It’s in your hand, the winning Powerball numbers. Double check. Triple check. Once more just to be sure. What’s it worth? $100 million? $200 million? Doesn’t matter, you’re life has changed.
What now? New cars? McMansion? Private jet? Yacht? How about new homes for all your loved ones?
The sad reality is many winners of lottery’s biggest prizes – as well as those receive a large windfall from an inheritance, the buyout of a successful business or a big pro sports contract – are broke within a few years.
“The problem,” certified public accountant Jennifer Lane explains, “is people just go crazy with unchecked spending.”
SunTrust financial advisor Preston O’Neal agrees: “The mistakes lottery winners make is that they go buy a bunch of stuff. They buy toys up front and don’t secure the income.”
Buzz kill.
So we’ve all heard there’s a much better chance of being hit by lightning than actually winning a multi-million-dollar lottery prize. But what if? What do money managers say we should do with our newfound wealth?
The answer: Slam on the brakes. Slow down and come up with a plan.
“I’m not saying don’t go crazy,” says Lane, who practices with Decosimo/Vaden, a CPA firm that handles several Music Row millionaires.
“But don’t go crazy with all of it. Then you can have fun for a long, long time.”
So here’s the plan. Let’s say you won that $600 million prize. After taxes (about 40 percent) and a penalty for lump-sum payout, you’ll end up with a little more than $200 million.
Financial advisers say the first thing on your list, after signing your ticket, should be the assembly of a team you trust. It should include, at the very least, a tax attorney, financial advisor and accountant.
Then take half the money – in this case, about $100 million – and put it into a savings plan. That will be the principal that generates the interest you’ll live on for the rest of your life.
The economy is struggling, and interest rates are really low, but even at a conservative 1 percent interest you’re left with $600,000 a year after taxes. That’s about $50,000 a month.
But financial planners also warn that $50,000 a month – more than most make in a year – still isn’t enough to own multiple vacations homes, buy a jet and rent out Vegas hotspots every weekend.
“Probably where they go wrong, a lot of winners all of a sudden catapult themselves into a Donald Trump-like lifestyle,” says financial planner Lechelle Moore, a SunTrust senior vice president for private wealth management.
“A few hundred thousand dollars a year is fabulous lifestyle, but it’s not a Donald Trump lifestyle. It’s very generous but not outrageous.”
Adds Lane: “Just start living normally. Definitely don’t start living the rock star life.”
Also, make sure you pay all the taxes owed on winnings, advisers say, and pay off all debts – credit cards, car loans, student loans and mortgage.
Most want to stop working, but that requires a plan to keep spending in check, experts planners say.
“Budget, I know that’s a dirty word,” Lane says. “But if you don’t want to work again, you have to be responsible.”
But not that responsible. Remember that you’ve only socked away half your winnings.
“There has to be some crazy money to have some fun with and not worry about,” Lane says. “Enjoy it and share it with your family.”
So, sure, get yourself a nice house and car, maybe even a boat.
But advisors warn against multiple homes in exotic locations, buying private jets, yachts or starting companies on a whim. The new rich sometimes don’t realize how much money can be involved in the upkeep of expensive toys.
“Those big ticket items come with a lot of big-ticket maintenance costs. Just heating or cooling some of those bigger homes can be outrageous,” Lane says.
And dealing with relatives and friends can be tricky.
“Friends, family, churches, all kinds of people come out to them wanting their money,” Moore says. “It’s unfortunate so many people come after you.”
Winners should come up with a dollar figure for friends, relatives and charities and stick to it, Moore adds.
O’Neal, whose clients have included a $90 million lottery winner, says, with compassion: You’ve got to take care of yourself first.
All three advisors say setting up some sort of foundation to make gifts to charities is a good idea. Doing so lets you come up with a plan for philanthropy and it gives you a place to direct charities looking for donations.
Can you keep your winnings a secret?
Tennessee law requires the identities of winners to be made public. But there are ways around that.
Lawyers suggest you set up a blind trust or a corporation before you claim your prize. That way, a third party – on your behalf – can claim the prize and fulfill the state’s disclosure laws. But when the XYZ Corp. claims $600 million, no one has to know that’s you.
“That way you don’t have all these relatives coming out of the woodwork,” says estate/trusts attorney B. Jo Atwood of Atwood & Moore, in Murfreesboro.
Finally, do you take the lump sum, which comes with a 10 percent penalty, or do you take payouts over 20-26 years?
Advisor opinions vary.
If you haven’t been good with money in the past, Lane says, don’t take the lump sum. That way, you’re guaranteed money every year, and it’ll go to your heirs if you die before you receive the full amount.
But most advisors say take the lump sum, for a couple of reasons.
The first is that taxes are relatively low right now and bound to go up. And you’re taxed in the year that the lottery payment is made, so you would likely pay higher taxes for future payouts.
The second is that if the winner and the spouse both die, the estate would have to pay estate taxes on funds that hadn’t been paid yet, O’Neal says.
How likely are you to need this advice? Not likely. The chance of winning a huge lottery payout is something like one in 100 million.
There has been just one Powerball winner ($25.5M) in Tennessee, none since 2005.
But if it happens, at least you’ll know what to do – after you’ve been revived.