I Won the Lottery, Now What?
I Won the Lottery, Now What
Derek Carawan, AAMS
Since the North Carolina Lottery was signed into law in 2005, I have had several people ask a variety of questions about it. Although I do not recommend it as a method to save money or fund retirement, I do realize that it has some appeal and I believe a large number of people who play the lottery lack some knowledge that they should have with regard to rules, processes and guidelines. Be advised that if you need clarification on anything in this article, you can go to http://www.nc-educationlottery.org for additional information. It also has a FAQ (frequently asked question) tab that is very helpful.
No doubt that there are countless stories of people who won a large sum and claimed that the lottery made their lives miserable. In part, this is due to the publicity that comes with winning. In some states it is permissible to remain anonymous. However, that is not possible in North Carolina unless the winner can produce a valid protective order or Address Confidentiality Program authorization card. These items are part of Chapter 15c of the North Carolina General Statute. These protections are extended to those who are victims of domestic violence, etc. whose safety could be compromised if such information were made public. Having said this, there are some things that you can do before coming forward and claiming your winnings.
Winners have 90 days to redeem a scratch off ticket and up to 180 days to redeem a Powerball ticket. This is plenty of time to interview and hand pick the best attorney, CPA and financial advisor that you can find. I would not recommend that you let one of these professionals put your team together for you without you interviewing others for the same position. It probably goes without saying but hire people for the special skills that you need. In other words, don’t hire a real estate attorney. You may want to hire a trust or tax attorney or both. Regardless of whether you redeem your ticket immediately or at some point in the future, the NCEL recommends that you sign your ticket(s) as soon as you get them. You may even want to make a photocopy of the ticket and put it elsewhere, just in case. Lottery tickets are bearer instruments. That means that whoever has it in their possession is the winner. If you lose the ticket and have not signed it, that’s a problem, you lose!
Should you take the lump sum or the 30 year payout? While most people take the lump sum, there are reasons not to. Here is an example. I used an online calculator and assumed the winning ticket was worth $10 million. I also assumed that the combined state and federal tax rate was 35%. This gave a lump sum of $3,513,095. Not too shabby. However, if you assume the same tax rate, $216,666 x 30 year payout = $6,499,980. These are basic calculations. I am not accounting for inflation, investment performance, etc. I know what you are thinking. What happens if you choose the 30 year payout and die before you get all of the payments? Well there is a strategy to help mitigate that. I asked 5 life insurance companies to give me universal life quotes for a 40 year old non-smoking male with a death benefit of $6,000,000. (I could have gotten quotes for a 30 year term policy and it would have been less expensive.)
The lowest quote was a $26,253 premium per year. Here’s the math: $216,666 minus $26,253 equals $190,413. $190,413 times 30 years equals $5,712,390. In reality, the calculations are a bit more complicated, but you get the idea. In this scenario, the 30 year payout doesn’t sound so bad. Plus, it protects the winner from squandering the lump sum winnings.
What are some smart ideas to do with the money so as not to “BLOW IT”? Well, if you did take the lump sum of $3,513,095, you could make an agreement with yourself that you would only spend/invest/give-a-way a certain percentage of that money each year. If you settled on 4% ($140,523/year), that would be your annual limit on spending your winnings. Another idea is to pay off debt first then employ other solutions. If you have a credit card that is charging 15-20% in annual fees. That might be a good place to start.
Be very careful about giving money to those you care about either directly or through some legal instrument such as a trust. It could disqualify them or their family from other benefits that they may be otherwise entitled to. You should inform yourself of the individual’s entire situation before you make such a “helpful” contribution to them. Otherwise, your good intentions could have drastic consequences.
How do you redeem your ticket? Don’t forget the 90 and 180 day redemption period. If the prize is $600 or more, you must provide a photo I.D. and a social security number. Both federal and state taxes (if applicable) are withheld. If you are claiming as a group, things are a bit more complicated. In the interest of space I am addressing individuals only in this article. You should call Player Services at 877-962-7529 before you go the NCEL office in Raleigh. They will verify your numbers and give you instructions on what to do next. Let them know when you plan to go to the NCEL office and also call the NCEL office and let them know as well. Take your ticket to the Raleigh Regional Claims Center and bring proper identification such as a driver’s license, Passport or Visa, Military ID, Social Security Card, etc.
Derek Carawan is a LPL Financial Advisor and LPL Registered Principal / Securities offered through LPL Financial/ Member FINRA/SIPC and may be reached at, www.carawanfp.com , 919-870-8181 or firstname.lastname@example.org .
These views are those of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
The illustrations included in this article are hypothetical and are not representative of any specific situation. Your results will vary.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal planning advice. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
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