How to Win at Winning the Lottery

For those who play the lottery and are lucky enough to have their numbers hit, a procedure should be followed to protect the payout. The procedure limits the negative implications of winning and limits the likelihood of future bankruptcy.

How do you claim lottery winnings?
To avoid an avalanche of family members and friends hounding you for loans or gifts, the best way to claim lottery winnings is anonymously. To claim a prize anonymously, a “Blind Trust” is created to shield the identity of beneficiaries and only disclose the name of the Trustee. The Trustee for the Blind Trust then claims the prize for the benefit of the respective beneficiaries.

If there were a pool of co-workers, friends, or family members who claim the prize, an entity (such as a partnership, LLC, or corporation) can be created to direct proceeds to each individual. This allows for structure in the distributions disproportionate allocations in the event one member of the pool is entitled to a larger or smaller share of the proceeds.  

Can I buy all of my friends and family gifts?
Yes, but not before evaluating the tax considerations.  Lottery winnings are taxed as ordinary income. While the lottery commission does withhold some taxes, there may be additional taxes due by April 15 of the following year; thus, it is best to hold off on spending until you determine how much the IRS will take.

Additionally, there are gift tax implications for giving things away.  If you decide, I want to buy a car for every member of my family; a gift tax return will need to be filed for every vehicle. To the extent you give away more than the lifetime gift tax exclusion amount, additional estate tax will be owed.

-- Related article: Creating your Will and Trust - Estate Planning 

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