Winning the lottery can be an incredible stroke of good fortune, but it also brings some big financial responsibilities. Many lottery winners are suddenly faced with handling more money than they’ve ever managed before. Without proper planning and guidance, lottery winnings can quickly disappear to taxes, bad investments, or excessive spending. That’s why working with a financial advisor is so crucial after a lottery windfall. Financial advisors help lottery winners make the most of their prize money through services like tax planning, building an investment portfolio, establishing trusts, and budgeting for future needs.
How much do lottery winners typically win?
Lottery jackpots can range from hundreds of thousands to hundreds of millions of dollars depending on the game and whether the winner chooses a lump sum or annuity payment. Some of the biggest lottery prizes in U.S. history include:
|Year||Lottery||Annuity Amount||Cash Option|
|2016||Powerball||$1.586 billion||$983.5 million|
|2018||Mega Millions||$1.537 billion||$877.8 million|
|2021||Powerball||$1.586 billion||$983.5 million|
As the table shows, lottery jackpots can be worth hundreds of millions in cash when a winner opts for the lump sum. That kind of sudden money requires careful management.
Do lottery winners pay taxes on their winnings?
Yes, lottery winnings are considered taxable income under federal tax law and most state laws. Winners will owe federal taxes starting at 37% up to the top rate of over 40% depending on their total taxable income for the year. State taxes can add another 0-13% depending on location. Some key tax facts for lottery winners:
– Taxes are owed on the full prize amount, not just the lump sum for those taking an annuity. Annuity winners will pay taxes on each installment as received.
– Lottery winnings are subject to mandatory 24% federal withholding, but that may not cover the full tax bill. Winners should plan for any additional amount they may owe.
– Winnings can be offset by any gambling losses claimed as itemized deductions, up to the amount of gambling income.
– State taxes may also be withheld upfront in certain jurisdictions.
Proper tax planning is essential for lottery winners. An advisor can help project tax liabilities, file any returns due, and work to minimize taxes legally owed.
Do lottery winners usually get financial advisors?
It’s estimated that about 70% of lottery winners work with financial advisors after receiving their windfall. Hiring an advisor is considered a best practice to help winners navigate major decisions such as:
Choosing lump sum or annuity payments
The advisor can project cash flows and tax implications of each option. Lump sums provide immediate access for investing and paying taxes, while annuities generate a steady income stream.
Crafting an investment strategy
Advisors help allocate winnings across stocks, bonds, real estate, and other assets to fund winners’ lifestyle needs and build wealth. They steer winners away from common pitfalls like speculative investments in family businesses.
Paying off debts
An advisor can evaluate debts to pay off versus those to keep for potential tax deduction benefits. Mortgages, student loans, back taxes, and business liabilities are common obligations.
Building wealth protection vehicles
Trust funds, asset protection plans, and insurance policies can shield a winner’s identity and wealth from risks like lawsuits, divorce, creditors, and Medicaid spend-down requirements for long-term care.
Budgeting and cash flow planning
Winners need disciplined savings and spending plans to ensure their prize funds last. Advisors work with winners’ values to build reasonable budgets avoiding excessive splurges.
Tax planning strategies
Advisors look for ways to minimize taxes legally owed on winnings through tools like charitable trusts, donor-advised funds, deferred annuities, and asset location across taxable and tax-advantaged accounts.
What financial advice do lottery winners need?
Some key pieces of financial advice commonly needed by lottery winners include:
Keep lottery winnings confidential
Broadcasting a lottery win can open winners up to security risks and requests for money from friends, relatives, charities, and strangers. Anonymity helps maintain safety. Where publicity is unavoidable, advisors can help set limits.
Pay off high-interest debts
Credit cards, payday loans, and other debts charging double-digit interest rates should be paid off quickly using lottery winnings. This provides a guaranteed return equal to the interest rate.
Live below your means
Winners should resist spending splurges that can quickly drain a prize. Advisors help winners live below their means by developing reasonable budgets aligned with their values.
Lottery winnings should be invested conservatively in a diversified portfolio of stocks, bonds, cash, and other assets appropriate for the winner’s time horizon and risk tolerance. Speculating in IPOs or friends’ businesses is rarely wise.
Work with a team of professionals
In addition to a financial advisor, lottery winners need support from accountants, lawyers, bankers, therapists, and insurance specialists. This team approach helps winners make the most of their windfall.
Plan for taxes
Taxes can eat up over one-third of lottery winnings. It’s critical to plan for tax liabilities, work to minimize taxes legally owed, and not spend the prize before accounting for taxes.
Protect your identity
Trust structures and other tools can help lottery winners maintain anonymity after a win if desired. This helps avoid unwanted publicity and solicitation risks.
Don’t rush big decisions
Buying houses, cars, businesses or making large gifts should be done cautiously over time, not in a quick rush following a win. Advisors help winners thoughtfully plan major financial decisions.
How can financial advisors help lottery winners?
Some of the key ways a financial advisor provides value to lottery winners include:
Strategic tax planning
Advisors look for ways to minimize taxes legally owed on winnings through strategies like:
– Deferring taxes with tools like annuities and self-directed IRAs
– Offsetting gains with capital losses harvesting
– Using charitable trusts and donor-advised funds
– Taking advantage of applicable state tax benefits
Building a legacy plan
For winners interested in philanthropy and passing on wealth, an advisor can help them:
– Set up trusts, foundations, and donor-advised funds
– Develop an estate plan with wills, trusts, powers of attorney, etc.
– Make thoughtful lifetime gifts to heirs and charities
Advisors help winners analyze risks and take protective measures such as:
– Purchasing insurance policies for health, life, disability, liability, and property
– Using legal tools like trusts and prenuptial agreements
– Working with estate attorneys to avoid disputes
Advisors construct and manage customized investment portfolios to help winners:
– Preserve principal through conservative asset allocation
– Earn inflation-beating returns within a chosen risk tolerance
– Rebalance periodically to stay on track toward financial goals
– Optimize portfolios for taxes using strategies like asset location and loss harvesting
Cash flow planning
Winners need help planning their new cash flows for:
– Paying estimated taxes on winnings
– Budgeting reasonably increased spending
– Funding large one-time purchases or gifts
– Saving and investing surplus funds
Sudden wealth can be emotionally and socially destabilizing. Advisors provide coaching on:
– Adjusting to a new lifestyle
– Navigating requests for money
– Finding meaning and purpose beyond money
– Avoiding distrusting others or excessive guilt
What mistakes do lottery winners make with their finances?
Some common lottery winner mistakes include:
Spending excessively on cars, houses, vacations, etc.
It’s easy to get carried away enjoying a prize. But excessive splurges deplete winnings quickly. Budgets keep spending aligned with values.
Going into costly businesses with little experience
Some winners rush to start businesses like restaurants only to lose money. It’s generally smarter to invest winnings and not speculate in untested business ideas.
Making loans to friends and family who won’t repay
Personal loans often go unpaid and strain relations. Gifts within budget are smarter than risky loans.
Not planning properly for taxes
Taxes eat up a big share of winnings. Failing to plan for tax liabilities leads to financial shocks.
Trying to time the market
Some winners try playing the stock market only to lose big on bad bets. Conservative investing is a better strategy.
Keeping poor accounting records
Detailed financial records prove crucial at tax time. Lottery winners should adopt disciplined record-keeping habits.
Not protecting their anonymity
Publicity puts winners at risk of security threats, harassment, and constant money requests. Anonymity helps maintain safety.
Making quick major decisions
Winners should resist rushing into home purchases, business investments, gifting, and other big financial moves. Careful planning over time leads to better outcomes.
How do financial advisors help lottery winners manage risks?
Key ways financial advisors help lottery winners manage risks include:
Setting up trusts
Trusts protect assets from creditors, divorce, lawsuits, and probate. Different types of trusts can shield winners’ identities and control distributions.
Insurance for health, life, disability, property, liability, and special items provides security against losses. Umbrella policies offer added liability coverage.
Using prenuptial agreements
For married winners, prenups protect assets in case of divorce. Postnuptial agreements also help for those already married before winning.
Working with estate planning attorneys
Wills, powers of attorney, and medical directives help avoid probate issues and disputes between heirs.
Advisors help winners set up trusts and LLCs to claim winnings anonymously where permitted. This adds financial privacy.
A prudent investment portfolio avoids excess risk while still earning healthy long-term returns. Advisors construct personalized plans based on winners’ needs and risk tolerance.
Referring to other professionals
Advisors coordinate work with accountants, lawyers, therapists, and other specialists to build a comprehensive risk management plan.
Following a wealth preservation plan
Custom plans outline strategies to protect lottery winnings through smart budgeting, taxes, gifting, trusts, investments, and insurance. Advisors adapt plans as winners’ needs evolve.
How do financial advisors help lottery winners stay grounded?
Lottery winners face unique psychological challenges transitioning to sudden wealth. Advisors provide important coaching and support in areas like:
Avoiding distrusting others
Winners may grow suspicious that new friends and romance prospects only want their money. Advisors remind winners to look for genuine relationships and not assume the worst in people.
Planning charitable giving
Giving back provides meaning and purpose beyond the money. Advisors help winners set structured philanthropic budgets.
Finding healthy pride in achievements
Winners should take pride in winning the lottery – not excessive ego, but proper self-esteem. Advisors reinforce a balanced perspective.
Ignoring comparisons to other rich people
There will always be billionaires with more wealth. Winners should be grateful for their own good fortune without comparing to others.
Not letting money rule all decisions
Advisors encourage winners to stay grounded in their values and not let money dictate choices. Wealth enables options, but it shouldn’t rule priorities.
Surrounding themselves with positive people
Winners should be selective about who they let into their inner circle. Positive friends and mentors help winners stay centered.
Avoiding excessive guilt and noblesse oblige
Winners do not need to feel guilty for their luck. While generosity is good, winners do not have to solve all the world’s problems.
Moderating pleasurable splurges
It’s fine to enjoy winnings in moderation through responsible splurges budgeted wisely. But advisors caution against overindulgence.
Developing a sense of purpose beyond money
Passions, hobbies, socializing, spirituality, volunteering, and family provide meaning. Advisors help winners maintain balance and perspective.
Coming into a financial windfall like winning the lottery presents unique planning challenges and risks if not handled properly. That’s why working with a trusted financial advisor is considered so valuable. Advisors provide education, guidance, coaching, and support across all aspects of managing a lottery prize. With proper advice, lottery winners can prudently invest, protect, and enjoy their windfall for the long-term rather than squandering it recklessly. While coming into big money is exciting, winners need objective advisors to help them act wisely. This leads to better outcomes for lottery winners’ finances and overall well-being.