As of this post, the Mega Millions jackpot is up to $1.6 billion. That is beyond life changing, that is island buying.
With all the billboards, social media posts and articles, it would be hard to not be aware of how big the jackpot has grown. So, against your better judgement, you may have been swept up in the mania and purchased a ticket. But what would happen if you actually won? Many people have probably worked this part out extensively – what they would buy, how fast would they quit their job, where would they move or travel to. But most people have spent less time imagining how this would affect their tax planning strategy and their estate plan. The odds are pretty good that many people who actually win large jackpots have devoted exactly zero time to working through such considerations.
What are the tax implications?
For starters, if you won $1 billion, $100 million or $10 million, you would find yourself in the top federal income tax bracket, as lottery prizes are considered earned income for that year, and so right off the top, 37% of whatever giant number you won would be gone. And if you have an investment portfolio, landing in the highest federal tax bracket would also move you into the highest capital gains tax bracket of 20%. If you win a lottery jackpot, you do have the option of taking a lump sum or of structuring your winnings as an annuity, which would be a set annual payout, typically over the course of 30 years. But with a large figure like $1 billion, whether you take a lump sum or an annuity payout, you are still going to be over the annual earned income top bracket – over $500,000 for single filers, or $600,000 for couples filing jointly. And depending on your state of residence, there may be state taxes on your winnings as well; state tax rates on gambling winnings, which is what a lottery prize is, vary by state and range from 0% to as high as 8.82%. And in some states, there are local taxes to be paid as well – in New York City for example, the city tax is an additional 3.9%. But regardless of the state you live in, 24% of your jackpot will be withheld automatically when you are declared the winner, and you will be responsible for setting aside and paying whatever else you owe. There are many more tax implications to consider, but this overview gives you a basic foundation for what to expect when you hand in your winning ticket.
How would this affect my legacy?
Prior to winning the lottery, you may not have given much thought to estate planning. With a significant lottery win, and really, without a significant lottery win, your estate plan should always be a priority. Estate planning encompasses a number of considerations, but on a very basic level, it means committing your wishes for your home, vehicles, and any other assets you possess to record. Depending on your situation your estate can be very complex or it can be straight forward. Whatever your situation may be, you need an up to date, executed will clearly expressing what you want to happen to your liquid and illiquid assets. An executed will allows an estate to pass easily through probate and reduces time and expenses for your loved ones. That said, winning a large lottery jackpot will add a whole new level of complexity to your estate plan. If you elect an annuity payout, you have to consider what you wish to happen to the remainder of your prize if you should die before the 30 years are up. Would you want it split equally among your children and your spouse? Would it make sense to provide a percentage of the prize to your beneficiaries, and the rest to a trust with specific provisions as to how and when distributions would be paid? Do you have any philanthropic intentions that should be included? There are also estate tax questions you must consider – the jointly filed estate tax exemption in now $22.4 million, which means you can pass along $22.4 million to your children, friends, or whoever you’d like free from federal estate tax. The rest of the money in your estate which will be passed on at your death will be subject to a federal estate tax of 40%, and potentially additional state inheritance taxes, too.
There are many strategies you can employ to protect your assets and to make sure they are distributed how and to whom you wish. But to make sure your wishes are carried out faithfully, it is recommended that you work out a vision for your legacy with a trusted financial advisor. If you have never worked with a financial advisor before, you may have a lot of questions about your options in the marketplace. Most of the advertising out there is from large investment banks who claim to offer comprehensive financial advice but are oftentimes simply investment managers pitching their own proprietary products, and who have hundreds of clients for whom they have limited to zero availability. On the other end of the spectrum are Registered Investment Advisors, who operate under the fiduciary standard, which means they are required to always work on behalf their client, in support of their stated objectives.
At Waldron, we take it a step further. We serve a select number of clients so that all of our financial advisors are able to meet with every client they serve, and to develop independent investment portfolios and estate planning and tax planning strategies that are customized to support each clients’ unique and specific goals, and updated as life events occur. If you are lucky enough to purchase a winning ticket, be one of the outliers who doesn’t end up in a National Enquirer story about tragic lottery winners. Find a financial advisor who you trust and take full advantage of your windfall.