Last week, three Powerball ticket holders won the record $1.6 billion jackpot. Lottery winners are advised to hire an attorney to protect their money from scammers, opportunists and tax collectors. Here are some of the common issues that lottery winners and overnight millionaires will face.
A large jackpot involving multiple people can lead to disputes. They can be difficult to resolve since many of them are unwritten, informal agreements. For example, let’s say I gave a friend $20 to buy 10 quick pick lottery tickets. He purchases 10 tickets for me and 10 tickets for himself but holds on to the tickets until after the winning numbers are announced. One of these 20 tickets had the winning number. My “friend” tells me that my ticket lost while keeping the winning ticket for himself. Similarly, the manager of a lottery pool holding all of the tickets may decide to run off with the money and deny the existence of the pool, betting that the others cannot afford an attorney.
Most states require the names of winners to be public to show that the lottery system is not rigged. While some may relish the attention, most winners will want to disappear until the hype dies down. They will want to know how to establish residences using other people’s names, business entities or pseudonyms. And they will have to do it in a way that will avoid or frustrate private investigators.
Lottery winnings are taxable income to the federal government. But some states, such as Florida, have no state income tax. Also, some states, like California exempt lottery winnings from state income tax. They will want to know if they owe any additional taxes at the end of the year, the tax consequences of taking the lump sum versus the annuity, and how to take advantage of favorable tax laws previously unavailable to them. If the ticket holders are senior citizens, then they may want to consider letting their children claim a portion of the winnings in order to avoid estate taxes.
Lottery winners will need legal assistance determining whether an LLC, corporation, or a non-profit tax-exempt entity is appropriate for whatever venture or cause they wish to pursue. The proper entity will minimize taxes, protect their assets, and help them maintain control.
Lottery winners will purchase businesses, invest in real estate, and other assets. So they will need to set up an estate plan to ensure these assets are managed by people they can trust and distribute to beneficiaries in case of death or disability.
While some winners will quit their day job, others will want to continue working. Unfortunately, they will become lawsuit magnets from clients and co-workers. Employers and their insurance companies have a strong financial incentive to point the blame to them in order to eliminate or reduce damages. Lottery winners should be advised about the risks of continuing to work, what steps they should take to protect themselves, and whether there are any statutory employee indemnification laws.
Lottery winners will eventually face a frivolous lawsuit. Most of these lawsuits will be pro se with statute of limitations issues, bogus causes of action, and other procedural defects. Others may have interesting but audacious theories. For example, an ex-spouse might sue for a share of the winnings because three of the winning numbers—4, 27, and 10—happens to coincide with the anniversary of their divorce (April 27, 2010). Most of these lawsuits will hinge on the hope that it will settle quickly. To deter scammers, advise them to publicly announce the hiring of an attorney who is an expert in malicious prosecution and abuse of process laws.