The odds are against you. But someone will win the next big lottery. If it happens to be you, wouldn’t you rather be prepared? Consider some advice from people whose job it is to guide recipients of unexpected windfalls. You may have use for the information someday.
The following is excerpted from a more extensive article on vice.com
What’s the first thing you should do if you have a winning lottery ticket?
First thing, you want to sign the back of it, because [a winning ticket] is what’s called a bearer instrument—technically whoever hands it in is declared the winner. If you sign the back of it, you secure that it is yours. And I tell the big jackpot winners to sign the back, but to leave some room above it, because if we decide to claim it in a trust fund or an LLC or any other kind of entity, you will be able to write the name of that entity above it, and then sign as a trustee or something like that. So sign the back, make a copy of it, and preferably put it in a safety deposit box, or hide it somewhere in your house.
Do you do this before you even contact the lottery commission?
I would, because every state is different when it comes to the process. On the big jackpots, you file an initial claim, and they’ll do a background check on you. But if you’re gonna wanna claim it as a trust or an entity, you really need to do that first, because it’s really difficult to change it once you hand the ticket in. I know a lot of people just want to get the ticket out of their hands and bring it to the lottery office, but if you call us first, we can help you walk through it.
Is there a possibility of the lotto ticket expiring?
Yeah, but you have six months to a year, depending on where you win, to do it. This whole process I am talking about takes two or three weeks; it’s not a long time. So we’ll set you up with an entity or a trust in a day and get it done.
Can you explain the benefit of putting it in an entity or a trust?
First of all, if you can preserve any kind of anonymity, you wanna do that. You wanna limit your exposure. So a lot of the winners choose to form a trust just for that purpose, so that the name of the winner is gonna be the trust. So if you’re looking up in the past who won $300 million two years ago, it’s gonna say the name of the trust rather than your name. Because people are gonna look for you whether it’s for handouts, charities, investment opportunities, whatever.
Why do so many winners go broke?
If someone wins let’s say $50 million, after taxes it’s $25 million in their account. Then they buy a house, which is fine, but then someone they know says, “Listen, I have this great real estate investment opportunity, you put $10 million in, and you’ll make $30 million.” And they do it because they don’t know how real estate works—you could lose it that way. Or you can say, “I wanna start a business that I’ve always dreamed of starting, what’s the worst it’ll cost me, $5 million?” Then you realize you have to put another million into it, and then another $3 million.
More advice for lottery winners from Marketwatch.com:
1. Finding the right assistance
Chances are you probably aren’t an attorney, accountant or financial professional. However, you will require those services upon winning the lottery to ensure the longevity and anonymity of your wealth. Take your time to research and hire legal counsel with expertise in financial issues, a fee-only financial advisor who will suggest solid investment strategies — not financial products that will give the biggest commissions off of your new wealth, as well as a Certified Public Accountant (CPA) that has experience with sudden wealth. Together, they will help you make sound decisions at such an overwhelmingly turbulent time.
2. Decide whether to take the pay out or the lump sum
Both options will have their consequences on your taxes and short or long-term financial goals. Contrary to what you may think, if you opt to take the lump sum, you won’t receive the full jackpot. That figure is actually based on the amount you would derive with the second option, which would be a 20- to 30-year annuity…
The advantages to taking out the lump sum include: having a larger sum of money initially can work to your favor if you are savvy about investing, your winnings will be subject to the current taxes — and because those rates can climb at any time, it may save you money, and it’s guaranteed and given to you all at once without worrying about future variables.
On the other hand, poor management can diminish the value of your winnings, and it’s a lesser value than the annuity option, as mentioned above.
The advantages of opting for the payout is that you will receive the full amount of the jackpot, the payments provide long-term income, they will keep you in a lower-income tax pool, and you will have fewer opportunities for high losses due to poor financial management.
The disadvantages, however, are that there will be less initial money to invest and compound, you could die before getting to use all of your earnings or pass them onto heirs (some states have rules against this), and you can’t touch the winnings until the year they pay out — so you can’t count on them for projects or emergencies.
3. Decide whether to claim your earnings through a trust or limited liability company (LLC)
Lottery winners may want to establish a trust to claim and better manage their money, and to keep some degree of privacy. They can claim their earnings through the trust rather than personally to avoid the sudden attention from friends, long-lost family, and countless causes and charities. They use their trusts to protect earnings from legal actions set against them and to lessen their tax burden and distribute it among the beneficiaries of the earnings if there is more than one.
4. Set up potential income streams
While you may be looking forward to winning the lottery so you can dump your job, think twice before completely abandoning all sources of income outside of the jackpot earnings. Many winners quit their jobs, give out exorbitant amounts of money to loved ones, and burn through funds on large purchases. The earnings are not as grand as you may think. If you’re not taking the lesser but quicker lump sum, even a $1 million prize over a 20-year annuity plan may be less than what you make currently.
Most of us have debts we’d like to take care of, as well as investments or retirement accounts we’d like to contribute more to, e.g. 401(k), and family we’d like to assist (helping kids with college tuition, etc.). If you do quit your job, make sure you’re still looking for potential income streams.
5. Invest wisely and tax efficiently
You want to invest some of your earnings and watch them grow — but be wary of your investments. Diversified portfolios are always best, especially those containing a mix of long-term and short-term investments like stocks or fixed income from bonds.
…Your tax burden derived from the gains of your investments and the interest earned from their success may be significant, placing you in a higher tax bracket. Therefore, contemplate tax-free municipal bonds for a portion of your winnings. While the interest earned may be lower, the earnings are free from federal income taxes and sometimes even state taxes.
Hope for the best. Prepare for the worst. But don’t forget to prepare for the best, as well. The whole point to The Next Level, The Dangerous Child Method, The Society for Creative Apocalyptology, and other nascent Al Fin Institute projects is the birthing of a more abundant and expansive human future. With a clear focus on that goal, finding ways to invest unexpected income should not be difficult.