ESTATE PLANNING FOR LOTTERY WINNERS
On February 14, 2023, California state lottery officials named the winner of the largest lottery prize in U.S. history. Edwin Castro won an eye-popping $2.04 billion lottery drawing, choosing a lump sum payment of $997.6 million instead of annual payments over three decades.
If you're fortunate enough to have a winning lottery ticket, it is important to carefully consider how you want to handle your unexpected windfall. There is an unfortunate pattern of lottery winners blowing their new wealth. You don't want to be one of them, even if your prize is much smaller than those mentioned.
Here are 4 tips for managing your money if you win the lottery:
Claim your winnings with caution
Make gifts to your family carefully
Keep income tax consequences in mind
Contact Professional Advisors
Claiming Your Winnings
Lottery winners typically have a specific length of time to claim their winnings, although the deadlines vary by state. If it is never claimed, it will be transferred to the state’s general fund. So, although it isn't wise to delay too long, you should take time to think carefully about what you would like to do with the cash you have won, preferably even before you claim your prize.
Make Gifts Without Unintended Tax Consequences
Some family members, acquaintances, and scammers are likely to want a piece of your winnings. Don't feel pressured to do anything that you don't genuinely feel good about. Be firm about your choices, regardless of attempts to make you feel obligated or guilty. Nevertheless, you may choose to be generous with your winnings, making gifts to family members, loved ones, or charities. However, keep in mind that large gifts may have tax consequences. In 2023, the annual gift tax exemption amount is $17,000 per recipient. This means that, with a few exceptions, if you give more than $17,000 to someone other than your spouse or a dependent, you may be subject to gift tax.
Keep Income Tax Consequences in Mind
Although the winner of California’s lottery opted to receive a lump sum of $997.6 million, he didn't actually receive that amount. He had to pay taxes on it. Before the state of California gave him any of his winnings, 24 percent—$239.4 million—was withheld and sent directly to the IRS. In addition, because the highest federal income tax rate is 37 percent, an additional 13 percent—$129.7 million—was due in April of 2023. After these federal tax payments, Mr. Castro was left with a measly $628.5 million.
It is important to file tax returns reporting your winnings and pay taxes owed to avoid interest and penalties. There is a 5 percent per month penalty for each month after the due date up to a maximum of 25 percent for failure to file your tax return on time. If you file your tax return on time but don't pay all of the tax you owe on time, there is a failure-to-pay penalty of one-half of one percent per month up to a maximum of 25 percent of the amount of unpaid taxes. The amount of the penalty will increase if the IRS issues a notice of intent to levy property as a means of collecting the amount due. If your prize winnings are substantial, these penalties could also be sizable.
It is also crucial to make a good-faith effort to ensure that your tax return accurately reports your winnings. Don't take any steps to willfully evade paying taxes owed. In 2021, an Ohio man who won $1 million in the lottery was charged with filing a false tax return to avoid taxes. According to court documents, the man, who pleaded guilty, had falsely claimed large gambling losses and transferred significant sums of money to foreign bank accounts that were not disclosed to the IRS in an effort to avoid paying taxes on his winnings. The maximum penalty for filing a false tax return is three years in prison and a fine of up to $100,000.
Contact Your Financial Advisor, Tax Preparer, and Estate Planning Attorney
The financial, tax, and legal issues that arise when you win a large prize can be overwhelming if you do not seek help. Before you make any major purchases or gifts, it is important to immediately contact a team of professionals to help you handle your winnings.
At DuPont and Blumenstiel, we serve your legal, financial, and tax needs all in one place. Our sister companies, DuPont Wealth Solutions and Ohio Tax Advocates can help you plan for any situation. If you would like to preserve your new wealth and enable it to grow, it is important to contact our financial advisors who can help you make wise decisions. Our tax advisors will also teach you certain strategies to save money on taxes. Our tax preparers can file an accurate and timely tax return on your behalf so you can pay taxes owed by the IRS’s due date. Our estate planning attorneys will coordinate your documents to reflect your financial and tax needs. We will help ensure that your winnings are protected during your lifetime and after.
Let us help you avoid hasty decisions that you may later regret. Call our Dublin, Ohio office today at 614-389-9711 to set up an appointment that benefits you and your loved ones.