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Cashing Out Lottery Payments

Americans spend $70 billion annually on lottery tickets – and around 1,500 people each year become the lucky individuals who win more than a million dollars.

Like structured settlements, lottery winnings can be issued in the form of an annuity. This means that instead of taking a lump sum right away, the winner takes payments. Lottery winners can then choose to sell those payments later, transforming the winnings back into a lump sum.

If one fateful day you find yourself the winner of a huge jackpot, it's important to know the implications, as well as your options.

What to Do When You First Win the Lottery

  • Sign the back of the lottery ticket and snap a picture of both sides of it.
  • Research how much time you have to cash in. Wait as long as you can before cashing in, you’ll need to take the time to plan.
  • Call your lawyer. If you don’t have one, find one. What kind of lawyer? Find a partner at a large, national firm. Essentially, you want your lawyer to make more money then you have. That way, the lawyer won’t have the incentive to swindle you.
  • Keep the ticket in a secure place.
  • Don’t splurge, don’t quit your job.
  • Keep quiet about it. Depending on your state, your lawyer may even recommend forming a private trust for the money which allows you to keep your name anonymous.

Taking the Lump Sum or the Annuity

Winners of the lottery have a choice: Take a (smaller) lump sum or take an annuity that pays out little by little each year. In total, the annuity results in more money over time.

Three out of the one hundred and two total Powerball winners have chosen to take the lump sum over the annuity. However, taking the cash upfront means you get a smaller amount of money in the end.

The Process of Selling Lottery Payments

Often times, taking the annuity leaves you the opportunity to take a lump sum later. Twenty-eight states allow lottery annuity owners to sell all, or a portion of, their future payments.

The process works in the same way, and through the same channels, as selling a structured settlement:

  1. Someone scheduled to receive lottery payments in the future contacts a structured settlement, or annuity, buying company .
  2. The buying company is then responsible for drafting a contract detailing the transfer of payments.
  3. Next, the sale must be approved by a judge. The sale must be evaluated to ensure that it’s in the best interest of the owner.
  4. Once approved, taxes will be owed on the funds. Federal taxes apply at the typical income tax rate.

Managing Your Winnings

When people come into a lot of money, it’s common to feel pressure to suddenly live like they’ve always imagined the ultra-rich to live. However, like most things on television, it’s mostly smoke and mirrors and little substance. This can cause a winner to need to turn to selling their future payments.

Money Can Run Out

No matter how large it may seem, the winnings aren’t a bottomless pit of money.

When you win the lottery, you can do anything. You can buy a yacht. You can become an angel investor for small businesses. But that doesn’t mean you can buy all the yachts or invest in all the businesses.

Even seemingly necessary purchases can end up costing a winner money later. Owning a house, for example, requires the payment of taxes. Owning a multi-million dollar home can require proportionately larger taxes each year.

Most millionaires stay millionaires because they have budgets. It’s a good idea to work with an expert to develop, and stick to, a budget.

Your Life Has Changed

Hire a licensed therapist. Winning the lottery is a big change for not only your life, but for your identity and your relationships with those around you.

Ensuring your therapist is licensed is important. A licensed therapist of any brand, by law, cannot disclose what you talk about (unless you threaten to harm yourself or others). This ensures you can trust in their silence through this difficult time.

Donating Smartly

Many lottery winners say that the best thing they’ve been able to do after winning the lottery is help others. That said, it’s important to be smart about it. Don’t donate one giant sum all at once.

Instead, make a series of planned smaller donations, like $100,000 a year for ten years. This gives you a chance to hold the organization accountable for using the money wisely.

It’s important to take the time to make calculated decisions about your future
It’s important to take the time to make calculated decisions about your future.

Managing Relationships

Don’t start handing money out to people, close or otherwise. Once people see you as an ATM machine, there’s no stopping that association in their mind.

Stranger Danger

Lottery winners receive thousands and thousands of sob stories asking them for help. Some of which are real, many of which are not. Either way, you cannot help everyone.

Decide what initiatives and charities you’re prepared to help with. It’s a good idea to pay someone else to sort your mail and correspondence so you can easily identify those causes you’re not interested in.

Avoiding the Entourage

You won the lottery, so that means you can travel the world with all 23 of your best friends, right? Not so fast. Supporting several people burns through money faster than most people can imagine.

Find ways you can hang out with people that don’t involve you footing the bill. True friends will remain your friends even when the money is off the table.

Dealing with Family

Set up an amount of your money that will be devoted to family. It may seem cold to be so calculated about your generosity towards the people you love, but this is in everyone’s best interest.

Don’t hand out cash. You don’t want to become the welfare department for your family. Instead, work with your attorney to set up a series of trusts to provide money for higher education, as well as funds toward the purchase of a home they can afford the remaining mortgage on.

Problems With Winning the Lottery

You might be thinking, how can a lottery winner run out of money and need to cash out future payments? But the truth is, it is sadly common for lottery winners to struggle after hitting it big.

Lotto winners are:

  • More likely to get murdered
  • More likely to overdose on drugs
  • More likely to file bankruptcy
  • More likely to have interpersonal problem

Winning the lottery dramatically changes your life, and coping with that stress can be profoundly challenging. Not only that, lottery winners often find they are more likely to encounter unlucky events in the future. It’s important to take the time to make calculated decisions about your future – after the shock of the win wares off.