Congratulations – you won the lottery. A windfall of money will be life-changing. You may be able to buy a new home, start a small business or invest in a loved one’s dreams. While there are so many new options and opportunities available to you due to this influx of cash, there are also new responsibilities that go alongside the win.
Now is the time to build a team of trusted advisors to guide you and develop a plan that ensures your winnings are not squandered. The right decisions now can create financial security for the rest of your life as well as a legacy to leave behind.
Often the first big decision to make for lottery winners is whether to take the winnings in the form of a one-time lump sum or installment payments. Electing to take the lump sum up front often results in a discounted total. However, if the lump sum is properly invested, it may recoup or outperform the installment payment option. There is an estate planning consideration with this decision as well. For winners receiving amounts over the current federal estate tax exemption amount, estate planning may be required to minimize potential estate taxes after you die. For people who pass away in 2022, the exemption amount is $12.06 million. For a married couple, that comes to a combined exemption of $24.12 million.
This means a lottery winner’s estate may be subject to both federal estate tax and Maryland estate tax when he or she dies. By planning ahead, you can use asset protection strategies to minimize this tax liability.
The next consideration is income tax liability. Lottery winnings are taxable income the tax year received. A lump sum means you pay taxes owed on the entire amount. Installment payments are taxed each year according to the amount received that tax year. Before you see a dollar of lottery winnings, the IRS will take 25%. Up to an additional 13% could be withheld in state and local taxes. You may end up owing even more when taxes are due, since the top federal tax rate is 37%. A good first step a lottery winner could take is to hire a knowledgeable financial advisor and CPA who can help with tax and investment strategies.
Often the names of lottery winners are published in the mass media. This can bring a loss of privacy that may catch you off guard. An attorney can help you create legal entities that allow you to guard the winnings with more privacy.
If you have an arrangement to split the earnings with other winners, you may also need legal guidance on partnership arrangements that provide clear terms as well as afford some level of privacy. Forming a partnership allows a neutral third party to receive all the winnings on behalf of all the partners and then fairly distribute them.
You may also be interested in gifting portions of your winnings to other loved ones. There may be gift tax consequences if you gift more than $16,000 to any individual in a calendar year. An estate planning attorney can go over gifting strategies that meet your overall goals. For more information on estate planning for lottery winners, contact the experienced attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at firstname.lastname@example.org.