Six numbers. That’s it. Six numbers and you’re a billionaire! You probably already know exactly what you would do with the money. Maybe pay off your debt. Perhaps buy something expensive. You’d invest some. Donate some to charity, right? But if you ever plan to win the lottery, you’ll want to have a plan first. Here are our tips for those hoping to cash in to BIG money:
First things first: PROTECT THE LOTTERY TICKET!
If you do not own a safe deposit box, now is the time to get one because the first thing you should do is make a copy of the lottery ticket and place the original in a safe deposit box.
Under What Identity Should You Receive Lottery Winnings?
One reason to create a living trust before you claim your earnings is to protect your name from appearing in any public record or announcement of the lottery winners. You would likely have a lot of new friends if you claimed the money under your name. By creating a revocable living trust, you can claim the jackpot in the name of the trust. You can name a trust in a way that shields your personal identity.
Also, if you purchased your ticket as a part of a group or an office pool, you will want to establish an entity because many state lotteries require only one payee per winning ticket. This is also essential because assume you and your group agree that you would be the lottery claimant, when you distribute the winning portions to the other members of your group, it might be considered a taxable gift under the Federal Gift Tax laws.
Do Not Give Your Lottery Winnings Away in Probate Fees
If something were to happen to you before you were able to create a trust, your heirs would have to probate your estate in order to inherit your lottery winnings. Here are the current statutory probate rates in California:
- 4% of the first $100,000 of the gross value of the probate estate
- 3% of the next $100,000
- 2% of the next $800,000
- 1% of the next $9 million
- 5% of the next $15 million
And for all amounts above twenty-five million dollars ($25,000,000), the court determines how much the fees are. Also, your executor is entitled to the same amount. Assume for a moment that you won $20 million in the lottery. You’d pay $163,000 in probate fees to the attorney and another $163,000 in fees to your executor. That does not include other costs and extraordinary costs—all of which are avoided when you have an estate plan in place before you collect your winnings.
Also, a trust can establish guidelines for your children should something happen to you and they inherit your winnings before they are old enough to make wise
decisions with the money.
What about creditors?
One type of trust that will protect your assets from your creditors is called an irrevocable trust. Once you establish an irrevocable trust, you no longer legally own the assets used to fund it and can no longer control how those assets are distributed. You could put a portion of your lottery winnings in an irrevocable trust to be protected. However, by creating an irrevocable trust, you surrender the ability to later modify the trust.
Due to this change in ownership, a future creditor cannot satisfy a judgment against the assets held in irrevocable trust. But, the extent of protection turns largely on state law issues so you must talk with an attorney before establishing this type of relationship with your assets.
Importantly, a court can undo your transfer to an irrevocable trust if it finds that the transfer was made with the intention of defrauding creditors. These transfers are considered fraudulent, and in many cases carry significant legal penalties. This is why it is CRITICAL to practice asset protection planning well before you even anticipate being the subject of any liability.
To learn more about how to incorporate an Estate Plan into your plans to win big in the lottery, contact The Law Office of Lauren N. Peebles at (510) 588-8445. PS – Good luck! Don’t forget us when you win! 🙂