Lucky in Minnesota? 8 Tips for When You Win the Lottery
1. Consult a Tax Professional Before You Claim the Prize.
You have a choice between taking the payment as an annuity or as a lump sum. If you take the annuity, you will pay taxes as you receive your payments over time. With the annuity, the taxes will be paid on the entire amount when you receive it. The other consideration is what you could earn by investing the money if you took it as a lump sum. A tax professional can help you run the numbers before you decide.
2. Pay Off Your Debts.
Your rate of return is equal to the interest rate on the debt. If you are currently carrying credit card debt at 16%, paying off that debt will yield a 16% return on your money. You are not likely to find that kind of return anywhere else in today’s market.
3. Don’t Buy a Porsche – at Least Not Right Away.
Everyone has heard the stories of lottery winners who ended up bankrupt. For most, it was simply a matter of not being prepared mentally for managing their new money. The best advice is to wait several months before making any splurge purchases. Those months will give you time to assemble a team of advisors, set up a budget and make sure the money will continue to benefit you and your family for many years; then, and only then, should you consider splurging on yourself whether that is in the form of a luxury car, new house or expensive vacation.
4. Build a Legal and Financial Consulting Team.
You want to make sure you have a team of legal and financial advisors to help you manage and protect your money. This team can help you put together a long-term financial plan as well as a budget and asset protection plan.
Once you have a substantial amount of money, you will be surprised by the number of new friends and family members you have! It can often be difficult to determine who is trying to help you and who is trying to help themselves. By having a team in place, one or more members can also act as the “bad guy” and say no when necessary.
5. Create a Budget
With the help of your team, put together a realistic budget for yourself. If invested carefully, you may be able to live off of the income and never have to touch the principal. This can provide benefits to you and your family by knowing you have taken care of everyone in your life for many, many years.
Unfortunately, anyone of means is a potential target for the unscrupulous. While no asset protection plan can ever completely protect you, by using strategies such as exemptions, trusts, limited liability companies and family limited partnerships, you can set up a series of roadblocks those who want to try to tap into your funds. Your team of legal and financial advisors should be able to assist you with this.
7. Review Your Estate Plan
Under current law, each person has a $5 million dollar exemption on gifts. This can be applied while alive, at death or in combination. That means you can give away $5 million tax-free.
If you have minor children, put the money you leave for them in a trust. By doing so, in case something ever happened to you, you would have established in advance who manages the money for them, how it is managed, when they get it, and make sure their inheritance is protected from creditors, predators and failed marriages at any age. If you fail to do so, they will most likely receive their inheritance outright and unprotected at the age of 18 - remember my advice about not buying a Porsche?
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