Here is a brief excerpt from an article written by Deborah L. Jacobs and featured by Forbes magazine. To read the complete article, check out other sources, sign up for email alerts, and obtain subscription information, please click here.
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If you win the jackpot in the next Lottery drawing, you won’t ever have to worry about money again – right?
Wrong.
With good money management you–and your heirs–could live handsomely for many, many years. But from the moment that you claim that prize, you will be descended upon by vultures who want a hefty helping of those winnings. And if you didn’t have smart money habits up until now, you could easily turn out to be your own worst enemy by quickly squandering the fortune.
The first precautionary step you should take between now and the drawing is to sign the back of the ticket, says Carolyn Hapeman, a spokeswoman for The New York Lottery. A lottery ticket is a bearer instrument, she explains, meaning that whoever signs the ticket and presents a photo ID can claim the prize. So if you haven’t signed the ticket and it blows out of your hand while you are waiting for a bus, or if you show it to a buddy in a bar and accidentally leave it on the counter, you’ve lost the loot.
Here are [the first three of ten] steps to help you steer clear of additional risks. Most of them work well for other windfalls too–for example with sudden wealth that comes from an inheritance or the sale of a business.
1. Remain anonymous if your state rules permit it. Once people know you’re suddenly wealthy, you’ll be badgered by requests for handouts from everyone from charities to long-lost friends and relatives–not to mention all the financial “experts” who will be vying for your business. So check state rules to see whether you can dodge them all by remaining anonymous.
Although Mega Millions is a national lottery, rules on winner publicity vary by state. In New York, for example, winners’ names are a public record. Elsewhere it may be possible to maintain your anonymity by setting up a trust or limited liability company to receive the winnings, says Beth C. Gamel, a CPA with Pillar Financial Advisors in Waltham, MA. A client of Gamel’s who won a past lottery did that, and had a lawyer claim the prize on behalf of of the trust.
Depending on where you bought the ticket, prize winners have between 180 days and one year from the date of the drawing to claim their prize. So find out what the state rules are and plot a course.
2. See a tax pro before you cash the ticket. You have the choice between taking the prize money all at once or having it paid out over 26 years in the form of an annuity. With a lump sum payment, you must immediately pay tax on the entire amount, says Michael A. Kirsh, a financial planner in New York. With an annuity, you are taxed only as you receive the payments. People who have trouble controlling their spending might prefer the discipline of receiving the money as an annuity. But this payout form has other drawbacks, Kirsh notes. You will want to compare the effective yield of the annuity with what you could earn by taking the money as a lump sum, paying the taxes and investing the proceeds.
Another issue to consider is whether taking an annuity will leave your family without the cash they need to pay estate tax if you die before the 30-year period is up, Kirsh says. In such situations people typically buy life insurance policies to cover the estate tax bill.
You have 60 days from the time you claim your lottery prize to weigh the pros and cons. During this time, ask advisors to crunch the numbers and help you decide which type of payment suits you best.
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To read the complete article, please click here.
Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. She is a lawyer and award-winning journalist specializing in legal topics. In her new book, she draws on more than a decade of writing about the stressful issues that surround estate planning. Her articles for The New York Times, Bloomberg Wealth Manager, BusinessWeek and many other publications, have been widely cited and circulated by both advisers and consumers. Readers appreciate her clear, concise explanations of complex subjects and her ability to combine real-life stories with reassuring, practical advice. A senior editor at Forbes, she blogs at www.forbes.com/deborahjacobs/blog.
To keep readers current between editions, Jacobs issues updates that can be downloaded from her book’s Web site www.estateplanningsmarts.com and tweets at http://twitter.com/djworking.