Selling Lottery Payments
Lottery winners can collect their prize as an annuity or as a lump-sum. Often referred to as a “lottery annuity,” the annuity option provides annual payments over time. A lump-sum payout distributes the full amount of after-tax winnings at once. Powerball and Mega Millions offer winners a single lump sum or 30 annuity payments over 29 years.
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Lottery Payout Options
Before lottery winners can collect jackpots, they must usually make one important decision: Should they collect their winnings all at once or over a long period of time?
The first option is called a lump-sum award. That’s when the winner receives all of the lottery winnings after taxes at one time.
The second option is an annuity. Although annuities established by the lottery commissions have been informally dubbed “lottery annuities,” in reality, annuity contracts created for the purpose of distributing prize money typically fall under the safest category of annuities: fixed immediate.
Each state and lottery company varies. Powerball, for example, offers winners the choice of a lump-sum payout or an annuity of 30 payments over 29 years. Mega Millions offers lump-sum payouts or annuities. The annuity offers an initial payment followed by 29 annual payments. Each payment is 5 percent larger than the previous one.
Lump Sum vs. Annuity for Lottery Winners
While both options guarantee a lottery payout, the lump-sum and annuity options offer different advantages. Choosing a lump-sum payout can help winners avoid long-term tax implications and also provides the opportunity to immediately invest in high-yield financial options like real estate and stocks.
Federal taxes reduce lottery winnings immediately. But winners who take annuity payouts can come closer to earning advertised jackpots than lump-sum takers.
Consider the case of $228.4 million Powerball jackpot winner Vinh Nguyen, a California nail technician and sole top-prize winner of that game’s drawing on Sept. 24, 2014.
Most big-prize winners opt for the lump sum. That would have been $134 million. Instead, Nguyen opted for the annuity. That will give him the full $228,467,735 jackpot paid out over 30 years.
Those payments include interest that will accumulate from investments over the life of the annuity.
Annuities also protect winners who might otherwise spend everything after a lump-sum payment.
Some winners may squander their funds all at once or not invest it properly, leading them to bankruptcy or other financial troubles.
An annuity isn’t for everyone. Annuities are inflexible, prohibiting winners from changing the payout terms in the case of an unexpected financial or family emergency.
The annual payments may prevent a winner from making large investments. Such investments generate more cash compared to the amount of interest earned on the annuities.
Winners Face Tax Issues
Taxes also influence many lottery winners’ decisions on whether to choose a lump-sum payout or an annuity. The advantage of a lump sum is certainty — the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won. Once taxed, the money can be spent or invested as the winner sees fit.
The advantage of the annuity is the exact opposite — uncertainty. As each annuity payment is received, it will be taxed based on the then-current federal and state rates. Those who choose the annuity option for tax reasons are often betting that tax rates in the future will be lower than the current rates. However, should they regret their decision in choosing an annuity payout, lottery winners do have the option of selling their annuity payments for a discounted lump sum.
Can I Sell My Lottery Annuity?
If you are interested in selling some or all of your annuity payments, you should contact your lottery company to clarify if the annuity can be sold.
Winners also can decide to sell all or part of their future payments. The terms of the sale, including the total amount, are up for negotiation.
The lottery winner must have court approval for the transaction to take place. A judge decides whether such a sale is in the person’s best interest.
How Much Is My Lottery Annuity Worth?
If you want an estimate of the sales value of your lottery annuity, you can enter the information from your contract into this annuity calculator to get a custom quote that we stand behind.
What Happens to My Lottery Annuity When I Die?
In spite of rumors that the government gets to keep the money, lottery annuities are generally passed to the winner’s heirs. In fact, some lottery companies allow for a transfer of the funds only when the annuity owner dies. In this instance, any remaining assets will be disbursed to the estate or a living beneficiary until their death or the end of the contract.
Some lotteries will cash out an annuity prize for an estate, to make it easier for the estate to distribute the inheritance and to pay federal estate taxes when they apply. In order for the lottery to do this, it has to be allowed in the state where the ticket was purchased.
The Process of Selling Annuity Payments
Lottery winners who decide to sell their periodic payments must first learn if they are allowed to do so. That is often determined by the state in which the lottery was won and not by the state in which the lottery winner lives. Sometimes there are ways of finding a loophole, a task best suited for a personal attorney.
Who Buys Lottery Payments?
Typically, two types of companies purchase long-term lottery payouts: factoring companies and insurance companies. These are the same companies that purchase settlements from sellers who collect personal injury settlements, mortgage notes and other kinds of long-term payouts.
Factoring companies offer lottery winners immediate cash for their annuity contracts. They are buying the lottery winner’s future payments. The cash payment is less than the total of the scheduled annuity payments.
The company should offer you a quote in writing at no charge.
The annuity purchasing companies are part of a very competitive, heavily regulated market. Ask the company where they are certified and licensed and how long the quote is good. Ask about any fees and how long the company has been in business.
When selecting a buying company, it’s usually best to look for a company with experience and that has people who take the time to explain the written offer. Do not cave to pressure to sign something before you fully understand and agree.
The company you choose will draft a contract detailing the proposed agreement. The proposal has to be approved by a judge, who will determine if it is in the best interests of the lottery winner. The annuity purchasing company will take the contract to the judge.
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Tax Obligations of Selling Lottery Payments
Someone who cashes in some or all future lottery payments will owe federal income taxes. This differs from the sales of structured settlements from personal injury lawsuits. In those cases, buyouts are tax-free.Lottery Winners Can Collect Their Winnings as Either a Long-Term Annuity Payout or a Lump Sum; Factors Such as Taxes Can Play a Role in This Decision.
Cashing Out Lottery Payments
Americans spend $70 billion annually on lottery tickets – and around 1,500 people each year become the lucky individuals who win more than a million dollars.
Like structured settlements, lottery winnings can be issued in the form of an annuity. This means that instead of taking a lump sum right away, the winner takes payments. Lottery winners can then choose to sell those payments later, transforming the winnings back into a lump sum.
If one fateful day you find yourself the winner of a huge jackpot, it’s important to know the implications, as well as your options.
What to Do When You First Win the Lottery
- Sign the back of the lottery ticket and snap a picture of both sides of it.
- Research how much time you have to cash in. Wait as long as you can before cashing in, you’ll need to take the time to plan.
- Call your lawyer. If you don’t have one, find one. What kind of lawyer? Find a partner at a large, national firm. Essentially, you want your lawyer to make more money then you have. That way, the lawyer won’t have the incentive to swindle you.
- Keep the ticket in a secure place.
- Don’t splurge, don’t quit your job.
- Keep quiet about it. Depending on your state, your lawyer may even recommend forming a private trust for the money which allows you to keep your name anonymous.
Taking the Lump Sum or the Annuity
Winners of the lottery have a choice: Take a (smaller) lump sum or take an annuity that pays out little by little each year. In total, the annuity results in more money over time.
Three out of the one hundred and two total Powerball winners have chosen to take the lump sum over the annuity. However, taking the cash upfront means you get a smaller amount of money in the end.
The Process of Selling Lottery Payments
Often times, taking the annuity leaves you the opportunity to take a lump sum later. Twenty-eight states allow lottery annuity owners to sell all, or a portion of, their future payments.
The process works in the same way, and through the same channels, as selling a structured settlement:
- Someone scheduled to receive lottery payments in the future contacts a structured settlement, or annuity, buying company.
- The buying company is then responsible for drafting a contract detailing the transfer of payments.
- Next, the sale must be approved by a judge. The sale must be evaluated to ensure that it’s in the best interest of the owner.
- Once approved, taxes will be owed on the funds. Federal taxes apply at the typical income tax rate.
Managing Your Winnings
When people come into a lot of money, it’s common to feel pressure to suddenly live like they’ve always imagined the ultra-rich to live. However, like most things on television, it’s mostly smoke and mirrors and little substance. This can cause a winner to need to turn to selling their future payments.
Money Can Run Out
No matter how large it may seem, the winnings aren’t a bottomless pit of money.
When you win the lottery, you can do anything. You can buy a yacht. You can become an angel investor for small businesses. But that doesn’t mean you can buy all the yachts or invest in all the businesses.
Even seemingly necessary purchases can end up costing a winner money later. Owning a house, for example, requires the payment of taxes. Owning a multi-million dollar home can require proportionately larger taxes each year.
Most millionaires stay millionaires because they have budgets. It’s a good idea to work with an expert to develop, and stick to, a budget.
Your Life Has Changed
Hire a licensed therapist. Winning the lottery is a big change for not only your life, but for your identity and your relationships with those around you.
Ensuring your therapist is licensed is important. A licensed therapist of any brand, by law, cannot disclose what you talk about (unless you threaten to harm yourself or others). This ensures you can trust in their silence through this difficult time.
Many lottery winners say that the best thing they’ve been able to do after winning the lottery is help others. That said, it’s important to be smart about it. Don’t donate one giant sum all at once.
Instead, make a series of planned smaller donations, like $100,000 a year for ten years. This gives you a chance to hold the organization accountable for using the money wisely.
Don’t start handing money out to people, close or otherwise. Once people see you as an ATM machine, there’s no stopping that association in their mind.
Lottery winners receive thousands and thousands of sob stories asking them for help. Some of which are real, many of which are not. Either way, you cannot help everyone.
Decide what initiatives and charities you’re prepared to help with. It’s a good idea to pay someone else to sort your mail and correspondence so you can easily identify those causes you’re not interested in.
Avoiding the Entourage
You won the lottery, so that means you can travel the world with all 23 of your best friends, right? Not so fast. Supporting several people burns through money faster than most people can imagine.
Find ways you can hang out with people that don’t involve you footing the bill. True friends will remain your friends even when the money is off the table.
Dealing with Family
Set up an amount of your money that will be devoted to family. It may seem cold to be so calculated about your generosity towards the people you love, but this is in everyone’s best interest.
Don’t hand out cash. You don’t want to become the welfare department for your family. Instead, work with your attorney to set up a series of trusts to provide money for higher education, as well as funds toward the purchase of a home they can afford the remaining mortgage on.
Problems With Winning the Lottery
You might be thinking, how can a lottery winner run out of money and need to cash out future payments? But the truth is, it is sadly common for lottery winners to struggle after hitting it big.
Lotto winners are:
- More likely to get murdered
- More likely to overdose on drugs
- More likely to file bankruptcy
- More likely to have interpersonal problem
Winning the lottery dramatically changes your life, and coping with that stress can be profoundly challenging. Not only that, lottery winners often find they are more likely to encounter unlucky events in the future. It’s important to take the time to make calculated decisions about your future – after the shock of the win wears off.Lottery winnings come in all shapes and sizes. Here we explore what winning the lottery means, and what options you have moving forward. ]]>