If you should ever be so lucky as to win a major prize in a lottery, there are some things you need to know about:
1) Read the rules on the ticket and on the lottery’s website. Sign your name on the back of the ticket, unless the rules forbid it. Then make a copy of it and put it in a safe deposit box. Don’t feel compelled to tell the world just yet. Try to refrain from telling anyone beyond your immediate family. You can take your time before contacting the lottery authorities, but be aware that ticket expiration periods vary from state to state, from 90 days to one year. The back of your ticket will likely detail the expiration period for your state.
2) Assemble your team. You need to interview estate attorneys, accountants and financial advisers. An important caveat: Don’t hire only one money manager. You can assemble anywhere from three to six with different areas of expertise.
3) Determine whether you will accept the payout as a lump sum or in installments. At this point, the lump sum for the $500 million prize is $327 million before federal taxes are applied and $245.2 million after-tax. Conversely, you could choose to receive annual payments over 29 years, which would amount to $16.6 million a year pre-tax and $12.5 million after taxes. This does not include state or city taxes, which would further reduce your take. You have 60 days, after you claim your ticket, to make the decision.
You mostly hear about winners taking the lump sum, because they want to control the entire amount of money. This year, there could be a tax edge in taking the lump sum, since odds are good that taxes will rise next year.
The big problem with a lump sum is that winners often end up blowing the entire amount doing dumb things. Don McNay, author of the book “Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery,” says nine out of 10 winners go through their money in five years or less. “It’s too much, too fast,” he says. “Nobody is around them putting the brakes on the situation.”
The stream of income ensures that you won’t blow through your entire jackpot. That said, there’s a major caveat to going this route — if you die before collecting the entire amount, the remainder of your winnings may or may not pass to your heirs. This depends on the rules of the individual lottery and the state where you win.
4) Determine the legal structure of your investment holdings. Your attorney will help determine whether you should utilize trusts, limited liability companies or even corporations. Depending on your state of domicile, each may have advantages and disadvantages in terms of taxation, as well as privacy.
That said, it’s fine to splurge a little. The key is to not go crazy — initially, keep it under $100,000. That means don’t buy a new house or a Ferrari for a while, but do take your family on a fabulous vacation. And when you return, remember that you have a new job: Responsibly managing your money.