Personal Finance

What to do when you win the lottery

Life-altering sums

Timothy A. Clary | AFP | Getty Images

The Mega Millions largest jackpot ever was a drawing in March 2012 for $656 million. The second largest, a $648 million prize, was drawn in December of 2013 and split by a winner in North Carolina and one in Atlanta.

Such payouts are rewriting the financial rules about handling extraordinary and sudden good fortune — from dealing with reconfigured lives to getting tax advice.

"Buy that Rolls and save the rest" has become "Lawyer up and start a foundation."

Here are tips on what to do if you are the lucky winner.

By Paul O'Donnell
Originally posted 8 Aug. 2013;
Updated 6 Jan. 2016

Protect the ticket

Winning Powerball lottery ticket worth an estimated $425 million
Getty Images

Sign your winning ticket, make copies of it and stash the original in a safe-deposit box. If you are somehow separated from the ticket, your signature should ensure that you're not separated from the prize. The safe-deposit box will help ensure you're not separated from it.

Enlist help before claiming the prize

Nicolas Hansen | E+ | Getty Images

In most states, winners have three months to present a winning ticket. You likely won't be able to keep the secret under your hat for that long, but before you identify yourself, assemble a team consisting of a lawyer—your first call—financial planner and an accountant.

Among other things, winners are often subject to legal claims out of left field, sometimes from co-workers who went in (or declined to go in) on a pool ticket.

Stay anonymous, if possible

Valery Hache | AFP | Getty Images

A lawyer will also help create an entity, such as a revocable living trust or a family limited partnership, that masks your personal identity.

"Anonymity gets a lot of the initial fanfare out of your face," said Keith Fenstad, director of financial planning at Tanglewood Wealth Management in Houston.

Many states require that winners divulge their names for publicity purposes. If you have to ID yourself, change to an unlisted phone number to avoid calls from scammers and "friends" who surface to make special pleas. You may consider moving to an undisclosed location, even temporarily, to avoid the media crush.

Get the lump sum

Don Bayley | E+ | Getty Images

Winners must choose between receiving 30 annual allotments or a single payment, a choice that's often made based on tax ramifications. But since taxes are likely to be going up, it's better to have even a lesser amount taxed at lower rates—and your annual payments are going to take a tax hit anyway.

Age is more pertinent. The biggest payout to a single Powerball winner occurred in May 2013, when an 84-year-old widow from Florida took her $370.9 million pretax payout at once.

"It's more of a personal question than a tax question," said Peggy Johnson, a CPA in Broken Arrow, Okla., who noted that big jackpot winners will be in the highest bracket either way. "If you're a wise investor, it makes sense to take it all at once."

Take a breath

Ferrari dealership.
Akos stiller | Bloomberg | Getty Images

Give yourself time to emotionally and mentally digest what the money means to you. The biggest financial threat lottery winners face is succumbing to the temptation to binge on cars, boats and luxury homes.

Until the initial thrill passes, experts advise sticking the cash in a low-risk interest-bearing account, where it will start to accrue earnings immediately. In the meantime, spend a few days figuring out how many Ferraris you really need.

Pay off your debts

Jupiter Images | Comstock Imagse | Getty Images

Former lottery winners past who are now broke are often those who won $5 million or less—not $250 million.

"You can't give that much money away," Fenstad said, pointing out that the first $5.25 million you give your brother-in-law is free; the next $5 million will be subject to a 45 percent federal tax.

But let's say you did squander your Powerball haul on bad investments. You don't want to have blown $175 million and still owe on your car loan.

Set a budget

Wsfurlan | E+ | Getty Images

Conservatively speaking, a $250 million lump-sum payout, placed in diversified mutual funds and bonds, should generate $4 million a year after taxes.

Consider establishing an amount in this range as your annual budget, Fenstad suggested, leaving the principal as a backstop and the basis for wealth across generations. The pleasure of spending money diminishes over time, while the pleasure of having it doesn't.

Name your charity

Tazytaz | E+ | Getty Images

Eventually, experts say, people sitting on multiple hundreds of millions start to think about their legacy—and ways to reduce taxes now and on their heirs.

"Charitable giving would likely become a big part of your life," said Fenstad of a lottery winner.