When someone wins the lottery, it can feel like a dream come true. But what happens to the jackpot if the winner dies before they can receive their full prize money? Can lottery winnings be passed down in a will to heirs and beneficiaries, or does the money have to go back to the state?
The quick answers
- Yes, lottery winnings can be willed to heirs and beneficiaries after the winner’s death in most U.S. states.
- There are some restrictions though – the heirs may need to pay estate taxes on the winnings they inherit.
- If the winner dies before receiving all their prize money, the remaining payments are generally transferable to their estate.
- A few states require lottery prizes to be paid out to the winner’s estate if they pass away.
- To safely pass on lottery winnings, the winner should get their affairs in order with a will and estate plan.
Can you will lottery winnings?
In most cases in the United States, any assets or property owned by someone when they die is able to be passed down to heirs in their will. This includes lottery prizes, jackpots, scratch cards, or any other lottery winnings. So if you win the lottery, you are generally able to will those winnings to your beneficiaries when you pass away.
There are a couple caveats and restrictions though:
- If the lottery winnings are paid out as an annuity over many years, the payments may or may not be transferrable. The specifics depend on state law.
- Federal estate taxes may need to be paid by heirs on lottery winnings they inherit.
- A few states mandate that any unpaid lottery prizes must be paid to the winner’s estate, not the individuals named in the will.
But in general, the proceeds from lottery wins are able to be inherited by heirs if properly accounted for in a will.
Transferring annuity lottery payments
Lottery jackpots are usually given out in two ways – as lump-sum payments, or as annuity payments over many years, often 20 years or more. Whether lottery winners can transfer those annuity payments to heirs depends on the laws of the state where they bought the winning ticket.
In some states, annuity payments can be passed on through a will after the winner’s death. The remaining payments will continue being made out to the heir(s) named in the will. Examples of states where annuity transfers are allowed include Georgia, Michigan, and Kansas.
In other states though, the law mandates that any unpaid lottery winnings must go back to the state upon the winner’s death. So no payments could be passed on even if included in the will. Examples include Colorado, Delaware, and Massachusetts.
And some states fall in the middle – annuity payments can be transferred, but heirs may be limited to receiving only the remaining lump-sum cash value at the time of death. States like this include Illinois and California.
Annuity transfer states
In the states where annuity transfers are permissible, heirs essentially step into the shoes of the original winner. They receive all remaining payments on the schedule originally set up. Here are some of the leading states where annuity transfers are allowed:
- Georgia – Lottery winners can choose beneficiaries to receive remaining annual payments. If no beneficiary is named, payments go to the winner’s estate.
- Kansas – Heirs can be designated to receive annuity payments. If no designation, payments continue to winner’s estate.
- Michigan – Lottery prizes can be willed to heirs through a valid will or trust. Payments continue to beneficiaries.
Non-transferable annuity states
In these states, the government gets the unpaid lottery winnings back if the winner passes away before all payments are made. Beneficiaries cannot inherit remaining annuity payments. Some examples include:
- Colorado – All annuity payments stop upon winner’s death. Remaining money goes back to lottery fund.
- Delaware – Annuities cannot be transferred and revert to state upon winner’s death.
- Massachusetts – Remaining payments return to state’s general fund if winner dies.
Limited transfer states
Some states allow heirs to inherit lottery payments, but only up to the lump-sum cash value left at the time of the winner’s death. Once the heir receives that lump sum, no more annuity payments are made. Examples include:
- California – Beneficiaries paid balance of remaining cash value, no further annual payments.
- Illinois – Heirs can inherit lump-sum balance. No additional annuities.
- New York – Estate can receive commuted lump-sum value only.
Given the variation in state laws, lottery winners should carefully consider how they want remaining payments handled. Choosing lump-sum cash prizes simplifies things versus annuities.
Do heirs pay taxes on inherited lottery winnings?
If you inherit lottery winnings through a will, you will likely need to pay taxes on those winnings, just like the original winner would have. This applies to both lump sum prizes and ongoing annuity payments.
At the federal level, inherited lottery winnings are subject to estate taxes before being passed down. For 2023, estate taxes are owed on amounts above $12.92 million.
State estate taxes may apply too, depending on where the winner lived and purchased the ticket. Some states with an inheritance tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
For annuity payments, income taxes are due as the heirs receive each payment. The rate depends on their individual tax bracket. Any state taxes also apply based on residency.
Heirs can consult a tax professional to navigate this, including taking any allowable deductions. Proper estate planning is crucial for large lottery prizes.
What if the winner dies before receiving the full prize?
Another consideration is what happens if a lottery winner passes away shortly after winning, before they even have a chance to collect all their winnings. Does the entire jackpot still pass to heirs, or are there limitations?
The specific rules vary by state, but generally if a lottery winner dies after winning but before receiving the total prize amount:
- Any remaining lump-sum cash payments go to their estate for distribution to heirs.
- For annuity payments, heirs may get full remaining amounts, lump-sum value, or nothing – depending on state rules on transfers.
- Any taxes and debts are paid first before final distribution to beneficiaries.
So heirs can inherit lottery winnings even if the winner dies shortly after winning and before collecting all the money. But annuity payments may not always be able to transfer over in some states.
Can a trust receive lottery winnings?
Instead of naming individual beneficiaries in their will, lottery winners have another option for estate planning – naming a trust as the recipient of their winnings upon death. This can help manage the distribution of the money and protect heirs.
Most states allow lottery prizes to be paid to a trust, which then distributes the funds to beneficiaries. The specifics do vary though – some states require the trust to already exist at the time winnings are claimed, while others allow trusts to be set up later.
Some leading states where lottery winners can designate a trust include:
- Arizona – Lottery winners permitted to designate a trust to receive prizes.
- Colorado – Trust can be recipient of winnings, even if created after ticket purchase.
- Michigan – Lottery prizes payable to a trust are allowed under state law.
These steps can help lottery winners leverage trusts:
- Set up trust before claiming winnings (in states requiring preexisting trusts).
- Designate trust as recipient of all winnings.
- Name beneficiaries to receive distributions from trust per its terms.
- Hire trustee to manage trust assets and payments responsibly.
- Transfer winnings directly into trust bank account after any taxes paid.
Using a properly structured trust can provide protection, tax savings, and control over lottery wealth long-term.
Getting a will and estate plan
To ensure lottery prizes can be passed on according to your wishes, getting a thorough estate plan is crucial after winning. This involves:
- Creating a will directing assets to chosen beneficiaries.
- Evaluating whether a trust is appropriate to manage the winnings.
- Reviewing annuity rules in your state if you won ongoing payments.
- Looking into setting up entities like an LLC for asset protection.
- Choosing executors and trustees to administer your estate responsibly.
- Discussing the tax implications with financial and legal advisors.
A quality estate plan gives you control over what happens to lottery prizes when you pass away. It ensures your wealth and legacy are handled as you intend.
Key steps in creating an estate plan with lottery winnings
Here is an overview of key steps lottery winners should take in developing their estate plan:
| Step | Description |
|---|---|
| Choose beneficiaries | Decide who should inherit winnings like children, spouse, charity, etc. |
| Pick executors | Name responsible people to administer the estate when you pass away. |
| Create a will | Document leaving assets to heirs and naming guardians for minor children. |
| Look into trusts | Evaluate using trusts for asset protection and structured distributions. |
| Review state laws | Understand state rules on inheriting lottery prizes and annuity transfers. |
| Minimize taxes | Implement strategies to reduce tax liability when passing on winnings. |
| Update documents | Keep will, trusts, etc. updated as life circumstances change. |
Addressing these key areas allows lottery winners to feel confident their wealth and wishes are protected long-term through a robust estate plan.
Frequently asked questions
Can I leave my Powerball winnings to family?
Yes, Powerball lottery prizes can be left to family members upon your death. Include provisions in your will naming which individuals should inherit your jackpot. Be aware annuity payments may not always transfer, depending on the state.
What if my lottery-winning spouse dies first?
If your spouse won the lottery and passes away before you, in most states you are able to inherit any remaining prize payments through their will. Ensure you are named as the beneficiary and that their estate plan accounts for the lottery winnings.
Do I owe estate taxes on $10 million in lottery winnings?
If you inherit $10 million in lottery winnings from someone’s estate, you may owe federal estate taxes before collecting the money. For amounts over the $12.92 million estate tax exemption in 2023, a 40% rate applies. State taxes may apply too.
Can a child under 18 inherit lottery winnings?
A minor child can inherit lottery winnings, but they may not be able to directly control the money until adulthood depending on state law. Options like trusts can provide structured payments until the child comes of age.
What are the main estate planning steps for lottery winners?
The key estate planning steps include creating a will, choosing beneficiaries, looking into trusts, navigating state annuity rules, appointing executors, and implementing tax strategies. Hiring legal and financial advisors can help put a thorough plan in place.
The bottom line
While winning the lottery may seem like a dream outcome, it involves navigating some complexities surrounding passing on that newfound wealth. With proper estate planning, lottery prizes can successfully transfer to chosen beneficiaries after death in most cases. Understanding the rules around annuity payments, taxes, trusts, and wills allows winners to feel confident their wishes are followed.
