Estate planning after you win the lottery; 3 things you need to know

I want to wish all of those who bought tickets in the lottery.

Winning the jackpot is a very happy and exciting event. It can facilitate previously unattainable dreams such as buying a home, starting a business or paying for a child to go to school. However, a very wise man once said " mo' money mo' problems."mega millions

Due to this sudden influx of income, your estate planning needs will immediately become more complex. That is why it is important to find a group of trusted advisors to help you handle the financial planning, insurance, income tax, and estate planning issues that will arise.

Here are 3 things you NEED to know:

1. Lump Sum vs. Installment Payments

Lottery jackpot amounts are based on annuity payments for a fixed period of time. For example, the Mega Million jackpot pays in 26 annual installments. The winner can elect to collect the winnings in a discounted lump sum payment, equal to the amount the Lottery Commission would have to invest now to yield a payment stream equal to the amount jackpot amount.

Lottery winners may take the lump sum payment and invest and control the money themselves. For estate tax purposes, the lump sum arrangement will prevent the lottery winner's successors in interest from assuming a potentially large estate tax obligation. The winner's estate will have the money with which to pay the estate tax and liquidity problems can be avoided. Additionally, the winner can have flexibility in accessing funds in case of an emergency or for other reasons. With a lump sum arrangement, the winnings are always within the lottery winner's reach.

2. Income Tax liability

Lottery winnings are taxable income when received. If the lottery winner elects to take a lump sum payment of the present value of the winnings, the entire lump sum payment is reported as income. Conversely, a winner who receives payments in yearly installments, reports the amount received during that year as taxable income.

3. Estate tax liability

The lottery winner's estate may be subject to both federal and State estate taxes at his or her death. in 2016, the Federal Exemption limit is 5.45 million for a single individual and doubled if you are married. If you pass with more than 5.45 million, then your estate may have to pay up to 40% in taxes for the excess. A lottery winner can maximize at death deductions such as the marital and charitable deductions by executing an appropriate will or a will substitute such as a trust. By planning ahead, the lottery winner can control the distribution to beneficiaries and may be able to structure marital trusts and bypass trusts to minimize the estate tax burden. The lottery winner may consider incorporating life insurance into his or her plan. Life insurance planning is an effective technique to pay the estate tax on either the lump sum distribution or the present value of future lottery distributions. By purchasing the life insurance policy in a life insurance trust, the proceeds of the policy will not be subject to est. tax in the winner's estate

Before you decide on implementing any advanced plans, you should consult with a good estate planning attorney to determine what the best plan for your specific situation is.

Good luck!