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Selling Lottery Payments

Lottery winners can collect their prize as an annuity or as a lump-sum. Often referred to as a “lottery annuity,” the annuity option provides annual payments over time. A lump-sum payout distributes the full amount of after-tax winnings at once. Powerball and Mega Millions offer winners a single lump sum or 30 annuity payments over 29 years.

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Lottery Payout Options

Before lottery winners can collect jackpots, they must usually make one important decision: Should they collect their winnings all at once or over a long period of time?

The first option is called a lump-sum award. That’s when the winner receives all of the lottery winnings after taxes at one time.

The second option is an annuity. Although annuities established by the lottery commissions have been informally dubbed “lottery annuities,” in reality, annuity contracts created for the purpose of distributing prize money typically fall under the safest category of annuities: fixed immediate.

Each state and lottery company varies. Powerball, for example, offers winners the choice of a lump-sum payout or an annuity of 30 payments over 29 years. Mega Millions offers lump-sum payouts or annuities. The annuity offers an initial payment followed by 29 annual payments. Each payment is 5 percent larger than the previous one.

Lump Sum vs. Annuity for Lottery Winners

While both options guarantee a lottery payout, the lump-sum and annuity options offer different advantages. Choosing a lump-sum payout can help winners avoid long-term tax implications and also provides the opportunity to immediately invest in high-yield financial options like real estate and stocks.

Federal taxes reduce lottery winnings immediately. But winners who take annuity payouts can come closer to earning advertised jackpots than lump-sum takers.

Consider the case of $228.4 million Powerball jackpot winner Vinh Nguyen, a California nail technician and sole top-prize winner of that game’s drawing on Sept. 24, 2014.

Most big-prize winners opt for the lump sum. That would have been $134 million. Instead, Nguyen opted for the annuity. That will give him the full $228,467,735 jackpot paid out over 30 years.

Those payments include interest that will accumulate from investments over the life of the annuity.

Annuities also protect winners who might otherwise spend everything after a lump-sum payment.

Some winners may squander their funds all at once or not invest it properly, leading them to bankruptcy or other financial troubles.

An annuity isn’t for everyone. Annuities are inflexible, prohibiting winners from changing the payout terms in the case of an unexpected financial or family emergency.

The annual payments may prevent a winner from making large investments. Such investments generate more cash compared to the amount of interest earned on the annuities.

Winners Face Tax Issues

Taxes also influence many lottery winners’ decisions on whether to choose a lump-sum payout or an annuity. The advantage of a lump sum is certainty — the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won. Once taxed, the money can be spent or invested as the winner sees fit.

The advantage of the annuity is the exact opposite — uncertainty. As each annuity payment is received, it will be taxed based on the then-current federal and state rates. Those who choose the annuity option for tax reasons are often betting that tax rates in the future will be lower than the current rates. However, should they regret their decision in choosing an annuity payout, lottery winners do have the option of selling their annuity payments for a discounted lump sum.

Can I Sell My Lottery Annuity?

If you are interested in selling some or all of your annuity payments, you should contact your lottery company to clarify if the annuity can be sold.

Winners also can decide to sell all or part of their future payments. The terms of the sale, including the total amount, are up for negotiation.

The lottery winner must have court approval for the transaction to take place. A judge decides whether such a sale is in the person’s best interest.

How Much Is My Lottery Annuity Worth?

If you want an estimate of the sales value of your lottery annuity, you can enter the information from your contract into this annuity calculator to get a custom quote that we stand behind.

What Happens to My Lottery Annuity When I Die?

In spite of rumors that the government gets to keep the money, lottery annuities are generally passed to the winner’s heirs. In fact, some lottery companies allow for a transfer of the funds only when the annuity owner dies. In this instance, any remaining assets will be disbursed to the estate or a living beneficiary until their death or the end of the contract.

Some lotteries will cash out an annuity prize for an estate, to make it easier for the estate to distribute the inheritance and to pay federal estate taxes when they apply. In order for the lottery to do this, it has to be allowed in the state where the ticket was purchased.

The Process of Selling Annuity Payments

Lottery winners who decide to sell their periodic payments must first learn if they are allowed to do so. That is often determined by the state in which the lottery was won and not by the state in which the lottery winner lives. Sometimes there are ways of finding a loophole, a task best suited for a personal attorney.

Who Buys Lottery Payments?

Typically, two types of companies purchase long-term lottery payouts: factoring companies and insurance companies. These are the same companies that purchase settlements from sellers who collect personal injury settlements, mortgage notes and other kinds of long-term payouts.

Factoring companies offer lottery winners immediate cash for their annuity contracts. They are buying the lottery winner’s future payments. The cash payment is less than the total of the scheduled annuity payments.

The company should offer you a quote in writing at no charge.

The annuity purchasing companies are part of a very competitive, heavily regulated market. Ask the company where they are certified and licensed and how long the quote is good. Ask about any fees and how long the company has been in business.

When selecting a buying company, it’s usually best to look for a company with experience and that has people who take the time to explain the written offer. Do not cave to pressure to sign something before you fully understand and agree.

The company you choose will draft a contract detailing the proposed agreement. The proposal has to be approved by a judge, who will determine if it is in the best interests of the lottery winner. The annuity purchasing company will take the contract to the judge.

We recommend our partners, who have been vetted by experts in the field. They have helped thousands of people who need to get cash quickly.

Tax Obligations of Selling Lottery Payments

Someone who cashes in some or all future lottery payments will owe federal income taxes. This differs from the sales of structured settlements from personal injury lawsuits. In those cases, buyouts are tax-free.

Lottery Winners Can Collect Their Winnings as Either a Long-Term Annuity Payout or a Lump Sum; Factors Such as Taxes Can Play a Role in This Decision.

12 things not to do if you win the lottery

many people dream of winning the lottery. (Photo: Thinkstock)

Is the lottery the new American dream? Imagine becoming vastly wealthy overnight. Being a winner of a multimillion dollar lottery certainly will be a life-changing event for almost every single lottery winner. But what about when the prize is an astronomical sum of $100 million, $200 million or $300 million? Various Powerball and state lotteries have reached vast sums, and lotteries elsewhere have as well.

Future Powerball and state lottery ticket winners will become incredibly wealthy in an instant. Imagine being Joe Somebody and turning into Sir Joe the Magnificent overnight. Now imagine the unthinkable, where Sir Joe becomes Joe the Village Idiot in a very short time. Supposedly most lottery winners end up broke again. That just doesn’t seem right at all.

24/7 Wall St. wants its readers, particularly those few who are lucky enough to win the lottery, to avoid some of the simple and complex mistakes that have taken other lottery winners into bankruptcy. Some lottery winners have even died.

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24/7 Wall St. has decided to offer 12 important things not to do if you are a lottery winner. We have looked around at many research papers and other articles on the matter about those who land in instant riches against all odds. Doesn’t it seem cruel to imagine that many lottery winners become losers? There is a saying that newly wealthy people need to commit to memory: you should only have to get rich once. The reality is that some people just cannot help themselves in avoiding the pitfalls of instant wealth.

2015 may not have broken the record books on the highest lottery winnings in America. Still, there was a $310 million winner from the Powerball lottery in Michigan. In February of 2015, the Powerball drawing with a $564.1 million jackpot there were three different winners who got to split this top prize. New York’s March lottery drawing brought a jackpot worth $136 million. There have been other U.S. lotteries in years past with jackpots north of $500 million, and as mentioned a year-end lottery is up for grabs with a Powerball jackpot of $300 million and a Mega Millions jackpot of $117 million.

While many lists explain what you should do if you win, it is surprising how few actual warnings are out there that can be used a scare-tactic guide that makes lottery winners do the right thing. Did you know that you might become a marked target if you are a lotto winner? Some people find instant enemies, and some people become their own worst enemy. It might have been very hard to spend $30 million in 30 days in “Brewster’s Millions” during the mid-1980s, but spending $10 million, $50 million or even $100 million can now be done faster than you can imagine. Some people now could even manage to spend that much just in a single day or two.

Some points about what to do, or not do, may overlap or seem redundant. The problem is that there are many pitfalls that snag lottery winners who become vastly wealthy overnight or those who find themselves incredibly wealthy in a very short period. This list of tasks also has many lessons for those who win big legal judgments, who unexpectedly inherit millions of dollars and who get sudden windfalls of cash from a business deal or a business sale.

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Here are 12 things not to do if you win the lottery … or 13 things if the runner-up counts!

Forget to sign a ticket, or forget to report it to the state.

After doing some research, we find this is apparently the simplest and easiest error to make. Can you imagine losing a lottery ticket? Then imagine what can happen if someone else snags your ticket and shows up to collect the prize. Fighting over this is no simple task, and disputes have arisen over who owns what ticket. In a way, lottery tickets are almost considered the last form of bearer bonds that anyone can collect on if they show up with the coupons and bonds. Lottery tickets expire at different times from state to state, but they generally expire in 90 days to one year.

Tell everyone you know.

If you win millions of dollars, chances are pretty high that you will to want to brag about it and share some of your new joy. How could you not? The problem is that telling everyone you know before you collect your winning puts you in danger, and in more ways that just one. Everyone who has ever done anything for you now may come with their hands out asking for something, or worse. You probably have heard of kidnap and ransom insurance before. One lottery winner was even murdered. If you can manage it, and if your state allows it, try to remain anonymous for as long as humanly possible. How you became vastly wealthy will be found out in time anyway, but there is no need to alert everyone.

Automatically decide to take the up-front cash instead of the annuity.

Getting tens of millions of dollars at once probably sounds better than getting a paycheck for the next 30 years or so. Now consider that close to 70% of lottery winners end up broke, many within a couple or few years. Let’s say that you can choose to get $172 million up front, or you can choose to receive a payout of $300 million slowly over the course of a lifetime. Most people choose the lump sum rather than the annuity payment as it is instant empire-making money. Go see a reputable and visible tax professional and a reputable investment advisor at a top money management firm with a widely recognized company name and a long corporate history. This theme of “reputable and visible” will echo throughout. Do this before you make the decision about a lump-sum or annuity option.

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Think that you are the smartest person to manage your money and finances.

If you go from living paycheck to paycheck, does it sound right that you will know the best things to invest in and the best tax and asset protection strategies? There are many ways to invest and protect that fortune, and that might not include just buying some stocks and bonds and letting it ride. Your drinking buddy might also not be the best choice as an advisor and expert. Having a solid and respectable team of advisors and managers in place will act as your buffer that protects your assets now and in the future. Also, don’t think that this money is a tax-free payment as you probably will have to pay the top tax bracket to the IRS and the highest state and local income taxes. Do you know how to protect your assets against all threats and know exactly how to protect your estate in case you die or become incapacitated? Here is a hint: If you answered yes, you probably did not bother playing the lottery.

Let your debts remain in place.

If you get the “I’m rich and don’t have to pay anymore” bug, you might be dooming yourself. One lottery winner in California was strapped with debt from property purchases and what seemed to be excessive insurance policies. Whether you take the lump-sum or the annuity option, if you have a single penny of debt in the immediate future and distant future, then something is seriously wrong. For that matter, you should not have a single debt ever again. If you manage to go broke down the road and still have a mortgage, car payments, student loans, credit card debt and personal bills, you will have lost the right to be mad when all of your friends and family members ridicule you every day for the rest of your life.

Become the excessive high-roller, living the Big Life.

If you go from living a simple life to instantly being able to spend hundreds of thousands of dollars (or more) per week, what do you think happens to your expectations in life ahead? Chances are high that you will want more of the same. If you start gambling in Las Vegas and are not happy until you are gambling with hundreds of thousands of dollars (or more) per play, you are dooming yourself. Wait until the real con men find you. Taking you and your favorite 50 people on a luxury cruise around the world can become very expensive, very fast. Having an entourage generally only works for people who keep making more money, and entourages have bankrupted many musicians and athletes.

Buy everything for everyone, or even for yourself.

Do not go out and buy dozens of cars, followed by houses and whatever else, for you and your friends and family members. This will start you on a bad path, and you could easily become the next friends and family personal welfare department. If you start buying everything for everyone, chances are high that they might expect that to last forever. The other end of the story is that you do not have to be a cheapskate either. Still, after hearing a real life personal story of one lucky winner buying more than 30 cars and multiple houses in three months, it is just crazy.

Say to hell with a budget.

Maybe it sounds crazy that you have to live within means when you get empire-making money. After all, most lottery winners are instantly wealthier than everyone they know combined. This also goes back to having advisors and being prudent, but at the end of the day you do still have a finite sum of money. Chances are very high that you will make some serious purchases and your lifestyle will be changed forever. Without setting limits for yourself and for what you do with others is a recipe for disaster. Again, many lottery winners go broke. If they went broke in a very short period, what do you think the reflection about wishing for a proper budget would be?

Become the business backer for all your friends and family.

One common theme that has come up with lottery winners (and judgment winners) who suddenly get vast sums of cash is that their friends and family start pitching them on endless business ideas. Sure, some will sound great and some will sound crazy. If someone has no knowledge of a particular business and does not know what it takes to actually run a business, will that person do better because a lottery winner who lucked into vast wealth provided money to start it? If your answer is yes, you seriously need to protect yourself (from yourself).

Give away the whole enchilada.

This is probably not the case for most lottery players, but some people might want to give away just about all their money to a charity or to a religious institution. You can be more than generous without doing the unthinkable. Imagine what you will feel like down the road when a serious crisis arises in your life or your family’s life, knowing that you no longer had the means to change it. Should you be charitable? Absolutely! Should you give it all away just because a church or a charitable group does good things? Absolutely not, at least not while you are alive! If you insist on giving it all away, structure your will and estate to give it all away upon your death.

Get celebrity and athlete envy.

Keeping up with the Jonses is bad enough, but definitely do not try to keep up with the Kardashians or other celebrities. It may seem cool to own a 200-foot yacht. It may seem practical that certain celebrities have an entourage, or to have a film crew following you around. It may seem cool owning castles in Europe. Owning an original Picasso painting sure sounds impressive. Having a big new private jet makes sense for a lot of people. Trying to dodge taxes might even sound appealing to misguided people. Now go add up the price tags of these things, plus the cool cars and houses and the rest of it. You can go broke real quick. Just ask people like Nicolas Cage, Wesley Snipes, M.C. Hammer, Evander Holyfield and many other famous people who had it all and ended up broke or close to broke how they feel about things.

Think that laws and decency standards no longer apply.

It is true that the wealthier you get, the better attorneys and legal defense you can afford. That being said, living a reckless life without concerns about the laws of the land will not keep you from going to prison (or worse). You still have to live under the “good citizen” laws and you still likely will have to pay taxes. A good sports coach will tell any star athletes upfront that chances are high they will have to be human for far longer than they are going to stars. Movies often glamorize scoundrels, but what good does it do you if you are incredibly wealthy and such a pariah that no one will associate with you? Remember, you don’t get to take any of your wealth with you. And how fun will it be to be paying out all of your winnings to attorneys fighting to keep you out of jail or fighting civil suits looking to take your new wealth away?

Is there a thirteenth runner-up thing not to do?

Forget to wonder if the lottery you are playing is solvent and financially sound.

The State of Illinois did not have a budget resolution for much of 2015. The state’s finances have been challenged for years, and the state did not have the funds legally in place to pay out its top lottery winners. Imagine getting the winning numbers, only to receive a state voucher. It gets pretty hard to change your life in this manner on a state voucher that is nothing more than an IOU.

Again, 24/7 Wall St. would not want anyone who wins the lottery to end up without a penny to their name (or worse). Following a list of things to do or not do sounds easy enough. Unfortunately, life’s temptations can get in the way of logic.

24/7 Wall St. is a USA TODAY content partner offering financial news and commentary. Its content is produced independently of USA TODAY.

some people just cannot help themselves in avoiding the pitfalls of instant wealth.