Do you think you will ever have to worry about money again if you win the lottery?
Sorry to break it to you, but you will.
There are many stories of winners being their own worst enemy by quickly squandering the fortune. Let's look at what Your Smart Money Moves should be when you win the big one.
Before the ticket blows out of your hand while you are waiting for a bus, the first step should be to sign the back of the ticket. A lottery ticket is a bearer instrument, so whoever signs the ticket and presents a photo ID can claim the prize.
- Remain anonymous. It's amazing how many people come out of the woodwork when they know you have money. You'll get the charities, the long lost friends, CPAs, lawyers and financial planners all vying for your business or looking for a piece of the pie. Unfortunately there are only a handful of states that do not publish the names of their winners, and Georgia is not one of them.It is possible to set up a trust or limited liability company to receive the winnings and keep your personal name out of the publications. Meet with a lawyer before you claim the prize to get everything set up correctly.
- Create your team. You should carefully make selections of a CPA, CFP and lawyer. Check their backgrounds. See if any complaints have been made against them from state of federal authorities. Run your team like a board of directors. Have your CFP create a long term plan and let your team comment on it. This will create checks and balances on each of your team members. Have someone on your team field all the requests you will start getting from organizations. That way you do not have to be the bad guy when the answer is no.
- Plan charitable gifts. Have a conversation with your CPA on charitable deductions. Gifts made by Dec. 31st can offset the additional income from your lottery winnings. With public charity, the tax deduction is limited to 50% of your AGI for cash contributions and 30% for donations of other appreciated assets held more than 12 months. And if you cannot make up your mind on who to give to, ask your CPA about a donor-advised fund. These allow you to take a federal tax deduction but postpone deciding which charities get the money until sometime in the future.
- Avoid sudden lifestyle changes. We have all dreamed of the first thing we do after finding out we won the lottery was to go tell our boss to shove it and quit our job. Resist the urgent to make any life changes for the first 6 months. You need time to acclimate to your new life. Save the big purchases for later.
- Map a budget. A good financial plan can create investment income streams. Living on that income can protect your winnings. Avoid that wild spending spree. If you start spending the principal you could find yourself like those stories of people filing bankruptcy a few years after winning the lottery. Something you can do during that first six months is pay off any debt you have. Until you have a financial plan created, most of the money will sit at a bank earning low rates, so paying of that debt can save you interest and will give you a clean slate to work with.
- Protect your new assets. People do strange things, like lying down in front of your car, when they know someone has money. You need to create a defense to protect yourself against lawsuits and creditors. Trusts, family limited partnerships or limited liability companies can all be used to set up roadblocks. Have your team put together the best strategy for your situation.
- Create an estate plan. Most people do not have to worry about estate planning now that the exclusion is over $5 million, but now that you have won big money will need to work with an estate attorney minimize the tax bite upon your death and provide your heirs with more of your new wealth.
Good luck on those numbers.
Written by: Van Pappas CFP®
Vice President and Private CFO™, oXYGen Financial, Inc.
Request a FREE consultation: www.oxygenfinancial.net
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