Advice for the latest multi-millionaire lottery winner
The talk among everyone in the U.S. this week seems to be about the lottery. The Mega Millions jackpot was won by one lucky South Carolina resident who grossed over $1.5 billion before taxes and the Powerball lottery which has soared over $600 million. Few would know what to do with that kind of money, although it’s a pipe dream anyways, since a person is more likely to be struck by lightning twice than win one of the big lotteries. Still it is fun to dream. In fact, many call the lottery a tax on the poor, since recent studies showed that the poor spend the most, as a percentage of income on lotteries, in hopes of changing their financial fortunes. One study showed that for those making less than $15,000 per year, 5% of their net income is spent on lotteries.
The history of the lottery goes back to the days of the revolutionary war when the armies ran numbers in an effort to raise money. But, the first real lottery in the United States only took place in New Hampshire in 1964, when the state held a referendum to offer the numbers game as a way of raising money for education. Before then, many Americans still purchased lottery tickets from outside of the United States and it was difficult not to know someone who had purchased an Irish Sweepstakes lottery ticket from "the Irishman down the street." Most states followed New Hampshire’s lead and the methods started with drawing numbers from a bowl, then a computerized number randomly generated and later scratch tickets. It was only in the 1980s that the now common form of lotteries that drops balls from a drum was introduced. And the first interstate lottery didn’t take place until 1996, when six states joined forces to create The Big Game, which is now known as Mega Millions. It, along with the Powerball lottery remain the biggest lotteries in the U.S. today. Lotteries are legal under U.S. law as long as they are run by states or by charities for smaller amounts, and only Alabama, Alaska, Hawaii, Nevada and Utah do not offer a lottery by their own choice.
In light of the excitement surrounding the lottery I spoke to a financial planner, an accountant and a lawyer and asked if they could give some advice if by some miracle a person were to hit the jackpot. They were only too happy to.
Jack, who I met at a conference, is a financial planner from Scottsdale Arizona and gave the following advice:
"I’ve actually advised two multi-million-dollar winners on what to do and not to do and they are still millionaires today. And one is much wealthier than even before they won. Far too many come into this windfall and just squander it on monster houses, big vacations, fancy cars, strip clubs, hookers etc. and worse of all giving it away to everyone who comes to them looking for a handout. My advice to both of them and what would be my advice to everyone is to take a breath, remain anonymous if possible, contact your accountant and determine immediately whether it’s best to take the installments or the lump sum. You have up to 3 months to make that decision and it should be made with forethought. Almost everyone takes the lump sum and most accountants advise winners to do that, but in many instances it’s not a good option. The decision should depend on your plans over the next 30 years and what level of risk you’re willing to put into investments as well as your age. And most importantly it depends on how addictive a personality you have. People who squander big jcakpots often waste it on more gambling, addicting substances or just even compulsive shopping. If that is part of your makeup then the installments are the way to go. Even if you blow your first installment and realize your reckless ways there are still 29 more payments to come. The tax hit is enormous and to some getting back only $300 million or so on a $900 million win eats at them. Often they just want to see the tax taken out at a slower rate and of course the decision often relates to whether they believe their taxes will increase or decrease over the years. It’s also important to remember that at any point you can get a loan on all or a portion of your remaining balance from a bank and often at a better rate than the government takes off the top.
I would also tell winners to determine how they want to divvy out the winnings. Most lottery corporations are happy to pay out winnings in any way the winner wants, so often it’s best to say something like “I bought 40% of the ticket, my wife bought 30% of the ticket and both my sister, brother and mother-in-law bought 10% each.” In many states gifts are taxed higher than direct winnings and each person you want to give money to can decide for themselves whether to take the lump sum or an annuity.
I would also strongly recommend to pay off all debts immediately, set a budget, decide on charities you want to support and stick to them only.Learn to say the word ‘no’ as everyone will come out of the woodwork looking for money, set up trust funds and education funds for family and quit your job. Far too many people feel they still have to work even if they are multi-millionaires, but it makes no sense and will only cause resentment among co-workers. If you must work then do something you enjoy and if you can start a small business to hire others who, unlike you, really need a job.
But most importantly I would suggest deciding what your priorities are and come up with a plan to get there. Ideally winners would park their winnings in a good yield investment and live off the interest. If a winner gets $200 million say, then it’s easy to find investments that will pay a 5 percent dividend or more. So technically if you could live off a gross salary of $10 million a year you would never have to touch the $200 million. Of course, that takes willpower and as we see with professional athletes, actors or artists who just suddenly get rich overnight, the tendency is to spend it. But even then, it can be done responsibly. Even Tom Brady has a budget he sticks to."
The second person I spoke to was Phil, a tax expert from Rochester, New York who provided some advice from a tax perspective.
"Whether you take a lump sum or annuity you’ll be in the top tax bracket, so there’s no real benefit to either choice from a tax perspective. What is important is what you do after receiving the money to limit your tax burden. Don’t give too much away to family other than your spouse or to friends because you’ll be dinged with a gift tax. It’s better to allocate an amount at the time of collecting your winnings if the state allows it. You often see offices come to collect as a group and many times it’s not divided equally. The office may have 20 people in the lottery pool, purchasing $150 worth of tickets but half may have only put out $5 while the other half put out $10. In that instance the $5 group would get 1/40th of the winnings while the $10 group would get 1/20th. You can make the same argument for family members which will avoid you getting a big hit on the gift tax.
Another logical piece of advice I would give is to consider investments that will result in capital gains should you sell it. An example would be houses used as rental income or local stocks. Only half of capital gains are taxable which could make a huge difference in your tax bill and your investment benefits others as well. If you don’t really want the income from the rent or dividends you can always donate them to your favorite charity and just get a good feeling and karma. And if you win a lot of money and feel so inclined you can set up a foundation and raise even more money from the public for your charities of choice.
One last piece of tax advice I would give is to look for tax shelters offshore. The governments have tried to cut down on the practice, but legally sheltering money from Uncle Sam has gone on for decades and almost every wealthy person I know has a Swiss bank account or investments in some Caribbean ventures. I always tell my clients that it’s better for them to have the money because the IRS would take every dime from you if they could."
The last person I talked to was Kelly, an attorney from California who I dealt with in the past for gambling articles.
"The main reason you must contact an attorney first after winning the lottery is to be safe. Each state has different laws, so the attorney you hire should be knowledgeable about the laws where you bought the ticket and where you presumably reside. An attorney will be your point of contact in case any disputes arise with family or the lottery operator. And as someone who has fiduciary duty to you they will make sure your other contacts such as accountants, financial planners or advisors, along with your family, are working in your best interest and are not looking to pad their wallets at your expense. Attorneys will also help you with investments, foundations and tax shelters to insure they are legal in your state and will not get you in trouble with the IRS, along with any incorporation decisions should you decide to set up a foundation or start a business. And, of course, attorneys will help with wills and setting up a proper power of attorney. Lastly, attorneys will help you deal with any changes to alimony payments and child support should it apply. You’d be amazed how many family members come out from hiding and say that you somehow owe them money. But the bottom line is you need an attorney to keep you safe. Just because you have money doesn’t mean that you are above the law and one of the big pitfalls to anyone who comes into an instant fortune is to do something with good intentions but risks getting them in trouble with the police or the IRS."
Congratulations to the South Carolina Mega Millions $1.5 billion lottery winner who also had the good fortune to live in a state where they can remain anonymous. Let’s hope for their sake they followed the advice listed.