Winning a lottery is amazing, but if you choose annual payments over a lump sum, you need to know everything about lottery annuity payments. It’s natural to wonder if you’ll be able to get advance cash from your next payout in case you need money urgently. Or maybe you want to know who will receive the payments if you die before completion of your annuity.
Lottery annuity payments are transferable. You can sell your lottery annuity payments for instant cash. You may also have to share your winnings with your spouse, especially in case of divorce. After you die, future payouts will become a part of your estate or go directly to a beneficiary you chose.
It’s hard to answer this query in a single paragraph as it’s a broad question. There are many laws and considerations you need to keep in mind before trying to sell your lottery payments. Community property rules dictate the distribution of winnings between couples and their heirs, and in case of divorce, some other factors come into play.
Making the Choice: Annuity Payments vs. Lump Sum
Let’s daydream for a moment and imagine that you’ve won the lotto. Now, you’ll need to make some smart financial decisions if you don’t want to end up broke. The first of those is how you receive your money.
With most lotteries, you’ll have two choices when it comes to taking the prize home. If you make a mistake, you won’t be able to make the most out of this once-in-a-lifetime opportunity. These are your two options:
- You can take all the money at once. It’s self-explanatory how that would work. Note that this money, in some cases, will be less than the reported amount of the top prize.
- You can choose to receive a series of annual payments. These payments, in the long run, will amount to the total sum of the jackpot. The exact number of payments and other rules vary depending on the lottery.
For example, if you win a lottery of $1,000,000, you may be offered a cash payment of $785,000 or an annual payment of $50,000 for the next 20 years.
Considering you’re on this page, we’ll assume you’re opting for the annual payments. So let’s talk about lottery annuity in detail.
Basics of Lottery Annuity Payments
First of all, if you have any queries about collecting your prize money, you should review the rules of your state lottery commission. There’s a lottery commission in each state, and it sets its own rules for play.
However, for most states, the rules for collecting the jackpot from lotteries are similar. You can have anywhere from 90 days to a year from the date of winning to claim your prize. As we’ve discussed, you’ll need to decide whether you want a one-time cash payment or a lottery annuity.
For example, the Powerball lottery gives you the option to receive your prize as an annuity or a lump-sum payment. If you choose to get annual payments, you’ll receive 30 graduated payments over 29 years. In this option, the lottery takes your cash and invests it. It pays you not only each installment but the interest earned on the remaining balance as well. Powerball’s FAQ says that the annual payments increase by 5%.
Similarly, Mega Millions also provides you the same choices. The annuity period is also 30 years, and each payment is 5% more than the previous one.
Community Property Rules
In this section, we will talk about how annuity payments are distributed among family members. This includes couples, children, other heirs, or situations like death and divorce.
Your winning ticket may automatically count as joint property, depending on the community property rules in your state. Joint property is one that’s owned by more than one person. If your ticket is considered joint property, it means that both husband and wife own that winning ticket, not just the one who bought it.
In such a case, the married couple should consider opening a trust account to receive annuity payments. They can also set up rules regarding the distribution of money in case of divorce or death. Lastly, the couple can then also adequately cover children and other heirs to make sure that the money is transferred to that trust.
Transfer of Winnings in Case of Divorce
If you’re going through a divorce and happen to win a lottery, will a part of your money be transferred to your spouse? It all depends on what stage you are in the divorce process and the day on which you win the lottery.
In some states, the cutoff point is separation, which means that if you and your wife are separated without a divorce, and you win the lotto, that money will be considered your separate property, and you’ll get to keep it.
On the contrary, some states consider the date of filing divorce to be the cutoff point. In these states, if you happen to hit the jackpot but haven’t filed a divorce yet, your spouse will be entitled to a part of your earnings.
Selling Some or All of Your Annuity Payments
So, you’ve been getting annual payments from the lottery but need more money due to an investment opportunity or an unexpected financial problem? Well, if you didn’t already know, you can sell some or all of your lottery annuity payments for a lump sum. The rules for selling annuity payments differ from company to company.
If you’re interested in selling the rest of your lottery payments, you’ll need to contact your lottery company to clarify if you can sell it or not. In the USA, currently, 28 states allow after-market sales of annuity payments for a one-time cash amount.
You can choose to sell either all of your remaining payments or some of them. The total amount you receive and terms of sales are up for negotiation.
Understanding Structured Settlements
Lottery annuity is a type of structured settlement. It’s helpful to know how structured settlements work in case you decide to sell your annuity payments.
The first thing to know about a structured settlement is that your state lottery commission guarantees that you’ll receive all the money according to the schedule of payments. Many states have enacted laws aimed at protecting the receivers of annuity payments, known as Structured Settlement Protection Acts.
These laws also restrict the winner’s ability to sell his or her right to receive the rest of the payments in exchange for a one-time cash payment. The main restriction is that a court order is mandatory if you want to transfer or sell your annuities. A judge will decide whether the sale is in your best interest.
Besides these structured settlement laws, some states, such as New Jersey and Texas, have laws that apply specifically to transferring lottery annuity payments.
The Process of Selling Lottery Annuity Payments
The first step to selling your annuities is to learn if you’re even allowed to do so. Remember that it’s often determined by the state in which you won the lottery and not by the state in which you live.
Usually, either insurance companies or factoring companies will purchase long-term annuity payments. These companies will offer the lottery winner instant cash payout in exchange for their annuity payment(s). They’ll buy your future payments. The cash payout, of course, is less than the total amount of the annuity contracts.
If you want the estimated sales value of your lottery annuity, you can use this annuity calculator from annuity.org. You’ll have to enter your personal details and some details of your annuity. Then, they’ll provide you a quote at no charge.
Since the sale of your lottery payments must be approved by a court, the time it takes to convert the annuity into cash can vary. It depends on the state in which your payments are being transferred and also on the court. Some companies may be able to provide you a portion of the funds in advance within a few days of signing the contract.
Here’s the process of selling your lottery annuity:
- Look for an annuity purchasing company. You should select a company that has the experience and where people are willing to take the time to explain the contract. Ask them where they got licensed and certified and for how long the quote is valid.
- The company will draft a contract detailing the transfer of payments. Don’t sign anything before you fully understand and agree to it.
- The contract will now be approved by a judge. The company will present the contract in front of a judge who will decide if the offer is in the best interest of the lotto winner.
- After the approval, you’ll receive the cash and owe federal income taxes. These apply to the normal income tax rate.
Court Order Requirements
The petition or contract must follow the laws of your state if you want to get a court order to transfer your rights to receive annuity payments. The exact requirements may vary from state to state.
In general, the judge will need to know that the transfer is in your best interest. You’ll also have to show that you have received independent legal and financial advice about transferring your annuity rights.
The annuity purchasing company will need to disclose how they calculated the purchase price and any additional fees to complete the transfer. If the petition doesn’t meet your state laws, the court may deny your request to transfer your lottery annuity payments.
For example, in Texas, the lottery winner must be over the age of 18 and of sound mind. The transfer cannot be made under any kind of compulsion. You also need to have gotten advice from an independent counsel about your taxes. Upon the transfer, you’ll be releasing the Texas lottery commission from any further liability for the payouts.
Why Is Your Quote Less Than the Total Value of Payments?
You’ll not receive the full amount of your winnings when you sell your annuity payments. It’s the price you pay for getting access to your money instantly. The amount that’s substracted from your payments is known as the discount rate.
You want to look for a discount rate as low as possible. A decent buyer will take the time to explain the contract, their discount rate, and any other fees applicable for completing the transaction.
The discount rates vary from buyer to buyer, but it’s typically based on factors like the date of payout. For example, a $50,000 annuity payment that can be cashed out tomorrow is worth a lot more than if the payout gap was five years instead of a day.
What Happens if the Winner Dies?
Thirty years is a long time, and it’s common for lottery winners to die before their annuity payments are fully paid. Rumors claim that the government gets to keep the money, but that’s not true.
Lottery annuities are usually passed to the winner’s heirs or his or her estate after the winner dies. Most lotteries, keeping the uncertainty of life in mind, allow the lotto winner to directly select a beneficiary. If the winner has selected a beneficiary, the payments will start going directly to the beneficiary after his or her death.
If no beneficiary has been selected, the lottery payments will become an asset in the winner’s estate. The commission may also sell the rest of the balance at a fair market price and give the balance to the estate. Such cashing out makes it easier for the estate to distribute the balance among heirs and pay federal estate taxes.
Also, if one of the heirs dies, the children of that heir may be eligible to inherit some or all of the winnings that their parent would have received. The state laws will determine whether or not the deceased heir’s children are eligible to receive assets from the estate.
The concept of inheritance is a complicated one. There are no general rules as to who is eligible to inherit as they vary heavily according to the state laws.
There’s no fee for transferring the winner’s annuities to the estate. However, the federal government, 12 states, and the District of Columbia impose an estate tax. So it doesn’t matter if a beneficiary was named in the lottery agreement or not, the payments will be valued for tax purposes.
The states charging estate tax have their own set of rules and regulations. However, all states exempt any portion inherited by the deceased’s spouse from the estate tax.
Estate Tax Problems
The executor of the estate may be able to request a cash payment from the lottery commission in some states. It’s the same annuity or lump sum choice that the lottery winner had.
At first glance, it may look like the best option. However, there can be estate tax issues if the formula used by the state to calculate the cash amount is different from the formula used by the IRS to calculate estate tax on the annuity or cash payment. Obtaining a tax analysis from a certified financial advisor is necessary before opting for this transfer option.
We’ve talked about a lot of things in this article. Here’s a quick summary of everything you need to know about transferring lottery annuity payments:
- When you win a lottery, you can choose to cash out the whole prize or get annual payments.
- Powerball and Mega Millions will spread the amount of the jackpot through 30 years, transferring your payment as well as a 5% interest on the remaining balance.
- Depending on your state laws, you may have to share 50% of the winnings with your spouse, especially in case of divorce.
- If you need urgent cash, you may be able to sell some or all of your future payments for instant money if your state laws allow you to do that.
- If you end up transferring your right to receive future payments, the cash you receive will be less than the total amount of your annuities.
- You’ll require approval from a judge for selling your annuity payments.
- In case the lottery winner dies, future payments will directly go to the beneficiary chosen by the winner at the time of signing the lottery.
- If no beneficiary has been chosen, the payments will go to the person’s estate and assigned to a beneficiary based on the will.
- A lot of the above depends on your state laws. Each state has its own lottery commission.