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Benefits for Lottery Winners of Choosing Annuity Over Lump Sum

The Balance / Catherine Song

Every few months, the United States goes through Power Ball Fever, where the dreamers stand in line to be the one who wins the jackpot. The choice many winners make is taking the lump sum instead of the ​lifetime payout. People win, take the lump sum, and then file bankruptcy a few years later.

Annuity Lottery Payments Protect Assets From Others

When someone wins the lottery and takes a lump sum, it’s tempting to help out “family and friends” who come knocking. That’s how the march to bankruptcy begins. When you take the annuity lifetime income stream instead of the lump sum, you are establishing boundaries because your resources are limited. People may show up at your door every year for the rest of your life when the annuity payment is scheduled, but at least you’re less likely to make the generosity impulse mistakes you can’t afford.

In addition, the publicity surrounding winners of big jackpots makes them more vulnerable to scammers trying to steal their money.

According to a study in the Journal of Gambling Behavior, lottery winners generally don’t go on crazy spending sprees. The research found that 33% of lottery winners gave money to their children, 17% of winners gave money to their relatives, and 10% gave large sums to charities or churches.  

Annuity Payments Are Contractually Guaranteed

The lifetime income stream is a prudent choice because it is contractually guaranteed. In many cases, you have the option to set up the payments so—if you die—they continue for the lifetime of your spouse, or for a “period certain” that is much longer than your life expectancy. Guarantees are always good, but contractual guarantees are better. Contractual lifetime income guarantees are the best. In a survey by Gallup, 31% of Americans said they would stop working if they won a $10 million lottery prize.   Taking an annuity allows for a concrete plan based on actual income expectations.

Choosing a lifetime income stream over a lump sum certainly “handcuffs” your family and friends. It also handcuffs the lottery winner and protects them from their own poor choices. Your real family will thank you for it.

Financial Advisers Will Push the Lump Sum

Common wisdom from financial pundits, planners, and stock market experts is that you should always take the lump sum if you win the lottery. The argument is that choosing an annuity lifetime income stream will never beat a well-planned asset-allocated portfolio. In theory, that is true, but life is rarely lived “in theory.” It takes discipline to invest a lump sum and keep it there.

One focused study of Florida lottery jackpot winners reported in The Review of Economics and Statistics found that 1% went bankrupt each year.  

Still, the Journal of Gambling Behavior reported 37% of the winners in its study invested in stocks, bonds, or real estate, while 17% used the money to pay off debts.  

Learn why it is prudent and practical to take annuity payments instead of a lump sum when winning the lottery to protect your assets and family.

What Happens to Lottery Winnings if You Die Before Payments Are All Paid Out?

Are Lottery Annuity Payments Transferable?

Winning the lottery is a fantasy for people who imagine the wonderful things they could buy with the winnings, the trips they could take and the freedom they could have to never work again. While you want to be able to enjoy your winnings personally, you also want to ensure your family will be taken care of should you die before all those winnings are paid out. If you are entitled to ongoing lottery payments, those payments will continue to either a beneficiary or to your estate after you die.

Annuity vs Cash Option

Lottery winners have two options for payment: cash or annuity. With the cash option, winners receive all their payments up front. This amount will be less than the publicized jackpot amount but equal to the amount available in the jackpot prize pool. Winners who receive their winnings up front can determine how those winnings are distributed upon their death. With the annuity option, winners receive payments over a period of 30 years. The sum of all payments will equal the publicized prize pool. This option allows winners a continuous income source for decades.

Beneficiary

Depending on the rules of your state, you may elect to choose a beneficiary to receive the remaining payments of your prize. Unfortunately, most states only allow for one beneficiary to be named, which can pose problems if you have more than one heir you wish to bequeath assets to. Check with the rules of your state lottery commission to review your beneficiary options. If they only allow for one beneficiary to be named and you have multiple heirs, consider forgoing this option in favor of payments made directly to your estate.

Your Estate

If no beneficiary was chosen, your winnings would be sent to your estate for distribution to your heirs. If you have not made final arrangements and don’t leave a will, the state will distribute those assets according to the law. Each state has a different way to process estates with and without a will. Consult an estate planning attorney in your area to thoroughly discuss what you need to do to guarantee that your final wishes are carried out.

Taxes

All lottery winnings are taxed by the state and federal governments. As the winner, you are responsible for filing and paying those taxes. Upon your death, your estate and beneficiaries will be responsible for those taxes. Your beneficiaries also may be responsible for inheritance taxes of up to 40 percent, depending on the total size of your estate. Discuss your estate planning options with a certified financial planner who specializes in inheritance issues.

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Winning the lottery is a fantasy for people who imagine the wonderful things they could buy with the winnings, the trips they could take and the freedom they could have to never work again. While you want to be able to enjoy your winnings personally, you also want to ensure your family will be taken care of should you …