How Financial Advisors Can Help Lottery Winners

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Winning a sum of money through the lottery can be one of the most influential and life-changing moments in an individual’s or family’s lifetime; however, if managed improperly, lottery winnings can turn into a financial curse. While extremely rare, lottery winnings can happen, which can increase an individual’s or family’s ability to save and invest money and add to their personal or financial independence. Knowing exactly what to do if this circumstance were to happen or seek the advice and guidance of a trusted financial professional in the event of this situation arising is a much wiser alternative than going at it alone. Professionals in the finance, legal, and accounting fields can help lottery winners with aspects such as safety, publicity, taxes, and philanthropy, among many other factors that are outside of the expertise of the average individual. With a financial advisor or financial planner at your side, the room for financial error is minimized so that an individual or family can enjoy their lottery winnings responsibly with a greater chance of generational financial success and personal financial freedom.

If one were to win the lottery, finding a financial advisor or financial planner is the first step in order to safely and effectively plan what to do with the newfound winnings. A lottery can solve many problems, but especially if large enough, can present many new problems for individuals and families. Financial professionals face these types of scenarios routinely and are equipped and prepared to help in situations such as dealing with family members asking for money or an abnormal amount of incoming cash.

Choosing lump sum or annuity

Lottery winners often have the choice between a one-time lump sum payment or annual installment payments lasting for decades. Taking the lump sum payment allows for extra flexibility and potentially greater investment gains as one is able to receive all their money at once and start investing sooner than otherwise. However, choosing the annuity payout is often better, and recommended by financial professionals, especially for smaller winners and younger winners. This not only reduces the overall tax liability, meaning that the individual or family would receive more of their earnings over time, but this option also keeps individuals responsible and accountable as they have a steady stream of income coming in every year. This income is often not large enough to do serious damage to one’s finances like the lump sum payout is; instead, this option allows for steady use and reinvestment every year, making this the safer and more responsible option.

Whichever option an individual or family decides to choose, financial advisors and planners can help develop investment plans and strategies around that specific option in order to better accommodate the specificities of the needs, wants, and goals of the individual or family.

Helping you achieve your evolving financial objectives

Develop a Plan

In order to help a financial advisor or financial planner assist in one’s winnings, an individual or family first must collectively decide what their personal or financial goals are and what to allocate their new additional finances to. Financial professionals can often provide ideas or guidance on where to safely invest one’s earnings or where other lottery winners have allocated their finances to in the past. Often lottery winners put their winnings into a savings account and give themselves time to think about what to do with their new income.

Silence and patience is often the best move in order to avoid impulsive mistakes or rash decisions. It is often recommended to tell no one about one’s winnings, not even one’s friends or extended family, as this can often lead to loan requests, gift requests, or unwise investment schemes. Some states allow for winners to protect their identity from the public. This can prove extremely valuable as lottery winners can maintain their anonymity and enjoy their winnings away from the public and family eye.

Lottery winners also often have up to six months to collect their winnings which can give individuals time to develop a financial plan and course of action on how to approach their new finances. Putting one’s lottery ticket into a bank safety deposit box can be wise in order to give all individuals involved time to think and come up with a plan.

Restraining oneself from the urge to spend large amounts of money from an overall lottery winnings pool is necessary. Some impulses or financial dreams are just too strong and hard to control. Financial professionals recommend that in some cases, it may be wise not to completely suppress these impulses by indulging in a small portion of one’s winnings, close to 5% of the total winnings, to spend as the heart desires with little or no thought to whether the purchases are financially wise or not. This will fill the splurging or binging craving most individuals often have, and satisfy most introductory desires, allowing individuals to responsibly save and invest the rest of their lottery winnings and enjoy a nice retirement income.

Some financial professionals recommend lottery winners keep working in their industries to keep some sense of normalcy in their life. This can be a good idea for individuals who enjoy their job and would keep working without the need to support themselves through their profession. For many, their profession provides their life meaning and purpose; for those with that shared mindset, working a normal job while remaining a lottery winner may not be a bad idea.

Assemble a Team

Once the winning lottery ticket has been verified, it is crucial to begin establishing one’s finances and setting them up for financial success once the money has been received. Being unprepared when the funding starts flowing in can lead to financial disaster. This includes knowing where to allocate and deposit the money as well as any financial or investment plan prepared by a financial professional. Financial advisors or financial planners may often assemble a team of experts to handle one’s finances, including accountants, advisors, and attorneys, as immense lottery winnings often require a large qualified team in order to manage the money. Each member within the team has a detailed and complex job to perform that only they are specialized in. Attorneys are responsible for creating a trust to protect an individual’s winnings from publicity. An accountant’s role is to attempt to mitigate the inevitable tax bite from the original set amount, which can often be quite a large percentage of the overall funding. Lastly, a financial advisor’s role is to assess the financial goals of an individual or family and prepare a financial plan and an investment plan that will work to accomplish them in an efficient and safe way.

Managing Finances

Federal and state income taxes can often take huge chunks out of lottery winnings. Financial professionals specialize in devising strategies in order to minimize the amount of losses that are attributed to tax. Lottery winners often make charitable gifts or large contributions to donor-advised funds or private foundations to reduce the first-year tax bite while also giving back to charities and beneficial causes.

Another challenging aspect of managing sudden wealth is the inquiries made by friends and families for loans, gifts, and investments. Financial advisors and financial planners have been privy to this exchange as they have advised clients on similar situations. They can suggest better alternatives and practices, such as offering loved ones one-time gifts that avoid the federal gift tax limit or investigating offered investment opportunities to ensure their legitimacy and match of client objectives and goals.

Even the largest of lottery wins can eventually be lost through mismanagement of funds and poor decisions from the individual or family, a financial advisor or financial planner can help one avoid this negative outcome by discussing spending goals, financial goals, and investment objectives. This will help the financial professional come up with a plan for achieving these goals with the help of time-tested investment vehicles and strategies. They will also help individuals and families manage these investments so that the life-changing impact of the lottery win can remain long-term and not just temporary.

FAQs

Should I get a financial advisor after winning the lottery?

When winning the lottery, first assemble a proper financial team to help come up with a financial plan for the winnings before telling trusted family members or friends. Key people to have on one’s team are attorneys, accountants, and financial advisors or financial planners.

What should a lottery winner do first?

The first essential thing a lottery winner should do is make several copies of both sides of the ticket to show to lawyers and accountants. This allows one to secure the original ticket in a bank-safe deposit box or personal at-home safe.

How many people stay rich after winning the lottery?

It is reported that around 70% of people who win a lottery or large windfall end up broke in just a few years, according to a study run by the National Endowment for Financial Education (NEFE).

What kind of bank do lottery winners use?

Lottery winners typically register an account with a private bank and use their resources such as private banking, fiduciary investments, and other financial services specifically geared for high-net-worth individuals.

Is it better to take the annuity or lump sum lottery?

Choosing a lump-sum payout can help winners avoid long-term tax implications and also provides them with the opportunity to invest immediately into high-yield financial options and investments like real estate and stocks. Meanwhile, electing for a long-term annuity payout can have significant beneficial tax benefits and allows for less risk and more accountability/responsibility.

Should I put my lottery winnings in a trust?

Most state lotteries are required to release the name of the lottery winner and where they live; however, many lotteries allow one to maintain some level of privacy by claiming the proceeds through a private trust. A trust can put a direct barrier between relatives, friends, and strangers who would request for money or gifts.

How do you give money to your family after winning the lottery?

If one chooses to give money to friends or family, they have the option of physically taking money out of their bank accounts to give to loved ones or transferring funds into their accounts separately. This allows one’s family or friends to do what they please with the money they receive to fund personal expenses or financial goals. However, some taxation is possible depending on the amount transferred over or given.

Can the IRS take your lottery winnings?

Before seeing a dollar of one’s lottery winnings, the IRS will take 25%. An additional 13% could be withheld and taken in state and local taxes, depending on the state or region in which the individual lives in.

Where is the best place to deposit lottery winnings?

Bank deposit accounts are a good place for the safe storage of lottery winnings. These bank accounts are liquid, so one is able to withdraw money regularly whenever needed. A certificate of deposit, on the other hand, allows an individual to earn a higher interest rate but is illiquid. This means one must promise to hold the money in the account for a specified period of time or pay a significant penalty. This option can be attractive to individuals who do not plan to spend or allocate all of their winnings right away and instead prefer to wait a specified period of time before performing an action.

What kind of trust is best for lottery winnings?

Irrevocable trusts are highly recommended by most financial advisors and financial planners as it protects lottery winnings because the assets legally do not belong to the individual but to the trust. They also benefit all beneficiaries as they are not subject to estate taxes. Blind trusts are also recommended and suitable to protect one’s winnings from unscrupulous relatives and friends who crave and desire one’s property or money.

References

This material contains opinions of the author, but not necessarily those of Arrowroot Family Office LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this material may be reproduced or referred to in any form, without express written permission of Arrowroot Family Office, LLC. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is not indicative of future results.