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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.

Dear Powerball Winner: Take Our Advice and Take the Annuity

So let us suppose, reader, that you have won a $1.5 billion Powerball jackpot. Congratulations! You have some important decisions to make, such as what ailing magazine to acquire and what congressional seat your spouse should run for. But first, you must choose whether to take the prize as an annuity paid over 30 years, or a lump-sum payment right now.

If I’m reading you right, you should probably take the annuity.

First, some background: You might not realize this, but the top prize in the $1.5 billion Powerball is not actually $1.5 billion. (Nor is it $999 million, as many of the three-digit-readout lottery signs around the country say it is.) If you take the prize as a one-time cash payment, you will get a mere $930 million, before taxes.

If you want $1.5 billion, you’ll have to take it in installments over the next 30 years. That’s a long time, and so most people take the cash, according to Kelly Cripe, a Powerball spokeswoman. But I think most of them are making a mistake, for the following reasons.

First, while people associate the term “annuity” with payment streams that end when you die, the Powerball prize is actually what actuaries call an annuity certain: a stream of annual payments, every year from now until 2045, regardless of what happens to you. If you die before 2045, the future payments become part of your estate, like any other asset.

Second, there are big tax advantages to the annuity. The main one is that taking the annuity is basically like letting the government hold onto part of your prize for a while and invest it for you — and the government does not pay tax on investment income. Of course, once you get the annuity checks, you’ll have to pay income tax on them. But if you take the lump-sum cash prize, you’ll pay tax twice: on the prize when you win it, and on the income you get by investing it.

This adds up. If you invested all your prize money in the same way Powerball does (essentially by putting it in government bonds), you’d end up with 20 percent more cash in 2045 if you took the annuity option rather than the cash option, thanks to the tax savings. You could shave that difference by picking a different investment strategy with better tax management, but you’ll never beat the effective tax rate of zero on the investment income earned inside the Powerball annuity.

On the other hand, there is a potential tax disadvantage with the annuity. If you die before it’s finished paying out, you can leave the future payments to your heirs, but the I.R.S. will want to collect estate tax right away on those payments’ future value. If you die shortly after getting the prize, you won’t have nearly enough cash on hand to satisfy the taxes due.

Powerball’s website proposes a simple solution to this: If you die, Powerball can convert your annuity into a cash lump sum, so you can pay estate tax. However, it can only do that if it’s legal in the state where you bought the ticket. Texas, for example, has a law authorizing such conversions; New York does not. If your state won’t allow it, and you have reason to believe your life expectancy may be short, that is a strong argument for taking the lump sum.

Taxes aside, you’ll probably quibble with the pretax rate of return on the Powerball annuity. Effectively, it’s like investing in bonds that pay 2.843 percent interest. But that’s actually a good deal for an ultrasafe investment in today’s ultralow interest rate environment, said Allison Schrager, a financial economist with expertise in annuities.

Social Media Powerball Dreams

Americans took to social media to share their excitement, and qualms, about potentially hitting the jackpot, which was at $1.5 billion on Wednesday.

Ms. Schrager noted that you’d pay big fees to an insurance company to build the same investment that Powerball is offering you, and because of those fees your effective interest rate would be even lower than 2.843 percent. As annuities go, this one is structured very favorably.

But what if you don’t want an ultrasafe investment? I don’t know all about your risk preferences, but I do know you buy lottery tickets. So maybe you’d prefer to take the cash option and gamble in the stock market for a higher average return. Or maybe you have a brilliant business idea ready to go and all you’ve been waiting for is the several hundred million dollars in investment capital you need to make it happen. Or maybe you want to buy the biggest house in the Hamptons, and the $22.6 million first-year annuity payment isn’t big enough to do that. If you want to go any of those routes, you’ll have to take the cash option.

But this leads us to the biggest advantage of the annuity: protecting you from yourself.

Again, I don’t know all about you, but I do know you buy lottery tickets, so let’s consider the possibility that you are not one of your generation’s great financial minds. We all know the stories of people who win huge fortunes in the lottery and then lose them. The great thing about the annuity is, no matter what stupid choices you make this year, you’ll have an enormous check waiting for you next year — all the way until 2045.

The big advantage of the cash prize is flexibility, but let’s not underrate the value of the annuity’s inflexibility. Your Powerball win is likely to bring a lot of long-lost friends and relatives out of the woodwork with stories about why they need money. Being able to tell them that this year’s check is only for $22.6 million, and that’s really not very much after taxes and the new mansion and the summer house and the cars and the boats and the new political magazine, will help you conserve your fortune.

As a Powerball winner, you’ve already done way better than you could reasonably have expected with your investment strategy. Don’t press your luck. Take the annuity.

Comparing payout options is fun to imagine, but also a useful way to think about taxes, investment opportunities and human nature. ]]>