Setting up a trust for lottery winnings

Everyone dreams of being the next Powerball or Mega Millions winner. As the winnings grow and the odds shrink (1 in 292 million for the Powerball grand prize), more people are catching lottery fever. The biggest Powerball jackpot to date was $1.586 billion in January 2016, according to the Associated Press. That same year, the North American Association of State and Provincial Lotteries reported that national ticket sales reached $80 billion, which was more than sales from entertainment, gaming and sports events combined. And according to the California Lottery, sales in a single fiscal year topped $8 billion in 2021.

While winning the lottery can be exciting, those jackpots can become a tax nightmare if you don’t protect your winnings. Lottery winnings are taxed as income. The IRS will take 25% and as much as an additional 13% could be withheld in state and local taxes, depending on where you live. Additionally, the federal tax on big winnings can amount to 40%. And if you chose to pay your taxes in annuities, instead of one payment upfront, your beneficiaries could face a huge bill they can’t afford.

If you want to leave some of that money to your survivors, you need to reconsider your estate planning. The best protection for your winnings is a living trust. Not only are trusts a great way to secure your winnings over time, but they can also help avoid the cost and time of probate for your family and beneficiaries.

Too much money at once?

A sudden wealth event, such as winning the lottery, can sometimes be overwhelming for the recipient. Even if you don’t post your windfall on social media or go on a spending spree, predators could come knocking at your door. When you have a lot of assets, you can become a target for lawsuits, harassment, and requests for money from family, friends, and often complete strangers. Protecting your money is the “number one” reason to create a trust, particularly in states where you cannot remain anonymous.

Trusts come in two general types: revocable and irrevocable. A revocable trust allows you to make changes or terminations during your lifetime, but you have no protection from creditors. An irrevocable trust, however, gives you greater asset protection. They protect lottery winnings and investments because the assets legally do not belong to you, and they benefit your family, as they are not subject to estate taxes. Additionally, an irrevocable trust can only be changed if the grantor, creator, trustee and beneficiaries agree to the changes. If you are part of a winning lottery pool, an irrevocable trust guarantees that everyone gets their share of the winnings at the beginning of the trust process and helps prevent future disputes among the winners.

However, every state but five — Delaware, Kansas, Maryland, North Dakota, and Ohio — have laws that require the lottery to release the winner’s name and city of residence, according to the Multi-State Lottery Association. For winners who want even greater anonymity, a trust within a trust structure is recommended. In a blind trust, beneficiaries have no knowledge of the holdings, and no right to intervene in their handling. If you donate your winning ticket to a blind trust before claiming your prize, the trust is named as the winner and therefore is the only name released to the public. For example, Louise White, the Rhode Island winner of a $210 million lottery, named her trust the “Rainbow Sherbert Trust” after the ice cream flavor she purchased along with her winning ticket at a local grocery store.

Don’t become a statistic

Winning the lottery, especially if it’s a considerable sum, can be a life-changing experience in both good and bad ways. Believe it or not, broke lottery winners are common. According to the National Endowment for Financial Education, 70% of winners end up broke and a third go on to declare bankruptcy. Uncontrollable spending, poor investments and bad accounting can burn through a lucrative windfall in next to no time. If you’ve recently received lottery winnings, think carefully about how to protect your earnings. What you do next can put you on the path to financial wellness or leave you broke.

Proper estate planning is essential whenever large sums of money and assets are involved, and lottery winnings are no different. But don’t go it alone. Let the Law Office of David W. Foley help you avoid uncertainty by setting up a living trust. Our California living trusts are comprehensive and of the highest quality.