A financial windfall can be a blessing, a curse or more likely a combination of the two. Knowing what to do if you win the Powerball lottery or have any other event of sudden wealth is key.
As asset protection and wealth preservation attorneys my colleagues and I deal not only with those who have earned very significant amounts of wealth over a long period but in some cases also those whose fortunes have changed more rapidly. Whether it’s getting an inheritance, selling a business or other valuable asset like a patent or other intellectual property for a large sum, getting a huge lawsuit or divorce award or signing a sports contract or endorsement deal, nothing brings out the sharks like a windfall, especially if it is nationally publicized as in the case of the Powerball and Mega Millions Lottery.
Regardless of the source of the windfall, there are some basics we almost always educate holders of sudden wealth about:
Secure the source.
Whether it’s a winning ticket or anything else, how you hold the asset, both in terms of physically securing it and the choice of legal entity you may use to claim it or receive income, is always an important question. In the case of something that is both fragile and lacking formal title, like a lottery ticket, security is key. If you have a winning ticket, immediately photograph the ticket and secure it in a safe or safety deposit box that only you and those you trust implicitly is key. There have been a variety of cases where a ticket was lost, stolen or destroyed, including several where the “lucky winner” was actually killed by someone that wanted the ticket, including by their spouse.
Keep Quiet About It.
As much as your instinct may be to do cartwheels down the hallway of your office and yell, “I quit, suckers!” resist the urge to do so. A large and public windfall makes you a target for every creditor, claim, scam, long lost relative and tax and investment fraud promoter out there.
Learn to say no, to everyone and to give intelligently.
You will never be as popular loved and surrounded by long lost friends, relatives and even strangers that feel they should share in your good fortune. While we agree that altruism should be part of your plan, we want you give safely and responsibly. Everyone you have ever met and everyone you haven’t will all have a reason or a story about why you need to help them, so think about having some disciplined professional “gate keepers” in place that they have to get past first. My colleague Charlie Davis, founding partner at the law firm Davis Miles McGuire Gardner (DMMG Law) in Arizona, shared one possible scenario:
One idea is to put the winnings in a trust with a co-trustee who has to sign off on any distributions. That way they can fend off the free-loaders, etc. The winner can say, my co-trustee has to review and approve all distributions. The trust can be drafted so this is either illusory, or substantive, depending on the client’s wishes and needs. The problem is who should they get as co-trustee(s)? It has to be a trusted institution, or a professional firm with impeccable credentials. The trust would contain provisions that neither the trustee nor any related parties of the trustee could benefit from the trust assets, other than charge a reasonable fee for services. The trust needs to be drafted by an experienced trust attorney that can consider the income and estate (and in some states inheritance) tax and practical implications.
Charlie’s hypothetical is one of many we would consider and discuss with a client, there are others that are even more risk averse and private.
Get Professional Help Immediately, before contacting anyone including the lottery department.
The team required will typically include an experienced team of attorneys, financial advisors and tax planners (CPAs). Each should be experienced in working with high net worth clients and should be able to help you source any missing team members, including doing the required due diligence on each team member.
I personally consulted with a lottery winner that had won a jackpot of $60 Million plus. I brought in a top financial advisor and one of the leading tax planners in the country and we addressed a variety of issues ranging from trust and estate planning to tax and investment planning and had her all set to go before she was “sold” to another team of advisors by her family friend, the handler that was screening her team, despite the fact our “team” was significantly better qualified. The family friend was not a licensed advisor and, reportedly, took cash payments from the other advisors to steer her to them. That advisory team was subsequently stripped of their securities license and their business closed due to unrelated issues. Lottery winners are often targets for tax fraud, investment fraud and sold large amounts of legal planning they may not actually need.
Don’t Count Your Chickens and Don’t Think the Well Will Never Run Dry.
The media is full of stories about those that spent, lost or were swindled out of all their winnings after winning an unimaginable amount of money. In some cases holders of sudden wealth run out and start spending money even before they have it, signing up for loans, buying real estate, cars boats and etc. before they have cash flow from the windfall or even by buying assets without understanding the long term costs and liquidity issues they present, like buying a multi-million dollar home at the wrong time that then drops by 50% in value and is “underwater” for a number of years or not realizing that a large home has fixed recurring costs for maintenance, insurance and utilities that can easily be more than your old salary on a monthly basis.
Do the Math, Then Check It Twice.
Taxes, liquidity needs, investment plans and estate planning issues all play into how you choose to receive a windfall. In plain English, your planners will help you get the most possible and make more money off what you might win, as unimaginable as that may seem today. Every media source has articles saying you should “always” take the lump sum or “always” take the annuity. The most accurate answer is more likely, “it depends” on what you want, when you want it, what the cost will be and a variety of fact specific issues that should be factored into the decision. Part of the value of the educated team I said you need above is their ability to ask you the right questions, analyze your facts and advise you accordingly. Attorney Mike Ferrin is a partner at DMMG Law I work with often on estate planning issues. Mike had some specific thoughts on strategy as well, again with the caveat that really understanding what the specific windfall client wants and needs is key:
A few of the estate planning tools I would consider, in addition to what Ike might do with an Offshore trust and domestic holding vehicles would include putting the bulk of the lottery payoff (or any extraordinary windfall) in irrevocable trusts and other vehicles where professional trustees and investment advisors have to approve investments. This would help guard against unscrupulous or incompetent persons who want to help with investment strategies. This would also reduce estate taxes and provide liquidity to pay the balance of the estate tax. Some specific tools we often see come into play, include but are certainly not limited to:
Revocable Living Trust (with marital trust and dynasty provisions)
Irrevocable Trusts (with grantor trust and dynasty provisions)
Gifting and selling assets to irrevocable trusts to reduce estate taxes and protect from creditors
Family Limited Partnerships (to hold and manage assets)
Limited Liability Companies (to insulate real property and similar investments)
Irrevocable Life Insurance Trusts (to invest in and hold cash-value life insurance and other types of insurance that may be required for estate planning; remember, the govt.. wants 40% of everything over $5.4MM when you die, unless you plan around it)
Finally, if you win or have any other event of significant liquidity or windfall pending and need help, call us. If I win, don’t expect to be able to reach me for while.
We can help you through this maze and help you identify any of the other team members you may need.
About the author: Ike Devji is an attorney with 13 years of experience devoted exclusively to Asset Protection and Wealth Preservation. Ike helps protect a national client base of thousands of clients including business owners, physicians, executives, pro athletes and other successful individuals representing over $5 Billion in protected assets. He also a frequent author and professional speaker on these issues, with over 200 nationally published articles on related issues.
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