So the impossible happened, you won the lottery. All your dreams are just one multi-million dollar check away. So what is there to be cautious about? I’m sooooo glad you asked. If you ever find yourself with the winning ticket here are some things to keep in mind. First off the government is going to tax your winnings 28% right off the bat. Get this, you may have to pay back more based on your annual earnings. Even then you may face being penalized at tax time for not making estimated tax payments to the government.
Secondly get a financial advisor or lawyer to help you manage your money. Some people are bad with budgeting their own money and make less than $30,000 a year. So imagine what mistakes you could potentially make if you aren’t smart with your money. Think about what do most people say if they actually won. “I’mma get a mansion, a car, maybe an island of my own.” You get the point people for the outlandish out of the ordinary materialistic things that they would only dream to buy instead of thinking sensibly and thinking about their future.
Third thing to keep in mind is beware of friends and family members only there for the money. If you all of a sudden get call from family members who never called you before and or even bothered to get you a card for the holidays then you shouldn’t give them money. I know though family is family and you think you have more than enough to spare…right. Well then ask yourself if they won would you get that phone call?? I’m just saying.
Think about this. The lottery preys on the poor, which in most cases they are not used to handling million upon millions of dollars. Take this quote from Karen Johnson who wrote about the subject a few years ago. “People who live at poverty or at lower-income levels spend proportionately more of their income on lottery tickets than do people in the middle class or the upper class because the lottery is in the business of selling hope.” “We talking about 70% will lose their windfall within just a few years.”
Some individuals out there have been really smart with their money. For example Jim and Carolyn McCullar of Ephrata,Wa won 190 million back in 2011. They setup trust funds for their four children and 23 grandchildren. They also gave to reputable charities. Cynthia Stafford who also won the lottery for $112 million in 2007 split the winnings with her brother and father and started a company as well.
There are cases of people who spent their money irresponsibly. For example Evelyn Adams won the lottery twice once in 1985 and then once in 1986 totaling 5.4 million dollars winnings. After bad spending habits, gifts to family, bad investments, and gambling she ended up living in a trailer home. William”Bud” Post won $16 million back in 1988 and he died broke in 2006. It seems that the money went towards the usual stuff houses, cars, boats. Oh and yeah a family company that went down under and a twin-engine airplane, but he didn’t have a license for it…hmmmmm!!!! Excessive….you tell me. On top of all that William was sued by his former girlfriend and his brother hired a hit man to kill him. His own brother. Blood is not always thicker than water or in this case greed.
One thing to keep in mind is a lottery ticket needs to have your signature or else anyone with a photo ID can claim it. A few more tips to help you is remain anonymous if you can if your state allows you to. In New York where I live names are kept for public record. In states like South Carolina it is possible to keep yourself anonymous. Also keep in mind you have anywhere from 180 days to one year to claim your prize. This tip might be the hardest thing to do……..nothing. Don’t change your lifestyle at all from your normal day-to-day routine. Don’t quit your job, don’t buy a new home, don’t buy a new car, don’t do anything for at least six months first. Crazy right!!!! Here me out first. Set aside some of the money you want to splurge with. Instead of outright buying your dream house rent it out first and see if your really are in love with the neighborhood and your new home before you commit.
Make sure you pay all your debts before any big purchase is made. In case you didn’t know you can receive a lump sum payment or you have the option of receiving your winnings in annuity payments spread over the course of 26 years. When you take the lump sum you are hit with the tax all at once. When you take the payment option you are taxed when you receive the payments. If you have issues controlling your spending then the better option for you might be the annuity payments. One drawback of the annuity payment option is that if you die…..please don’t , but if you do the annuity payment will not be enough to pay the estate tax if you die before the 30 year period is up. A way around that problem could be buying a life insurance policy to cover the expenses of the estate tax bill. They usually give you 60 days to decide which direction you want to go in from the time you make your claim.
Make short-term investments. Then ask advisors to devise an investment portfolio divided in half equities and fixed income. Which brings me to my next point. Live within a sensible, realistic budget.Only spend your income not principle, once you start spending principal it has a tendency not to last. Also come up with a variety of strategies that can be used to protect your assets against creditors. This includes spouse’s, ex-spouse’s and anyone trying to make a quick buck off of you. Providing barricades to your money can make it difficult if not impossble for someone to get to.
Here’s a tip of how the rich stay rich. If you make a charitable deduction by Dec. 31 you can offset additional income. Gifts to a public charity donors are entitled to an income tax deduction up to 50% of adjusted gross income for cash contributions and up to 30% for donations of other appreciated assets held more than 12 months. You can also use a donor-advised fund, that allows you to make a charitable donation this year and then claim federal tax deduction for immutable contribution, but hold off on recommendations for the future which charities should receive grants.
You may also wanna think about an estate plan. Each person has a $5.25 million limit on tax-free transfer offers. These can applied during life, death or a combination of the two. Something to think about if you wanted to share with friends.