subject: Lump Sum Payouts vs. Annual Installments [print this page] Lump Sum Payouts vs. Annual Installments
Lump Sum Payouts vs. Annual Installments
Lotteries can produce instant millionaires and many lucky winners have found themselves in the enviable position of having to decide between taking their lottery winnings in a lump sum payout or as annual installments. Opinions differ as to which solution is the best and it is well known that in the US taxes can easily take over 50% from a player's winnings. European lottery players do not have this problem because most European lottery jackpots are tax free.
On CPA advises lottery winners to take the installments. Usually installments take place over a period of twenty years and should the winner die during that period his or her heirs will inherit the balance. He cites several factors in favor of installment payments;
Greatly reduced income, gift and estate tax rates.
Greater income and estate tax planning opportunities.
Annual payments will provide the winner with increased retention of income and more budgeting possibilities.
Annual payments reduce the chances of anyone else accessing the winner's funds.
He says that for jackpots of $10 million and under a lump sum payout may be preferable to annual payments. Many lottery winners who are unsophisticated in money matters often go on a spending spree which can end up in disaster even for those who have won hundreds of millions. Annual payments force financial discipline preventing huge spending binges. The tax bite for a huge jackpot can be crippling and annual installments allow the winner to mitigate the tax bite through the use of deductions not available to those who choose lump sum payouts. Winning a large jackpot can b e a disaster for those not prepared to handle large sums of money. There are many sad stories of lottery winners who have won millions only to find themselves broke within a few years because of a lack of planning and in inability to manage large amounts of money.
For those lucky enough to have won a huge Mega Millions or a Powerball jackpot a visit to a competent attorney and financial planner should be the first order of business. A competent financial planner can guide the newly minted millionaire through the maze of taxes and investment possibilities. While it may be tempting after winning a multimillion dollar jackpot to take the money and run it is a very bad idea that could lead to financial disaster. Most of us who buy lottery tickets hope to be in this very position some day and if and when it happens, hopefully we will all make educated informed decisions.
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