Lottery Fever Grips the Country

Unless you have been hiding under rock, you know that the entire country has a case of lottery fever, as the combined Powerball and Mega Millions jackpots have soared into the BILLIONS. With no Powerball winner over the weekend, that jackpot has climbed to $620 million for Wednesday's drawing and Tuesday night’s Mega Millions drawing has set a world record with a $1.6 billion prize, which amounts to a one-time cash option of nearly $905 million. 

Factor in federal taxes and the amount drops to $687 million â€“ and if your state levies taxies too, the pot could shrink by even more. Still, the worst that you would do on the lump sum, after tax pay out is about $600 million—not too shabby!

I grew up hearing the lottery slogan, “All you need is a dollar a dream,” which always stuck with me. While buying a ticket has crappy odds (Power Ball: one in 292,201,338, Mega Millions: one in 302,575,350), wasting a few bucks to get lost in your reverie of “What would I do if…” is not the worst way to spend a few minutes of a day. Those dreams add up, as sales of lottery tickets totaled nearly $73 billion in 2017.

Beyond the fantasy, what would a massive windfall mean to you? As a former investment advisor who had a lottery winning client, I have a little advice about what to do if you win.

1) KEEP THE TICKET SAFE: Read the rules on the ticket and on the lottery's website, then make a copy of it and put it in a safe deposit box. Don’t mess around with this part—you just defied the odds, the gods and just about every rule of nature!

2) CLAM UP: While this is amazing news, don’t feel compelled to tell the world just yet…refrain from telling anyone beyond your nuclear family, and tell the kids not to share the news on social media. Note: If you sign your name on the back of the ticket, it could be difficult to remain anonymous. You can usually take your time before contacting the lottery authorities, because they usually provide a pretty lengthy period (180 days) before you lose your chance.

3) ASSEMBLE A TEAM, NOT AN ENTOURAGE: You need to interview estate attorneys, accountants and financial advisors. My clients did something incredibly clever when they approached potential professionals, including me: they went through the interview process by discussing their situation, but held back the exact total of the windfall amount until late into the meeting. “That way, I could tell what kind of person I would be dealing with. In other words, do theses people treat all of their clients with respect or just the rich ones?”

4) CHOOSE LUMP SUM OR ANNUITY: The team’s first priority will likely be to determine whether to take the lump sum or the stream of income (annuity). You mostly hear about winners taking the lump sum, because they want to control the entire amount of money. Additionally time is on their side, because two-thirds of the time, a big chunk of cash invested over time will accumulate faster than smaller amounts invested at regular intervals. There could also be a tax edge in taking the lump sum, because most experts believe tax rates are likely to increase in the future, with the nation’s ballooning debt levels. That said, the numbers are so big in both scenarios, it may be important to look at the downside.

The big problem with lump sum is that winners often end up blowing some or all of their money doing dumb things. The stream of income ensures that you won’t plow through your jackpot, which is why I’m a big fan of the annuity option. There’s a caveat to choosing the stream of payments: If you die before payments conclude, the remainder of your winnings may or may not pass to your heirs. This depends on the lottery and the state in which you win. The Powerball annuity is an "annuity certain," meaning that the payments are still made if the winner dies before the 30th year. In this event, the remaining payments would go to the winner's estate, and would pass on to their heirs.

DETERMINE LEGAL STRUCTURE: Your attorney and CPA will help determine whether you should utilize trusts, limited liability companies or even corporations. Depending on your state of domicile, each may have advantages and disadvantages in terms of taxation as well as privacy.

SAY NO: Even with benign sounding legal entities, chances are that your secret will get out. You are going to be inundated with “fabulous investment opportunities,” not to mention pleas from relatives near and far. I advised my clients to provide for their children and for everyone else, say “no” until the financial plan has been created. There’s always ample opportunity to help, whether it’s a family member or a charity, so saying no for at least a year makes sense.

INDULGE YOURSELF, BUT NOT TOO MUCH: Allow yourself to spend some of the money before everything gets going. The key is to not go crazy. Ideally, don’t buy a new house or a Ferrari for a while, but do take your family on a fabulous vacation and when you return, remember that you have a new job: responsibly managing your money.

Here are some fun ideas for your splurge:

African Safari for family of 4: $100,000

Weekly massages for two for a year: $20,000

Jewelry splurge: $30,000

Tickets for sporting events/concerts/shows: $10,000

Have a money question? Email me here.