Lottery Winner’s Planning


After shock and disbelief wears off, you have to decide what to do first. Should you run to the state’s lottery claims office to notify the department that you have won? Call a financial adviser to help you decide how to invest your winnings? Call all of your relatives and friends to inform them of your good fortune?


You should call the attorneys at Sidney B. Margolis, Ltd. Before you contact the state’s lottery claims office and seek advice about investing, you must make two critical decisions, which are irreversible after you file your claim. The first is whether you are going to claim the lottery prize as an individual or as a member of a group, which will then reduce the arrangement to a written partnership agreement. The members of the group can be your relatives or other people to whom you are giving financial support. Because of the graduated U.S income tax rates, your overall income tax burden will be reduced by making the prize money taxable to the members of the partnership. The more partners, the greater the potential savings on income tax.

The second critical decision is whether to receive your prize as a lump sum payment or in annual installment payments. If you elect the lump sum, you will receive approximately one-half of the advertised price after reducing it: (1) to the present value of the annuity, and (2) by the U.S. and state income taxes required to be withheld. By receiving the lump sum in one year most of your prize will probably be taxed at the highest marginal U.S. income tax rate. If you elect installment payments, you will be receiving payments each year thereby reducing the marginal tax rates on your prize money and your overall tax burden.

If you elect to receive installment payments, you will be receiving a modest rate of return on your unpaid installments. In seeking your business, most financial advisers would counsel you to take the lump sum because they will tell you that they would be able to invest it in a manner which would earn a substantially larger rate of return. However, that is speculative; markets can be tricky and there is no way of knowing how successful the financial adviser will be. Furthermore, by taking the lump sum you will be giving up the opportunity of substantial income tax savings which installment payments offer you.

In addition to the tax and investment strategies discussed above, there is another important concern in deciding whether to take a lump sum or installment payments. That is the “sudden wealth syndrome”. Many lottery winners who had never had much money and who took the lump sum have found themselves broke after a few years. This happens for many reasons, including but not limited to: (1) buying lavish and expensive houses, cars, vacations, etc.; (2) making bad investments; and (3) being very generous in giving gifts to friends, relatives and organizations. In short, if you have not dealt with wealth, a lump sum could easily disappear.

If you elect to receive installment payments, there is a restraint on your ability to quickly deplete your lottery winnings. You will only be able to spend, invest, and give away unwisely only the money you have received in your installments. If you handle your initial installments unwisely, you still have the future installments to use wisely.

There are critical decisions to be made before you file your claim with the state’s lottery office or determine how you are going to invest your prize money. Talk to the attorneys at Sidney B. Margolis, Ltd. first. With over 35 years of helping and advising lottery winners, they will be able to guide you in making the right decisions for your situation.

Follow this link back to Practice Areas