Winning the lottery can be a life-changing event. For many winners, one of the first thoughts is wanting to share the money with family members. But can lottery winners actually share their winnings with family? There are a few key factors to consider.
Taxes on lottery winnings
First, it’s important to understand that lottery winnings are considered taxable income in the United States. When a person wins more than $600 from the lottery, the lottery organization will withhold 24% for federal taxes before distributing the money. This applies to both cash prizes and merchandise prizes valued over $600. State taxes may also apply, depending on the state where the lottery ticket was purchased and claimed.
So if a lottery winner receives a lump sum payment, a significant portion will immediately go to taxes. A winner would need to use other funds to share any of the pre-tax winnings with family members.
Gift tax rules
For any gifts over $15,000 per year to a single person, the giver may owe gift tax. This applies to monetary gifts and gifts of other assets. So a lottery winner would be limited in how much of their winnings they could gift to family members each year without triggering the gift tax. Some key gift tax points:
- The annual exclusion for 2023 is $17,000 – so gifts up to that amount per person are not taxable
- Spouses can combine their gift exemptions, allowing gifts up to $34,000 per person tax-free
- Gifts exceeding the annual exclusion count towards the lifetime gift and estate tax exemption limit ($12.92 million in 2023)
- Gift tax is paid by the giver, not the recipient
To avoid gift tax, a lottery winner would either need to limit annual gifts to under $15,000 per recipient or be prepared to pay the applicable gift tax.
Lottery prize payment options
Lottery winners can choose between receiving their winnings in either a lump sum payment or annuity payments over many years. Here is an overview of the payment options:
| Payment method | Overview |
|---|---|
| Lump sum | The full amount is paid immediately, after applicable tax withholding. For a $100 million prize, this may mean receiving around $75 million after taxes. |
| Annuity | The prize amount is paid out in graduated payments over 30 years. For a $100 million prize, it would be around $2.6 million per year before taxes. |
With the annuity method, options to share part of the annual prize payment with family members are more flexible. But for a large jackpot, the lump sum after taxes still provides a windfall that could be generously shared while staying under gift tax limits.
Establishing a trust
To provide an ongoing mechanism to share their lottery fortune, many winners choose to set up a trust. Different types of trusts allow customized control over distribution of assets.
For example, a winner could establish a revocable living trust to avoid probate and dictate how their winnings are managed and distributed to family now and in the future. An irrevocable trust could also be set up to immediately relinquish control and deliver assets to beneficiaries.
A trust allows sharing with family under defined rules outside the annual gift tax limits. Professional legal and financial advice is highly recommended to properly establish and manage a trust.
Gifting considerations
Before lavishly sharing a lottery jackpot, winners need to consider a few key points:
- Set aside enough for taxes: Taxes take a big cut immediately. Retaining enough funds to pay what’s owed to the IRS and state avoids hardship later.
- Get professional tax and financial advice: An experienced tax advisor and financial planner can identify the most advantageous approaches for gifting and developing a long-term wealth management strategy.
- Don’t feel obligated to share: Any gifts are fully at the discretion of the winner based on what people and causes they specifically want to benefit.
- Set limits and structure payments: Lump sums may be freely spent or abused. Structured payments maintained by the winner or a trustee can provide longer term security.
- Protect the winner’s interests: Limiting gifts to what the winner can comfortably afford and imposing controls helps avoid pressures or disputes down the road.
Sharing lottery winnings can allow a winner to positively impact family and good causes. But the decision requires research and planning to avoid unnecessary taxes, conflicts, or misuse of gifts.
What family members are eligible for gifted funds?
For gifting purposes, family members considered related parties to the lottery winner include:
- Spouse
- Children, grandchildren, great-grandchildren
- Siblings, half-siblings
- Parents, grandparents
- Spouses of the winner’s children, grandchildren, siblings
Gifts can be given to related parties directly or placed in trust for their benefit. Nieces, nephews, aunts, uncles, cousins, friends, and in-laws are not considered related parties from a gift tax perspective.
Special rules for spouses
A lottery winner can give unlimited monetary gifts to a spouse without owing gift tax. However, the spouse’s estate may be liable for estate tax on funds received when they pass away. Professional tax guidance is key to develop an optimal gifting and estate planning strategy between spouses.
Gifting to minors
For lottery winners who want to establish gifts for minor children or grandchildren, options include:
- Custodial account under the Uniform Gifts to Minors Act
- Irrevocable trust with specific distribution instructions
- 529 college savings plan account
These vehicles allow structured gifting while the child is a minor and imposition of controls around distribution of funds as they reach age of majority.
Lottery pools and gifting considerations
In some cases, winning lottery tickets may be held by a lottery pool or group of joint ticket purchasers. The prize must be shared among the members based on any agreed terms. Key considerations around gifting and taxes include:
- Taxes are due based on each recipient’s share of before-tax winnings.
- Gift tax rules apply to each member separately if they choose to gift part of their share to family or others.
- Members should claim their share of winnings and pay any taxes owed as an individual.
As with individual winners, anyone receiving a share of a group lottery win should get professional tax advice on how to handle and distribute their portion.
Publicizing plans to share winnings
Before publicizing plans to share substantial lottery gifts, winners should consider:
- Finalizing recipient list – Specifying who will receive what portion avoids inflating expectations.
- Tax and legal consultation – Ensure gifting plans align with tax rules and trust structures.
- Privacy considerations – Gifting privately may be preferable to announcing amounts and recipients.
- Security risks – Public gifts could expose recipients to security threats or abuse.
Winners may want to connect with recipients to share plans confidentially before making any public statements about gifting portions of the prize.
Gift and estate tax planning
Because lottery winnings can significantly increase the value of the winner’s taxable estate, planning around gift and estate taxes is crucial. Options lottery winners could consider include:
- Paying medical and education costs for family – These direct payments are exempt from gift tax.
- Funding irrevocable life insurance trusts – Can provide funds to heirs estate tax free.
- Lifetime gifts up to exemption – Currently $12.92 million per individual.
- Portability of spousal exemption – Allows unused exemption of deceased spouse to transfer to survivor.
- Trust distributions as annual exclusion gifts – Using trusts as a gifting mechanism.
- Charitable trusts – Can reduce estate value while benefiting causes the winner supports.
An experienced estate planning attorney can help lottery winners develop and implement customized gifting and estate planning strategies.
Publicity considerations around gifting
For major lottery winners who intend to gift some of their winnings, it’s important to think through how gifting plans are publicized. Issues to consider include:
- Tax implications – Publicizing large gifts could prompt tax authority scrutiny.
- Security concerns – Recipients being known publicly may increase risks.
- Respecting recipients’ privacy – Some may not want gift amounts and details revealed.
- Keeping gifts anonymous – Giving anonymously to causes/individuals is an option.
- Using third parties – Legal and financial advisors can help communicate on winner’s behalf.
Winners need to thoughtfully weigh the benefits and risks of revealing the details around their gifting plans. It’s often wise to avoid making public statements about gifts and recipients.
Impact of shared winnings on means-tested benefits
If a lottery winner gifts funds to a family member receiving needs-based government benefits, the additional income could impact their eligibility. Some programs with income cutoffs that may be affected include:
- Medicaid
- Supplemental Security Income (SSI)
- Food stamps
- Housing assistance
- Veterans pension benefits
Structuring gifts via trusts or annuities, or using them for non-cash support like paying medical bills, are some ways winners could share that may minimize impacts on benefits. Consulting with a social services eligibility expert is recommended.
Potential downsides of sharing winnings
While wanting to share with loved ones is natural, there are some potential downsides lottery winners should be aware of:
- Strained relationships – Asking for money can cause conflict and a sense of entitlement.
- Lifestyle imbalances – Family may envy a winner’s new wealthy lifestyle.
- Unwise use of funds – Family could squander gifts or make poor financial decisions.
- Loss of motivation – Large sums given could impact recipients’ work ethic and productivity.
- Tax complications – Gifts and trusts can come with tax paperwork burdens.
- Unsustainable expectations – Recipients may expect ongoing distributions.
Winners need to evaluate their circumstances and relationships to determine if sharing is appropriate, and structure gifts to minimize potential problems.
Avoiding family conflict
To help avoid tensions or conflict over shared lottery winnings, experts recommend:
- Open communication with family to discuss plans and boundaries
- Being selective in who receives gifts
- Explaining gifts are not infinite and establishing limits
- Using trusts or legal vehicles to impose controls
- Requiring financial education/counseling for recipients
Family therapy or counseling may also help navigate gift-giving to minimize jealousy, entitlement, resentment, or other negative consequences.
Balancing personal and charitable giving
Many lottery winners are eager to share their sudden wealth. It’s important to balance personal gifts to family and friends with charitable gifts. Factors to consider include:
- Tax implications – Personal gifts may trigger gift tax if over annual exclusions, charitable gifts are tax free.
- Control over funds – Personal gifts may be spent freely, charitable gifts can impose usage controls.
- Social expectations – Family may expect money, charities grateful for any donations.
- Long-term objectives – Giving to causes can make ongoing impact beyond personal gifts.
- Personal values – Who does the winner most want to benefit from the windfall?
Allocating a portion of lottery winnings thoughtfully between family and charitable causes can maximize the positive impact of sharing new wealth.
Managing shared winnings responsibly
If lottery winners do opt to gift a portion of their winnings, responsible management of those funds is crucial. Recommended practices include:
- Setting clear recipient expectations upfront about gift amounts and uses
- Structuring gifts/trusts to impose limits and controls on distributions
- Requiring financial education for recipients to promote responsible decision-making
- Working with advisors to monitor funds and prevent misuse
- Establishing rules around how long term trusts and distributions will continue
- Executing legal gift documentation to protect all parties
With proper administration, even substantial monetary gifts can enhance recipients’ lives without enabling poor choices or irreparably damaging relationships.
Avoiding trust mismanagement
For lottery winners using trusts as a mechanism to share winnings, proper trust administration is key. To avoid mismanagement:
- Hire experienced, reputable trustee to oversee administration
- Detail specific trustee responsibilities and scope in trust documents
- Require robust accounting and oversight procedures
- Establish clear rules around distributions timing, amounts and uses
- Prohibit co-mingling of trust assets
- Impose limits on trustee powers and compensation
With strict administration rules and oversight, trusts can prevent abuse and disputes around shared lottery gifts.
Conclusion
Sharing lottery winnings with family members is common. But winners need to educate themselves on the tax and legal implications in order to avoid unnecessary taxes or disputes. Following the annual gift tax exclusion limits, using irrevocable trusts, and working closely with tax and legal advisors can allow winners to successfully share their sudden windfall. With proper planning, winners can balance personal giving with charitable contributions and manage funds responsibly. This allows sharing lottery wealth while promoting positive outcomes for recipients.
