow me on Twitter
If you didn’t have smart money habits up until now, you could quickly squander the fortune.
The first thing 14 lottery winners have bought after finding out they were rich
What would you do if you won the lottery?
It’s a hypothetical question asked by anyone who has ever dreamed of winning a massive fortune.
Hitting the jackpot can open a world of possibilities for lottery winners, who may finally be able to buy a new house, find a new job they are passionate about, or create an organization focused on a cause they care for.
However, landing the jackpot can also take a turn for the worst. In fact, many lottery winners end up blowing it all.
Here are the first things 14 different lottery winners splashed their cash on.
Kathleen Elkins and Matthew Michaels contributed to previous versions of this story.
John Kutey built a water park.
After cashing in a $319 million Mega Millions jackpot for a share of $28.7 million in 2011, Kutey and his wife Linda decided to donate a portion of the winnings to building a water park in honor of their parents.
They donated $200,000 to construct Spray Park in Green Island, New York, The Albany Times Union reports.
Louise White created a trust and named it after her lucky dessert.
In 2012, 81-year-old Louise White of Newport, Rhode Island, bought rainbow sherbet at Stop N Shop just before purchasing a lottery ticket that would end up being worth $336.4 million, ABC News reports.
In honor of the lucky dessert, she created “The Rainbow Sherbert Trust,” a trust that would benefit her family.
Bob Erb advocated marijuana legalization.
Canadian pot activist Bob Erb became $25 million richer in 2012 after buying a lottery ticket on the way to his father’s funeral in Calgary, The Huffington Post reports.
He’d been buying tickets for 43 years.
The seasonal construction worker planned to continue working and donate his wages to the food bank. He also directed $1 million of his winnings toward 420 Day, an annual event supporting marijuana legalization.
Nigel Willetts traveled the world.
With 13,000,000-to-one odds, pub landlord Nigel Willetts won £1 million in 2014 after accidentally grabbing a £20 bill while buying lottery tickets, he told the Mirror.
He used the accidental winnings to travel the world, starting by treating 13 family members to a vacation in Florida over the holidays.
Jonathan Vargas created a TV show with female wrestlers.
Vargas was just 19 when he won a $35.3 million Powerball in 2008. With his new found funds, he created Wrestlicious, a women’s wrestling promotion. “Wrestlicious TakeDown” lasted one season on TV, showing audience members scantily-clad women performing sketch comedy.
CBS News reported that Vargas was looking to create a reality TV show based on the original program, though he did have some regret about how he spent his winnings.
Lara and Roger Griffiths bought their dream home.
In 2006, the Griffiths used their £1.8 million Lotto winnings to buy their dream home, with a price tag of £670,000, the Daily Mail reports.
They also bought a Porsche and two more properties to rent out, invested in the stock market, and Robert spent £25,000 making a record with his college band.
Sarah Cockings bought breast enlargement surgeries for her sister.
Cockings was a social work student when she won a £3,045,705 ($4.2 million) prize in 2005. ” I’ve got a really close knit family and my win wasn’t just for me but also for my family,” she said.
Cockings treated her loved ones by paying for her parents’ new house, vacations, and cars, according to the Daily Record. She didn’t leave her siblings out of the equation, paying for her sister’s breast augmentation.
Evelyn Adams took her winnings to Atlantic City.
Against all odds, New Jersey native Evelyn Adams won the lottery in back-to-back years — 1985 and 1986 — for a grand total of $5.4 million, AskMen.com reports.
Feeling lucky, and rightfully so, she took her extra cash to the tables and slot machines in Atlantic City.
She pushed her luck. As of 2016, she was penniless and residing in a trailer park after gambling it all away.
Merle and Patricia Butler invested in advice from financial planners.
After winning a share of the $656 Mega Millions jackpot in 2012, Illinois-based couple Merle and Patricia Butler were unsure of what to do with their new fortune, but they vowed to be smart about it.
Forbes later reported that they planned to spend the lump sum on advice from their financial planners and attorneys.
Denise and Paul Hardware invested in property.
The life of this Wales-based couple took quite the turn in 2007 when they won £5 million, ther Mirror reported.
After taking a celebratory cruise, they paid off their mortgage, bought their dream home in Somerset, and then invested in three more properties.
The winnings also allowed them to fund their son’s degree from Oxford Brookes University.
Vivian Nicholson treated herself to a perpetual shopping spree.
The Daily Mail reported that Vivian Nicholson won a fortune in Britain’s football pools in 1961: £152,300, or the equivalent of £3 million today.
She immediately ordered dresses from Harrods, bought several luxury cars, and traveled all over the US and Europe.
As of 2016, her closet was filled with haute couture, but her wallet was empty.
George and Beryl Keates gifted it to their family — and the couple still buys lotto tickets.
This English couple struck gold in 2012. Despite 14,000,000-to-one odds, they brought home £3.5 million, which they divvied out to family members, the Mirror reported.
“We gave £250,000 to each of our four sons, £10,000 to each of our nine grandchildren and gave some money to our sisters,” they told the Mirror.
And they still have some leftover money — some of which goes toward more lottery tickets.
Janite Lee made political donations.
After winning $18 million in 1993, a wigmaker from South Korea used a good portion to support the Democratic Party, the St. Louis Post-Dispatch reported.
It turns out she was a bit too charitable — her donations, coupled with gambling and credit-card debt, left her filing for bankruptcy in 2001.
Charlie Lagarde opted for $1,000 a week to fund her photography studies.
After winning the lottery on the first and only ticket she had ever bought, Lagarde, newly turned 18, was offered the choice of either a $1 million (£550,000) lump sum or $1,000 (£550) a week for the rest of her life.
She chose the $1,000 a week, and said she wanted to use the money to travel and study photography.
“One of my dreams would be to work for National Geographic,” she said, according to the Evening Standard.
SEE ALSO: 21 lottery winners who blew it all
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Based in the London office, she oversees and often personally contributes to Insider’s lifestyle, entertainment, digital culture, health, and royals coverage, working with a team of reporters who cover travel, food, fashion, beauty, fitness, nutrition, relationships, film, TV, celebrities, and influencers, just to name a few topics.
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Winning the lottery may be a dream come true, but what that actually looks like is different for everyone.