So You Won the Lottery

Visit your attorney.

Your Mega Millions will dramatically change the size and nature of your estate, so it’s important to make sure this change is reflected in your future plans. If you want to make sure your winnings go to your children and your children’s children, there are steps you can take now to help ensure that, while keeping the tax bite as painless as possible.

For very large prizes, it might make sense to visit an attorney even before you claim your prize.  You may want to place your ticket in a trust or some other entity before you cash it in, especially if you’re splitting the prize with others, such as a group of co-workers.

Collect your winnings.

First, you have to decide whether to take the lump sum or the annuity payment. For most lotteries, the advertised payout is the sum of all the annual annuity payments.  By claiming the lump-sum option, however, that amount is reduced to reflect the “present value” of all those payments. For example, the Mega Millions lottery offers an initial payment followed by 29 annual payments, with each payment being 5% larger than the previous one.  A typical payout might be $40 million through the lump-sum option, but $60 million total through the annuity, starting with an annual payment of $1.5 million.

Pay your taxes.

You’ll also have to deal with the taxes. Many lotteries, including Mega Millions, withhold federal taxes from the payout. Lottery winnings are taxed at your ordinary federal income tax rate, so for larger amounts you can expect to lose more than a third of your lump-sum payout to the IRS, in addition to any state taxes. Unfortunately, lottery winnings aren’t considered a capital gain. 

Pay your debts.

Whenever you receive a lump-sum windfall of any kind, one of the first steps to consider would be to pay off any high-interest debt. Credit cards are a good place to start. If you’ve got a balance on a card with an 18% APR, paying that off is roughly equivalent to making an investment returning 18%. Once you’ve got sufficient cash in hand, there’s no sense in carrying debt that does nothing but eat into your capital.

Re-evaluate your investment portfolio.

You’re rich now, so your portfolio should probably be focused more on protecting your wealth rather than growing your income. This might mean significantly re-thinking your asset allocation toward something that focuses on tax advantages, in order to optimize your wealth preservation and minimize the impact of future taxes.

Consider giving to charity.

This may finally be your chance to provide financial support to that worthy organization you’ve worked with over the years.  While direct cash gifts are the easiest way to give, there are a variety of options available that can help you maximize the tax benefits and maintain your own flexibility.  And remember that while supporting a down-on-their-luck relative may be a great use of the money, the IRS doesn’t consider gifts to a specific person as tax-deductible.

Protect yourself from scammers.

Lots of people will be out to grab a piece of your windfall, from professional fraudsters to family members – think the quirky brother-in-law looking for an investment in his llama farm.  FINRA offers a free Risk Meter and Scam Meter to help you determine if an investment idea is legitimate or not. But why are you looking at any “get rich quick” schemes? You’re already rich.

Don’t do anything – yet.

There’s no need to do anything impulsive that you might regret later. Before you decide what to do with your windfall, take your time, talk to your closest family members, and meet with your Baird advisor. Let’s make sure you wind up in the fortunate two thirds that can enjoy their winnings for a long time.