Winning the lottery is an exciting event that most people only dream about. When your numbers finally come up and you get that big jackpot, one of the first questions that comes to mind is when and how you actually get all that money. Understanding the process of claiming lottery winnings can help you be prepared to make the most of your windfall.
Do you get all the money at once when you win the lottery?
The quick answer is usually no, you do not receive the full amount of lottery winnings all at once in one big check. There are a few exceptions depending on the specific lottery rules, but most major lotteries in the United States and around the world give you a choice between receiving your winnings either in one lump sum payment or in installments over many years.
For example, Powerball jackpot winners can choose to receive their prize either as an immediate one-time lump sum cash payment, which is reduced by applicable tax withholdings, or as the full prize amount paid out annually over 29 years in increasing graduated payments. Mega Millions offers a similar choice between a lump sum or an annuity paid out over 30 annual installments.
Some smaller state or regional lotteries may automatically pay out jackpot prizes over a defined period of years rather than offering a lump sum option. On the other hand, certain lottery scratch games or draw games with smaller prizes may automatically pay out as a single lump sum.
Lump sum or annuity
The choice between accepting your lottery win as a lump sum or an annuity stream of payments over many years can have significant financial implications. A lump sum reduces the full prize amount by anywhere from 24% to over 50% depending on jurisdiction, because it allows the lottery to pay out your winnings immediately from existing funds and frees them from investing and making payments over decades.
Choosing an annuity spreads your lottery payments out over 20 or more years. You receive the full prize amount quoted for the jackpot, but you only get a fraction of it each year. The installments are indexed for inflation, so payments increase by a few percentage points each year to help maintain buying power over the payment schedule. Annuities provide a stable stream of income for life, but you don’t have access to the full lump of cash up front.
Financial advisors generally recommend taking the lump sum, as you can invest the money yourself and expect to earn higher average returns over the long run than the conservative investments used to fund lottery annuity payments. But an annuity can provide a measure of protection against wasting your newfound wealth all at once.
How long does it take to get your money if you choose lump sum?
If you opt for the lump sum payout, you won’t get your winnings right away on the spot. There is a process that takes some time. First, you need to claim the prize, which you typically have 60 to 180 days to do after the drawing, depending on where you played. You’ll have to provide photo identification and proof that you are the sole winner.
Next, your win has to go through a validation review and the lottery has to schedule your lump sum payment. This can take 4-6 weeks from the time you claimed the prize before your check is ready. Some lucky winners may get funds wired or direct deposited sooner, but there is always paperwork involved.
Once the lump sum payment is scheduled, you usually have 60 to 90 days to decide what institution you want to have transfer the funds. Choosing a financial planner or wealth management advisory team is highly recommended to help prudently manage your windfall.
Taxes on lottery winnings
Whether you take the lump sum or the annuity, federal and possibly state taxes will be withheld from your lottery winnings. In the U.S., gambling winnings including lottery prizes are subject to income tax at your top applicable marginal rate, currently up to 37% federally. Your specific tax liability depends on your total income and deductions for the year.
State tax rates on lottery winnings range from zero in states with no income tax up to over 11% in some jurisdictions. State taxes may apply regardless of where you purchased the ticket if you are a resident there. Tax treaties can affect those who win foreign lotteries.
Withholding rates
For U.S. lotteries, income tax withholding rates on lump sum payments are typically 24-27% for federal tax and 2-8% for various state taxes. Total withholding can be 30% or more of your gross prize. The lottery issues you an IRS Form W-2G showing the full amount won and the taxes withheld so you can report it properly.
Annuity payments also have standard withholding applied before you receive your check. The rate is lower, however, since the annual payment is spread over years rather than paid all at once. Federal withholding on lottery annuities is typically 25%, while state withholding ranges from 4-8% of each payment.
Settlement options
Rather than receiving a single lump sum, you may be able to choose from a few different cash settlement options when you first claim your lottery prize. For example, Powerball allows you to select from:
- Single lump sum payment
- Annual graduated payments over 29 years
- Annuity certain – Equal graduated payments over a defined number of years (10-18)
- Cash/annuity combination – Some of both
Settlement choices let you find an approach in between the extremes of one immediate payment or payments stretched out for decades. Annuity certain options provide a predictable income stream for a set number of years.
Do you have to accept publicizing your win?
In almost every case, accepting a large lottery jackpot means agreeing to public disclosure of your identity. This is done partly to provide transparency in the lottery system and assure public trust. Lotteries also want to publicize big winners to promote interest and ticket sales.
A few U.S. states do allow lottery winners to remain anonymous, but they are in the minority. Some headlines are written when winners are able to avoid publicity. Most winners agree to press conferences and their names and photos being used in news stories announcing their big prizes.
Publicity precautions
Once your name is public knowledge connected to a huge lottery prize, you should take measures to protect your identity and security. It is recommended to change phone numbers, set social media to private, and upgrade home security precautions. You may need to watch out for long lost friends and family contacting you expecting money.
Wealth management advisory firms can help lottery winners who want to keep a low profile manage investments discreetly. Establishing trusts and entities to claim prizes can also help shield identities. Taking publicity precautions allows you to enjoy your lottery fortune out of the spotlight.
Frivolous lawsuits
Unfortunately, one downside to the mandated publicity around major lottery wins is it potentially opens winners up to frivolous lawsuits down the road. Even if claims have no merit, you may have to incur legal expenses defending your good fortune. Umbrella insurance policies can help cover liability in case of any claims.
Can you remain anonymous as a lottery winner?
A minority of U.S. states do allow lottery winners to remain anonymous and avoid publicity. Requirements differ among the states offering anonymity protection:
| State | Anonymity Requirements |
|---|---|
| Delaware | Can remain anonymous if amount won is under threshold |
| Kansas | Name/photo not required to be released |
| Maryland | Can opt out of publicity if requested |
| North Dakota | Winners are not disclosed publicly |
| Ohio | Anonymous if purchased ticket via trust |
| South Carolina | Can claim anonymously for prizes over $1 million |
Most other states require full identification of winners for transparency. Some may allow you to claim via an entity or trust but still publish your name. Refusing publicity may forbid you from claiming the lottery prize.
Collecting as an entity
To keep your identity private, where allowed, having a lawyer claim your lottery ticket on behalf of a legal entity is wise. Rather than individual names, the entity becomes the official winner. This could be a family or corporate trust fund or a limited liability company (LLC).
The lottery still gets paid withholding taxes, but the public face is a legal creation rather than you personally. You can still benefit from the lottery fortune through the entity with proper planning. Using a trust fund is often the best approach to maintain privacy.
Do lottery winners pay more taxes?
In the U.S. and most other countries, lottery winnings are subject to ordinary income tax rates. Whether you pay more tax depends solely on your total taxable income for the year, not the source of the income. So lottery winners only pay more in taxes if the resulting increase in their yearly income bumps them into a higher bracket.
Withholding rates
The tax rates on lottery winnings are the same as normal income rates. However, winners do tend to pay more tax up front. Lump sum payments have up to 25% withheld for federal taxes and additional amounts for state taxes. About 1/3 of lottery winnings can be immediately taken as withholding.
Higher than usual withholding helps ensure the IRS and state tax authorities get their appropriate revenue from gambling windfalls. Proper planning with a tax professional can potentially help recoup some of the withheld amounts.
Income bump
Looking at your previous year’s income versus projected income including lottery winnings can determine if your tax bracket changes. Income thresholds for 2022 federal rates are:
- 10% – $0 to $10,275
- 12% – $10,276 to $41,775
- 22% – $41,776 to $89,075
- 24% – $89,076 to $170,050
- 32% – $170,051 to $215,950
- 35% – $215,951 to $539,900
- 37% – Over $539,900
State taxes have their own brackets. A significant lottery win could bump you into a higher threshold. Sound tax planning is vital to manage your liability.
Can you form a trust to claim lottery winnings anonymously?
Where state laws allow anonymous claims, trusts are often the vehicle used by lottery winners to keep their identities private. Claiming winnings through a properly drafted trust instead of personally can shield you from publicity.
Anonymity-protection states normally still get all required tax documentation and withholding from trust-based lottery claims. But the public face that receives the money becomes the trust name rather than an individual.
Requirements
For a trust to successfully claim a lottery prize anonymously, key requirements must be met:
- The trust must fully exist and be validly formed before the ticket is purchased and numbers selected. After-the-fact trusts will not work.
- Language must designate trust assets broadly enough to encompass unspecified windfalls and lottery proceeds.
- The trustee must be given power to claim and handle lottery prizes within the trust terms.
- Winnings are usually structured as capital contributions to the trust corpus, not as distributions.
These requirements legally separate the lottery proceeds from personally belonging to the trust beneficiaries. The anonymity stems from the winnings accruing to the trust as an entity, even though the beneficiaries ultimately benefit.
Umbrella trusts
Many family estate plans already include a broad discretionary umbrella trust as part of their structure. These can readily be used to claim lottery prizes anonymously in states allowing it. If your assets are already held in a suitable trust vehicle, lottery winnings can simply flow into the existing structure.
For those without an existing trust fund, state laws often permit quickly setting up a skeleton trust before a claim deadline. This allows establishing trusts for anonymity purposes. However, doing this retroactively does not work, as the trust must predate the lottery ticket purchase.
Conclusion
Hitting a big multi-million dollar lottery jackpot can certainly change your life in an instant. But collecting the actual winnings takes some time and involves a number of steps. You need to decide whether to take a reduced lump sum or annual annuity payments, plan for taxes withheld up front, and determine if you want to publicly accept the prize or remain anonymous.
Navigating the claims process, tax implications, and publicity issues surrounding lottery wins requires thorough advance preparation. Consulting financial advisors, tax professionals, lawyers, and wealth management experts is highly recommended. With the right planning, you can prudently handle your windfall and put your unexpected lottery fortune to good use.