So you won the lottery?

Now what?

First Things First

  • Know the time limit to collect the money, don’t rush.
  • it is a bearer instrument.  Sign the back.
  • Make copies of the ticket – do not run around town with the actual ticket
  • Do not tell everybody.  Keeping it private is one of your biggest assets.
  • How much did you win? The calculation.
  • Close your social media accounts (name is public (not photo) but people will search the internet for anything they can find).

Detailed California Lottery Winners Handbook Published buy the California Lottery.

The First Steps to Take

The lottery ticket is what is known as a “bearer instrument”.  Basically, the person in possession of the document is the presumed the owner, unless there is an owner indicated on the document.  This is why it is super important to sign the back of the ticket.  In California, your name will become public (in other jurisdictions the use of a trust, or by going to court, can shield your identity from becoming public).

It is important to note that your name becomes public; however, you are not obligated to put your face on every cover of every magazine and TV show.  Less is more.  You want to do the least amount of public interaction that is legally required..

A scam artist has you at a significant disadvantage when you win the lottery.  A legal search of public records (it would only take a seasoned person about five minutes to find out the following):  Your full name, current and all former addresses, current phone number and past phone numbers, the first five digits of your social security number, any property deeds that you are on tittle or have been on title, all professional licenses that you hold and have held, a list of potential relatives (with their addresses and phone numbers), a list of personal associates (with their addresses and phone numbers), Criminal filings against you, lawsuits that have been filed against you, a list of your neighbors (with addresses and phone numbers), past employers, educational institutions that you attended and more.  Basically, within a few minutes, people know more about you than you think and can use this to gain an inroad with you to get at your money.

In addition, they will go on social media and they will find a picture of you, your family, your pets and learn everything there is to know about you.  Just spend five minutes and do a google search of your own name—you’ll be surprised what is out there.

As such, before you claim your prize, you will want to obtain a new phone number, obtain private security for you and your family, find a safe place to live for the moment (not your current place of residence where everybody scam artist and reporter will be), hire a seasoned lawyer, prepare a place to transfer the money (think a bank or investment firm—we will discuss FDIC insurance later), hire a Certified Public Account, Banker, Financial Planner, and other professionals.

Privacy is the main asset that you can have.  Once you have claimed the prize and obtained the funds, what do you next?  There has to be a place to put the money.  A lot of people think a bank is a good starting place.  However, you have to be aware of the Federal Deposit Insurance Corporation (FDIC) and what they will pay you if your bank goes under.  Keep in mind that in the 2008 financial collapse there were 489 banks that went under from 2008 to 2013.

What to expect when you claim the prize

First, the lottery folks are very nice and professional. Of course they will congratulate you and make you feel comfortable.  They will ask you the story of how you came to have the ticket, how you paid for it, the store that you bought if from, your identification and your social security number.

The California lottery has a police department and their people are called “Lottery Investigators”.  They will check to see if you have any outstanding taxes, child support payments, outstanding warrants for your arrest, etc.”  They will check to see if the ticket is real and that you got the ticket legally.

There was a case where a man’s minor sign bought the winning ticket, but the lottery refused to pay it since the kid was too young to play. Additionally, the investigators have caught many crooks.

You have one year, in California, to collect the big prize from Mega Millions and Power Ball.  Do not be late in collecting your winnings because you will lose your money.   The unclaimed winnings will go to the California Department of Education. This has happened several times to lottery winners.

It is a good idea to know that the basic insurance amount is $250,000 per account; however, there are ways to increase the amount of coverage.  One such way is by using a trust.  The rule for a trust is $250,000 per beneficiary that is directly or indirectly named in the trust.   Please see The FDIC website to calculate your coverage. The problem becomes clear very quickly—you have too much money to adequately insure at the bank.  Even if you had and trust a four kids, the insurance would not cover a $100,000,000 bank account.

For brokerage accounts, there is SIPC, created under the Securities Investor Protection Act, that protects an investor from loss of cash and securities if the brokerage firm goes bankrupt.  The limit of protection is $500,000.00 total including a $250,000.00 limit on cash.

Federal Credit Unions are protected by NCUA (National Credit Union Association) and their deposit insurance known as NCUSIF.

Keeping the ticket safe.

Make several copies of the winning ticket and only take the copies around to your professional’s offices – (Hire the attorney and have the attorney make the other professionals sign a Non Disclosure Agreement). I would highly suggest that you put the winning ticket in a safe deposit box before you claim the prize. However, although I believe banks are very safe, I do have one personal note to make, Do not have a safe deposit box that is close to the floor – although it is highly unlikely that a bank is going to catch fire, if it does, the water pools at the bottom of the building a ruins the contents in the boxes nearest the floor.  In addition, do NOT use a fire proof safe at home. As a former locksmith, I can tell you that a motivated thief will just steal the safe and drill it later. Also, you have to understand how a fire proof safe works.  It is rated to withstand a certain amount of heat for a certain amount of time; however, to save the contents inside the safe, it has a material that release water vapor to keep the safe cool on the inside.  This means that water is coming into contact with your precious ticket and destroying it whether or not it burns up.  There are also Fireproof Document Bags, but I don’t think they offer enough protection.

Estate Planning

Once you win the lottery and have time to focus, you will want to make sure that you reduce your taxes, eliminate the need for court proceedings such as Conservatorships and Probate, and to make sure your heirs receive the money at the right times in their life after you die.

There is an old saying that a rich eighteen year old is a poor nineteen year old. in short, there needs to be a plan in place that will effectively pass the winnings to your heirs when you die, but without ruining their lives.

As an estate planning attorney,  I can safely say that love and money are not the same thing.  Would you give your child millions of dollars when they are too young to handle it and you know it will destroy their life? There is an old saying that a rich eighteen year old is a poor nineteen year old. In short, there needs to be a plan in place that will effectively pass the winnings to your heirs when you die, but without ruining their lives.

Estate tax is the tax owed by the decedent that dies with an amount of world-wide assets that exceeds the federal estate tax exclusion amount.  In 2022, the amount you pass away with before there is any tax is $12.06 million. This makes several assumptions such as this a single person and they are not giving any money to charity).  The amount over the $12.06 million threshold is taxed at 40%.  With the size of a big lottery winning of $100,000,000 you can quickly see that $88,000,000 ($100,000,000 winning minus the $12,000,000 exemption) would lead to $35,200,000 in death tax.  Currently, the State of California does not have inheritance tax (that is the tax on the heir for receiving the money).

There are two general principles in estate tax planning. Decrease the value of the estate for I.R.S. taxation purposes and increase the amount of money that is available to pay any outstanding estate tax bill.

There are numerous techniques that an estate planning attorney can use. For example, a lottery winner could buy real estate and put the properties in a Limited Liability Company (LLC). If properly structured, at the death of the lottery winner, the estate could reduce the value of the reportable real property assets by approximately 35%. Once the property is converted into a stock form of ownership, the estate is allowed to take a lack of marketability and a minority interest discount (this requires knowledgeable estate planning and is not automatic by any means). Basically, for every one million dollars of real property, the estate value would be reduced by $350,000.  This would save about $140,000 in death taxes per $1,000,000 of estate value.

Another line of defense for property owners is excessive liability insurance (known as Umbrella Insurance). It protects your real property and motor vehicle liability in excess of your regular insurance. It is here that you can buy a couple million dollars of insurance protection for a relatively cheap amount.

To increase money on hand at the time of death we would look toward a life insurance policy. The point of life insurance is that if you need a $1,000,000 of insurance it should cost less than $1,000,000 in premiums over your lifetime. The type of life insurance that you will need is called “whole life” – it is basically an investment account that that will grow in value that you can borrow against, during your lifetime, income tax free, while providing significant amounts of money at the time of your death.  Furthermore, the winner could use the real property to secure a loan (premium financing) to pay the premiums and still have money to invest in other opportunities. The life insurance is placed into an Irrevocable Life Insurance Trust (ILIT) and it becomes estate tax free (the payout would not be subject to the 40% tax if it is paying out millions of dollars). There are many more techniques, but you can see there is a lot of things to consider when you win.

Additionally, the estate planner can keep your assets private in what is called a “blind trust” alongside with carefully crafted LLCs. The LLCs also provide asset protection in the event that a tenant sues you.  Remember, your attorney is playing sophisticated defense for you and has to be paranoid (to a certain degree) and protect you from obvious and not so obvious problems that might come your way. The attorney’s job is to be there for you and to be one step ahead of the problem.

A lottery winner may also want to transfer a significant amount of money to their loved ones during their lifetime.  The first thing you should know is that an individual in 2022 can give away $16,000 to a person per calendar year and not have any gift tax.  Gift tax is a tax on the giver (not the receiver).  Currently there is a 40% tax on the amount that you give away, but you can use your $12.06 million estate tax exemption (which is also your gift tax exemption) to avoid gift taxes (when you use your gift tax exemption it reduces your estate tax exemption).

Bad Things that Can Happen

There is an old joke in estate planning that involves a married man asking his attorney how you leave money to his young mistress.  And the answer is easy—get your wife to expressly consent to the gift.  The point is this—In California, your money that is won during marriage that is derived from community property is jointly owned with your spouse.   You can not secretly give the money away to your friends and lovers and think that it is a good thing to do.

Interesting Lottery Stories

There are many cautionary tales to tell, one that sticks out in my mind is the wife that won the lottery and then divorced her husband several days later and did not disclose that she had won the lottery.  She tried to keep the whole amount to herself, but the judge awarded the whole amount of the winnings to her husband based on the idea that you should not be able to profit from outrageous fraud.

This idea of winning the lottery, getting a divorce, and trying to keep the winnings happens more often than you think.  For instance, here is a case in Michigan and another case from England. Lottery winners are also the victims of fraud, scams, bad investments and even murder.

25 Worst Lottery Winner Horror Stories (Cautionary Tales)

Winning lottery ticket for Alabama Waffle House waitress led to lawsuit, kidnapping

Income Taxes.

Income is defined as “all income from whatever source derived…” by Congress in Section 61(a) of the Internal Revenue Code. It is long established that winning the lottery is income.  Please do not think that winning the lottery is tax free.   Instead, you should think of it as very taxable and then some.

At the beginning of 2022, there was a $632.6 million dollar jackpot (lets assume there was only one winner—yes, in reality there were two winners). Remember, this $632.6 number is not a real present number that indicates what you actually won. You did not win that amount. The number represents an annuity amount that you would receive over a 29 year period.  What you need to know is the present cash amount. Here, the real number is $450,200,000 (cash value).  There is what I call “math-a-magics” going on here, basically what amount of money would need to be put into an annuity to create the $632.6 million dollars if a payment was going to be made to you each year.    I will assume that we all would like the lump sum amount, but you should know that there is the option for you to have the State send you a yearly check.  If you decided on the yearly check, it is important that you assign your winnings into your living trust so as to avoid probate.  There is a form that I’ve helped clients fill out, called the “Declaration and Assignment of Lottery Prize to Revocable Living Trust Form”.  You must request it from the lottery office.

Next, there is an automatic 24% Federal Income Tax withholding.  Here, that amount would be 24% of the cash value of $450,200,000.  That would be a huge $108,048,000.   There is currently no California withholding amount.   Please keep in mind that you will owe a lot more federal income tax and California state income tax when April 15th comes around.   In 2021, the highest tax rate is 37% and there is an additional 3.8% tax for the Patient Protection and Affordable Care Act—(40.8% Federal tax rate for most of your winnings).  In addition, California has a tax rate of 12.3% for earnings over $625,369).   So by using simple math, we get approximately the following total remaining income tax bill of $450,200,000 at 40.8% = $183,681,600 and  $450,200,000 at 12.3%  = $55,374,600.  Total income tax bill is $239,056,200 and you already withheld $108,048,000, so you still would owe an additional $131,008,200.   For those keeping score, your $632,600,000 win is now down to a mere $211,143,800.   Basically, you wind up with about one-third of the amount you thought you won after the initial round of taxes.  Then without proper planning, if you died soon after winning, your estate would owe another $80,000,000 in estate tax to the federal government and you would have a significant legal bill for the disastrous probate.

Some people say they would denounce their United States Citizenship and run off to a foreign jurisdiction.  It’s not that simple.  You would still owe the initial amount of Income Tax on the winnings.  You would merely be trying to avoid future income tax and death tax.  However, you need to be aware that it is not that simple to renounce your U.S. citizenship.    At first you will have to file an 8854 form with the Internal Revenue Service . There is a fee of $2350 that you must pay as well.   There are major consequences for renouncing your citizenship.  You will need to move out of the country and find a country with a better tax system that will accept you.  Also, all but about $699,000 of unrealized capital gains must be treated as realized—that means you have to write a big check.  Additionally, to avoid the estate tax, you need to get your assets outside of the United States (that means sell all of your United States Real Estate and Businesses) and you can not come back to the United States and stay for an extended amount of time.  If you don’t follow the rules, the Internal Revenue Service will come after the tax.   I personally would not recommend giving up your United States Citizenship.

However, there are famous people that made a lot of money and did renounce their citizenship. One example is a founder of Facebook that now lives in Singapore.

The Team that you will need:

  • The Estate Planning Attorney that oversees the whole team and is dedicated to reducing taxes, avoiding Probate and is your contact person.
  • The Asset Protection Attorney that is lawsuit protection focused.
  • The Business Formation Attorney that will create LLC’s for the Real Estate.
  • The Real Estate Attorney that looks over purchase contracts, understands tenant/landlord laws, evictions, loan agreements, etc.
  • Certified Public Accountant that is focused on reducing your personal income taxes
  • Certified Public Accountant that is focused on your company’s performance
  • Certified Public Accountant that understands how to reduce income by using pension plans
  • A Defined Benefit Company that can run your Pension Plan
  • Financial Planner for the business
  • Financial Planner for you as the individual

As you can see, you do not need one lawyer—you need a team of lawyers. You will most likely require an accounting firm that can do the big tax planning, but can also provide people that can keep your business books up to speed and write checks to all of your providers (saving you from having to learn bookkeeping, accounting, and the law).  The financial planning that you will need will be significant to adequately diversify your portfolio.   In addition, by using a defined benefits plan you will be able to defer significant amount of income (reducing your income tax), these plans can be quite complex and need its own set of experts.  Finally, all of these experts have to know how to work with each other and they need to remember that you are the boss.  Plus, they all need to be reachable.  You should instantly become one of their top clients and you should be treated as such.

Always do a background check on your advisors

Before you hire a professional, always look up their record with the California State Agency that is involved.

Especially with an Attorney, you can quickly see the attorney’s discipline record.  Here is an example of an attorney with a record of public discipline. For stock brokers and financial planners (they are regulated federally by FINRA).

About Samuel

Samuel B. Ledwitz is a licensed California Attorney that holds the designation as a State Bar Certified Specialist in Estate Planning, Trust and Probate Law.  Attorney Ledwitz also possesses an advanced law degree (LL.M. in Estate Planning) from the University of Miami School of law. Furthermore, he is a Real Estate Broker, Notary and Life Insurance Agent. He is also a former armed security officer and locksmith. In addition, he teaches an estate planning class at a local college and is a former high school substitute school teacher.  He has a unique perspective on this topic. His law firm has helped three lottery winners and one Indian Reservation Slot machine winner with various aspects of their estate planning.