You won the lottery! Now what?
A Powerball lottery winner and a team of Wells Fargo professionals offer tips on what to do after hitting the jackpot.
When Raymond Buxton won the $425.3 million Powerball lottery in 2014 — the largest jackpot ever won in California up to that point, according to the California State Lottery — he was determined to take steps to help beat the odds and not squander his windfall.
On average, 70 percent of lottery winners lose or spend all their winnings in just five years, according to the National Endowment for Financial Education.
Buxton is working with a financial professional from Wells Fargo Private Bank and a team of other professionals. Here’s a look at what he’s done, along with some professional tips from representatives of Wells Fargo Private Bank, Wells Fargo Advisors, and Abbot Downing, a Wells Fargo business that serves ultra-high-net-worth clients.
Find professional, third-party advisors — not family members or friends — to help you manage your wealth, said Susan Inwood, a financial advisor for Wells Fargo Advisors. Too many times, she said, wealthy individuals trust their money to confidantes — rather than choosing an objective, experienced financial professional. You need someone to be a trusted financial advisor, she said, who is less likely to take advantage of you.
“There is so much to learn about taxes, tax laws, gifting and inheritance laws, philanthropy, wills, limited liability corporations, and protecting yourself and your assets,” Buxton said. “Early retirement is a full-time job. But winners now have the resources to hire professionals in financial management.”
Here’s who you’ll need, at minimum: a certified public accountant, an attorney, a financial planner, and a financial advisor, said Jay Messing, Wells Fargo Private Bank’s senior director of planning for the Northeast region, but you should do your research too. A financial planner can likely introduce you to appropriate specialists as needed, he said. Just make sure they all have experience with high-net-worth clients.
“Make sure the team members work well together but are independent,” added Buxton. “Stay away from the one-stop shop. You want a diverse and autonomous group that can, and will, work together for your benefit.”
Though a lump-sum payment may be taxed at a higher rate than annuity payments, it could result in a bigger bank account in the long run, said Lisa Hutter, Wells Fargo Private Bank’s senior director of planning for the Southwest region. That’s because you can invest the money on your own, which may mean a greater potential for growth — even with the higher tax rate, she said.
Consider a $1 million prize. Assuming a combined federal and state income tax of 45 percent, and a 7 percent annual rate of return after investing, Hutter said, the lump‑sum winnings after taxes would grow to $1.7 million after 20 years, while a 20-year annuity would grow to only $1.4 million 1 .
So, consider taking the lump sum, she said, unless you think you’d be prone to one of these pitfalls: spending it all too soon, being pressured into sharing the cash with family and friends, or investing in risky business ventures. (If this sounds like you, Wells Fargo’s financial professionals say, consider the annuity payments.)
Many overnight millionaires squander their windfalls rather quickly due to impulse buys, financial mismanagement, and outside influences. That’s the danger of spending before you plan, Messing said.
Resist the “urge to splurge,” he said, and take a financial breather.
Added Carol Schleif, deputy chief investment officer for Abbot Downing, “The reason we tell winners to pause is winning the lottery is a major life event — like the sale of a business, or a death or birth of a family member. Old friends can view you differently, and it complicates many relationships and emotions.”
Use this quiet time to create a plan for how to manage, invest, and spend the money wisely, Messing said. Until the plan is in place, he recommends keeping the money safe in short-term, liquid vehicles that can easily be moved into an investment portfolio when the plan is finalized and you’re ready to act.
You’ll have to figure out what your priorities are. Consider some of the questions Wells Fargo Advisors financial advisors ask their clients during the firm’s Envision ® investment planning process:
- Who makes up your family and how do you support — or want to support — them financially?
- Do you want to keep working? If so, when do you want to retire?
- What is your risk tolerance?
- What are your hobbies and interests?
- What is something you’ve always wanted to do?
- What are some things you’ve been wanting to do more, if only you had the money?
- What charities or causes are you most passionate about supporting because you truly believe in their work?
“Based on those answers, you and your financial advisor create a plan to help you do the things you want to do without busting your now-much-larger budget,” Inwood said.
As part of your overall planning process, you should also talk with your financial team about budgeting issues, tax considerations, and asset allocation parameters, as well as estate and philanthropic strategies, according to Messing.
Tell your team about your priorities, Hutter said, whether it’s paying for your children or grandchildren to go to college, or covering a loved one’s medical expenses.
“Understanding the big picture allows your advisors to better help you plan for you and your loved ones accordingly,” Hutter said.
As with any investment portfolio built for the long haul, Inwood said, it’s important to diversify, monitor regularly to check alignment with your goals, and rebalance assets as needed to stay on track regardless of the market cycle.
As you budget, be sure to account for expenses related to big purchases, said Arne Boudewyn, head of family governance and education for Abbot Downing. “That new house you’ve always wanted can cost 10 times what you initially pay for it when you add in maintenance, furniture, utilities, and entertaining,” he said. “Making a plan and understanding your cash flow and expenses is critically important as you embrace your new identity as a lottery winner and wealth stakeholder.”
You should also expect to pay a lot of taxes. A multimillion‑dollar payout this year can catapult lottery winners into the highest federal tax bracket (37 percent for 2018). And winners who bought their ticket outside of their home state could be hit with taxes from both states.
If you are charitably inclined, consider making larger charitable gifts in the year the winnings are collected, so you can claim a larger deduction, Hutter said. You could create a family foundation or a donor-advised fund that allows you to fully fund charitable contributions in one year and then distribute that money over time to different philanthropic organizations. (More on charitable giving later.)
Consult with legal and tax professionals about the implications of charitable giving, as donations to a donor-advised fund are irrevocable, and to help ensure you have enough money on hand to cover taxes, which Hutter said could range from 40 to 60 percent.
Once you receive the cash, it becomes your asset; any monies not spent will be included in your estate for purposes of calculating the estate tax, Hutter said. The new tax law allows individuals to exclude $11.2 million ($22.4 million as a married couple in 2018) of assets from their estate for purposes of calculating the federal estate tax at a rate of 40 percent.
States differ on exclusion amounts and tax rates, and some states don’t have an estate tax at all. Given the new income-tax provisions, it’s important to not only consider your own estate-tax planning but also the potential tax consequences to your beneficiaries, Hutter said. Before engaging in any estate planning strategies, you should consult with your attorney, tax advisor, and/or estate planner. For example, if a beneficiary lives in a state with high income tax rates, you may be better off with a trust structure that allows you to continue to pay income taxes on the money, or for the trust to be based in a lower-tax state, Hutter said.
Once word spreads of your windfall, expect monetary requests from relatives, friends, and charities, Buxton said.
“Money won’t change who you are, good or bad, but it will absolutely change the perception of those around you,” Buxton said. “The bottom line I learned is that my money won’t fix your problems, or the rooted circumstances that spawned your money problems. So my advice to others would be to feel free to help where you want, but don’t be afraid to say no!”
Guilt often causes irrational behavior, Boudewyn said. If you want to go on a vacation, he said, go on a vacation. Don’t feel obligated to share your wealth with others (family, friends, charitable organizations) before you have a plan and a clear sense of what you wish to do.
If you would like to devote a portion of your newfound wealth to charity, determine what types of causes you would like to support, Messing said. Then, work with your financial professionals to create a grant-making policy and a formal process for reviewing requests. The more specific you are about the causes you would like to support, the easier it is to say “no” to causes and organizations that don’t meet your criteria.
If you are creating your own foundation, Inwood added, seek out your financial team’s help to structure it properly to help ensure the charity has money to continue its work long after you’re gone.
Buxton said that, since winning, he has worked with his team to develop a long-term, diversified investment strategy to help him reach his goals to travel, fight childhood hunger, and promote pediatric health.
“You need a proactive, long-term plan that will perpetually evolve. You can’t get tied down by micro-management or market swings, but you do need to keep an eye on your money and your long-term goals,” he said. “Balance is the key. Go with your gut, tweak as necessary, and don’t forget the charitable opportunities that may be important to you.”
1 This information is hypothetical and is provided for informational purposes only. It is not intended to represent any specific return, yield, or investment, nor is it indicative of future results.
Investment and insurance products: NOT FDIC-Insured NO Bank Guarantee MAY Lose Value
Wells Fargo Advisors is not a tax or legal advisor. If legal, accounting, or tax assistance is required, the services of a competent professional should be sought.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.
A Powerball lottery winner and a team of Wells Fargo professionals offer tips on what to do after hitting the jackpot.
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What To Do If You Win The Lottery
Dec 25, 2018 6:31:00 AM
You probably know that winning the lottery is a pipe dream. You’re more likely to be struck by lightning than win the lottery, and you also know that investing your money wisely will eventually give you a better return than you’ll ever get from a lottery ticket. However, there is one dirty secret about the lottery. It’s something very few people want to think about.
The worst thing that can happen to you while playing the lottery isn’t that you’ll lose—it’s that you’ll actually win.
As it turns out, getting millions of dollars creates as many problems as it solves. This is especially true if you don’t have experience handling that kind of money.
Around 70% of lottery winners have to declare bankruptcy within five years. Even if you don’t go broke, you’ll have to deal with pressures you never dreamed of. Most of that will come from your friends and family, who will come to see you as less of a human being and more of a piggy bank.
You’ll also have to deal with an endless parade of acquaintances and strangers begging you to donate to charities, political candidates, colleges, building renovations, foundation drives and countless other causes. You might feel a little better knowing that most of these people are sincere, although you’ll encounter your fair share of con artists.
Other people might try to take your money without your consent. A disturbing number of lotto winners have been kidnapped, robbed or even murdered, sometimes by a family member wanting their inheritance a little too early.
Knowing all this, you may wonder if anyone who wins the lottery actually gets to be happy.
The answer is that some people manage to thrive with their newfound wealth. You can too, but you have to be smart, modest and very responsible with money.
First Steps If You Win the Lottery
So let’s say you win the lottery. What should you do? Buy a round of drinks for everyone at the bar? Walk into your boss’s office and quit in the most obnoxious way possible?
Don’t do any those things. The first thing you should do after you find out you’ve won the lottery is nothing. Don’t let anyone know.
Instead, take a day or two and research attorneys. You’ll want to get a lawyer from a large national firm, one with experience handling trusts and estates. You may be tempted to go with your family’s lawyer, but you want an impartial attorney who knows how to set up a trust where you can put your newfound wealth.
Collecting Your Lottery Prize
Once you have a trust set up, read up on the rules about collecting the prize. Your best bet is to have your new attorney collect the prize as a representative of your trust and stay out of the spotlight as much as possible.
If you do have to accept the prize personally, try to disguise your appearance. Grow a beard, change your hairstyle and wear a hat or head scarf if at all permissible. Remember that your goal is to remain anonymous when collecting your lottery winnings. Also be sure to get a P.O. Box where all correspondence to you can be sent.
When you get the prize, you can choose to have it presented as a lump sum or receive an annual annuity for several years. Always elect to get the lump sum, and place it in a trust.
If you elect to go with the annuity, the government will invest your money in U.S. Treasury instruments with interest rates that will barely beat the inflation rate. You can easily beat that. The only time the annuity option is preferable is if you know you have an addictive personality that will absolutely burn through your winnings once you have them.
When you get your prize, don’t be surprised if it’s a lot lower than what was advertised. You can expect to walk away with about 46% of the total winnings if you take the lump sum, due to the way the lottery prize is structured. You’ll also have to pay 33% of the remaining amount in taxes, possibly more depending on your state’s tax collection rate. At this point, you may be feeling cheated, but don’t be—you still have a few million left.
Post-Prize, Pre-Spending Phase of Winning the Lottery
The taxes have been collected, and you’ve got a few million in cash you didn’t have before. Now’s the time you purchase the mansion and million-dollar sports car you’ve always wanted, right?
Wrong. Before you start spending, you’ll need to allocate your funds.
You may be wondering why you have to allocate funds (or budget) if you’re a millionaire, and the answer is that you, like 99% of the population, have no idea what that kind of money can and cannot do.
To make sure you spend your money wisely, hire an accountant. You’ll need one who is used to dealing with millions of dollars.
You’ll also want to hire a financial advisor to help you invest the money, but you’ll need to do so with caution. You will be swarmed by almost every financial manager in the United States, all of whom will have a surefire way to increase your money by investing in funds that have really cool acronyms and can show you very convincing PowerPoint presentations accompanied by documents thicker than a Tom Clancy paperback. Stay away from them, and instead select a financial advisor who will only invest in what you want them to.
Make Your Money Work for You First
Now you’re ready to allocate funds.
The first order of business is to get yourself set up for the rest of your life. Take a look at 10 year U.S. Treasury notes, which you can buy at a credit union or other financial institution, and which usually yield around 3% returns per year. That means if you put in $34 million, you should get a little over $1,000,000.
This is one of the safest bets you can make, since if the U.S. defaults on these notes, you will have a lot bigger problems than getting your money back. If you’re extremely cautious, you might want to look at investing some money in Swiss Government Bonds . They do not pay as much (if any) interest as a U.S. Treasury bond, but if those bonds fail you’ll be too busy dealing with the collapse of civilization to care.
Now that you have a safety net most people can only dream of, you might want to set aside some money for your friends and family. Select an amount that you’re comfortable with, but remember you don’t actually owe them anything. Also, you should NOT consult with friends and family on how much you should set aside, unless you really want to foster bad feelings and set yourself up for a lawsuit or two.
The best thing you can do is take the money you’re going to share with friends and family and put it in a separate trust that is empowered to fund things like higher education, help with purchasing a home, and perhaps even help in funding significant events like weddings.
What do you do with the rest of your money? If you’ve gotten a prize with a lump sum of $100 million after taxes, by now you’ve invested $34 million in your safety net, and probably around $10 million in the friends and family trust, which is incredibly generous.
This leaves you with $54 million dollars, and while you should invest most of that money, too, here’s where you get to start exercising some personal discretion. Your best bet is to follow Warren Buffet’s example and put it in an index fund. You’ll get about a 7% return over the next ten years. You don’t have to invest in an index account, though. You might also want to invest in a business, or in real estate. Both of those are good ideas, but again, be sure you’re investing wisely.
Going back to our $100 million example, let’s say you’ve invested $40 million of your remaining $54 million in the stock market or in business. That leaves you with $10 million that you can spend however you want. You’re taken care of financially for the rest of your life, so feel free to buy whatever you want now, from sports cars to islands to joining high-stakes poker games with individuals who look remarkably like James Bond.
You can even use this to finance some kickstarters or startups you think need the help. Again, though—do NOT do this for anyone you know. It never ends well, and it can only lead to bad feelings and lawsuits.
If any of this makes you feel uneasy about winning the lottery, don’t worry—your chances are still as remote as they have ever been. Instead of trying to win the lottery, though, you’ll probably get a better return on your investment if you spend your money on something else instead. You can put your money into a Certificate of Deposit (CD) to generate interest, for example, or even put it into your checking account so you can make a down payment on your next auto loan.
Check the rest of the First Alliance Credit Union blog, too. Each post offers solid, practical advice on how to manage your money. You probably won’t become a millionaire, but you will learn to manage the money you do have more effectively.
There is one dirty secret about the lottery. As it turns out, getting millions of dollars can create as many problems as it solves. This is especially true if you don’t have experience handling that kind of money. Learn what you should do if you strike it rich by winning the lottery!