In a recent conversation, Scott Barchus, partner, founder + director of Aldrich Wealth Family Office, shared his best practices on everything from how to navigate sudden wealth and financial planning strategies to how to handle the winning lottery ticket leveraging his experience guiding clients through this exact process.

Once you become aware that you have won the lottery, you should ensure the winning ticket is secure and place it in a safe deposit box. You should photograph the ticket itself and the process of storage into the safe deposit box for your protection. Tell as few people as possible; the laws regarding privacy and anonymity vary from state to state, and it may be possible to collect your prize without publicly disclosing your identity. You should then proceed to obtain professional advisors to guide you through the process.

I would suggest identifying an estate attorney, tax professional, and a financial advisor who have prior experience in working with the recipients of sudden wealth, and wealth at the scale you are about to receive.

At a minimum, when deciding between a lump-sum distribution and an annuity payout you should consider the following:

• Are you planning to make immediate purchases, such as a home, or are there large personal or charitable gifts that you’d like to make? These desired outflows may outsize the first few years of your annuity payments. While other lotteries may differ in their rules, both Powerball and Mega Millions have an increasing annual annuity payment. There are benefits to this structure, but as a result your first-year receipt will not only be a fraction of your total payout, but also significantly smaller than 1/30th of the stated prize payout.
• You should consider the tax impact of the decision;
• You should strongly consider your willingness and ability to take on the risk associated with investing the proceeds and growing them over time. When you choose a lump-sum, the lottery agency transfers all risk to you, while the annuity forces the lottery agency to maintain the risk, but with a lower possible return on your winnings;
• In the case of a lump-sum you need to have confidence that you will not squander the funds away since you will have immediate access to all of the winnings; the annuity stream of payments forces that discipline upon you;

Many of these decisions require significant planning, all of which should begin prior to submitting your ticket; task your advisory team with presenting you with illustrations of the options available to you and fully identifying the pros and cons of each.

Depending upon the state where the lottery is won in, the tax ramifications could be different. You should gain a good understanding of the effective tax rates that will apply in both a lump-sum and annuity form of payment. In a lump-sum form of payment, there will likely be withholdings by the lottery agency upon payout, with more tax likely due at the tax deadline of the year that you claimed the prize. Tax planning in the year of a lump-sum payout will be critical, as this will be the greatest opportunity to reduce the associated tax liability through charitable giving and other planning. Many lottery winners establish a foundation in the initial year and make sizable gifts to the foundation to reduce the tax burden of the prize. It is also likely that you will begin to have to pay estimated tax payments to the Federal and State taxing agencies going forward; it will be important to have your tax advisor estimate these for you, as there can be significant penalties and interest for an underpayment of your estimated tax in any given year.

Things that your financial advisor should consider in your long-term financial plan include your long-term expected spending, gifting and charitable intentions, what a reasonable rate of return on your investments would be given a prudent asset allocation strategy, estate planning strategies that can reduce the impact of taxes and transition funds to family members successfully, and risk reduction strategies.

You should not make your situation of being a lottery winner more public than necessary as there can be some risk to you in doing that. There are people that will try to take advantage of your newly found wealth and in fact your property and person could be at risk. You should be cautious of doing any gifting to family and friends without consulting with your professional advisors. Generally, you should not make any significant decisions without the support from your professional advisors.

Our team of professionals is dedicated to helping individuals navigate the complexities of sudden wealth, ensuring it seamlessly integrates into your overall financial plan, enabling you to meet your financial goals. Through a comprehensive approach, our team empowers you to make informed decisions that support your long-term financial success.