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Benefits for Lottery Winners of Choosing Annuity Over Lump Sum

The Balance / Catherine Song

Every few months, the United States goes through Power Ball Fever, where the dreamers stand in line to be the one who wins the jackpot. The choice many winners make is taking the lump sum instead of the ​lifetime payout. People win, take the lump sum, and then file bankruptcy a few years later.

Annuity Lottery Payments Protect Assets From Others

When someone wins the lottery and takes a lump sum, it’s tempting to help out “family and friends” who come knocking. That’s how the march to bankruptcy begins. When you take the annuity lifetime income stream instead of the lump sum, you are establishing boundaries because your resources are limited. People may show up at your door every year for the rest of your life when the annuity payment is scheduled, but at least you’re less likely to make the generosity impulse mistakes you can’t afford.

In addition, the publicity surrounding winners of big jackpots makes them more vulnerable to scammers trying to steal their money.

According to a study in the Journal of Gambling Behavior, lottery winners generally don’t go on crazy spending sprees. The research found that 33% of lottery winners gave money to their children, 17% of winners gave money to their relatives, and 10% gave large sums to charities or churches.  

Annuity Payments Are Contractually Guaranteed

The lifetime income stream is a prudent choice because it is contractually guaranteed. In many cases, you have the option to set up the payments so—if you die—they continue for the lifetime of your spouse, or for a “period certain” that is much longer than your life expectancy. Guarantees are always good, but contractual guarantees are better. Contractual lifetime income guarantees are the best. In a survey by Gallup, 31% of Americans said they would stop working if they won a $10 million lottery prize.   Taking an annuity allows for a concrete plan based on actual income expectations.

Choosing a lifetime income stream over a lump sum certainly “handcuffs” your family and friends. It also handcuffs the lottery winner and protects them from their own poor choices. Your real family will thank you for it.

Financial Advisers Will Push the Lump Sum

Common wisdom from financial pundits, planners, and stock market experts is that you should always take the lump sum if you win the lottery. The argument is that choosing an annuity lifetime income stream will never beat a well-planned asset-allocated portfolio. In theory, that is true, but life is rarely lived “in theory.” It takes discipline to invest a lump sum and keep it there.

One focused study of Florida lottery jackpot winners reported in The Review of Economics and Statistics found that 1% went bankrupt each year.  

Still, the Journal of Gambling Behavior reported 37% of the winners in its study invested in stocks, bonds, or real estate, while 17% used the money to pay off debts.  

Learn why it is prudent and practical to take annuity payments instead of a lump sum when winning the lottery to protect your assets and family.

Selling Lottery Payments

Lottery winners can collect their prize as an annuity or as a lump-sum. Often referred to as a “lottery annuity,” the annuity option provides annual payments over time. A lump-sum payout distributes the full amount of after-tax winnings at once. Powerball and Mega Millions offer winners a single lump sum or 30 annuity payments over 29 years.

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Lottery Payout Options

Before lottery winners can collect jackpots, they must usually make one important decision: Should they collect their winnings all at once or over a long period of time?

The first option is called a lump-sum award. That’s when the winner receives all of the lottery winnings after taxes at one time.

The second option is an annuity. Although annuities established by the lottery commissions have been informally dubbed “lottery annuities,” in reality, annuity contracts created for the purpose of distributing prize money typically fall under the safest category of annuities: fixed immediate.

Each state and lottery company varies. Powerball, for example, offers winners the choice of a lump-sum payout or an annuity of 30 payments over 29 years. Mega Millions offers lump-sum payouts or annuities. The annuity offers an initial payment followed by 29 annual payments. Each payment is 5 percent larger than the previous one.

Lump Sum vs. Annuity for Lottery Winners

While both options guarantee a lottery payout, the lump-sum and annuity options offer different advantages. Choosing a lump-sum payout can help winners avoid long-term tax implications and also provides the opportunity to immediately invest in high-yield financial options like real estate and stocks.

Federal taxes reduce lottery winnings immediately. But winners who take annuity payouts can come closer to earning advertised jackpots than lump-sum takers.

Consider the case of $228.4 million Powerball jackpot winner Vinh Nguyen, a California nail technician and sole top-prize winner of that game’s drawing on Sept. 24, 2014.

Most big-prize winners opt for the lump sum. That would have been $134 million. Instead, Nguyen opted for the annuity. That will give him the full $228,467,735 jackpot paid out over 30 years.

Those payments include interest that will accumulate from investments over the life of the annuity.

Annuities also protect winners who might otherwise spend everything after a lump-sum payment.

Some winners may squander their funds all at once or not invest it properly, leading them to bankruptcy or other financial troubles.

An annuity isn’t for everyone. Annuities are inflexible, prohibiting winners from changing the payout terms in the case of an unexpected financial or family emergency.

The annual payments may prevent a winner from making large investments. Such investments generate more cash compared to the amount of interest earned on the annuities.

Winners Face Tax Issues

Taxes also influence many lottery winners’ decisions on whether to choose a lump-sum payout or an annuity. The advantage of a lump sum is certainty — the lottery winnings will be subjected to current federal and state taxes as they exist at the time the money is won. Once taxed, the money can be spent or invested as the winner sees fit.

The advantage of the annuity is the exact opposite — uncertainty. As each annuity payment is received, it will be taxed based on the then-current federal and state rates. Those who choose the annuity option for tax reasons are often betting that tax rates in the future will be lower than the current rates. However, should they regret their decision in choosing an annuity payout, lottery winners do have the option of selling their annuity payments for a discounted lump sum.

Can I Sell My Lottery Annuity?

If you are interested in selling some or all of your annuity payments, you should contact your lottery company to clarify if the annuity can be sold.

Winners also can decide to sell all or part of their future payments. The terms of the sale, including the total amount, are up for negotiation.

The lottery winner must have court approval for the transaction to take place. A judge decides whether such a sale is in the person’s best interest.

How Much Is My Lottery Annuity Worth?

If you want an estimate of the sales value of your lottery annuity, you can enter the information from your contract into this annuity calculator to get a custom quote that we stand behind.

What Happens to My Lottery Annuity When I Die?

In spite of rumors that the government gets to keep the money, lottery annuities are generally passed to the winner’s heirs. In fact, some lottery companies allow for a transfer of the funds only when the annuity owner dies. In this instance, any remaining assets will be disbursed to the estate or a living beneficiary until their death or the end of the contract.

Some lotteries will cash out an annuity prize for an estate, to make it easier for the estate to distribute the inheritance and to pay federal estate taxes when they apply. In order for the lottery to do this, it has to be allowed in the state where the ticket was purchased.

The Process of Selling Annuity Payments

Lottery winners who decide to sell their periodic payments must first learn if they are allowed to do so. That is often determined by the state in which the lottery was won and not by the state in which the lottery winner lives. Sometimes there are ways of finding a loophole, a task best suited for a personal attorney.

Who Buys Lottery Payments?

Typically, two types of companies purchase long-term lottery payouts: factoring companies and insurance companies. These are the same companies that purchase settlements from sellers who collect personal injury settlements, mortgage notes and other kinds of long-term payouts.

Factoring companies offer lottery winners immediate cash for their annuity contracts. They are buying the lottery winner’s future payments. The cash payment is less than the total of the scheduled annuity payments.

The company should offer you a quote in writing at no charge.

The annuity purchasing companies are part of a very competitive, heavily regulated market. Ask the company where they are certified and licensed and how long the quote is good. Ask about any fees and how long the company has been in business.

When selecting a buying company, it’s usually best to look for a company with experience and that has people who take the time to explain the written offer. Do not cave to pressure to sign something before you fully understand and agree.

The company you choose will draft a contract detailing the proposed agreement. The proposal has to be approved by a judge, who will determine if it is in the best interests of the lottery winner. The annuity purchasing company will take the contract to the judge.

We recommend our partners, who have been vetted by experts in the field. They have helped thousands of people who need to get cash quickly.

Tax Obligations of Selling Lottery Payments

Someone who cashes in some or all future lottery payments will owe federal income taxes. This differs from the sales of structured settlements from personal injury lawsuits. In those cases, buyouts are tax-free.

Lottery Winners Can Collect Their Winnings as Either a Long-Term Annuity Payout or a Lump Sum; Factors Such as Taxes Can Play a Role in This Decision. ]]>