Have plan in place in case you win lottery — and it includes not telling anyone
Lottery jackpots have been all over the news. We know someone in South Carolina won the $1.6 billion Mega Millions drawing. Powerball Saturday night will have a jackpot topping $700 million.
Both multistate lotteries changed their rules to produce fewer jackpot winners, but much larger jackpots when there is a winner. These huge jackpots produce more interest and players’ payments help fund state programs. Different states use the money in different ways. In Pennsylvania, lottery profits are used to fund senior citizens programs.
Winning more than $1 billion is only a dream for most people. There is probably no other way most people could ever have this much money. Taxes will claim a big share of your winnings. You will be in the maximum income tax rate of 37 percent. Pennsylvania used to exempt winnings of residents if they purchased their tickets in state, but that changed in the new law. You will pay state taxes, and the new federal tax law passed in December limits your deductions for paying local taxes to $10,000.
You could end up paying way more than half of your winnings in taxes. Besides income tax up front, you could owe estate and inheritance taxes when you pass on money to family and friends. The federal estate tax rate alone is 40 percent after you use your exemption of $11.18 million for you and your spouse. Gifting more than $15,000 per person uses up part of your exemption. You would need to have a very comprehensive tax plan.
If you buy a lottery ticket in Pennsylvania, your identity will be announced. That means you would be flooded with requests for money from everyone. You would need to hire an adviser who could tell most of these people “no” for you, or you could run out of money much faster than you think.
The Certified Financial Planner Board of Standards said “nearly a third of lottery winners declare bankruptcy – meaning they were worse off than before they became rich. Other studies show lottery winners frequently become estranged from family and friends, and incur a greater incidence of depression, drug and alcohol abuse, divorce and suicide than the average American.”
If you win, the first thing you need to do is keep quiet. Maybe turn off your social media accounts and tell very few people. Put together a team of a lawyer, accountant and financial planner. Many experts suggest signing the back of the ticket and making several copies to prove ownership if you are separated from your winning ticket.
Sometimes you can create a trust of family limited partnership to help protect your identity. People still could identify you, but it takes more work. You need to make sure you have an up-to-date estate plan because things can change quickly. Also, there cannot be any holes in your liability insurance because your odds of being sued will increase if you are thought to have deep pockets.
If you are ever lucky enough to win a major lottery, you must put together a complete plan before you claim your prize. As in many other areas of your financial life, having a good plan will pay big dividends.
Even if you do not win this time, there will be other big jackpots. Always remember, never play more than you can afford to lose.
Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.