Ella Rice: Lottery Trust

If you’re one of the lucky few to strike it rich in the state lottery, congratulations! But before you jet off to the tropics, break ground on that new four-story mansion, or start giving out a bunch of cash to your friends and relatives, you’ll most likely need some help managing all of that newfound wealth. Establishing a “lottery trust” in the form of a blind trust, revocable trust, or some other legal entity can help alleviate potential problems. For instance, a blind trust allows lottery winners to maintain their privacy in states that prohibit winners from remaining anonymous.

This article provides the basics of establishing a lottery trust, but there is no one-size-fits-all approach as the needs of each lottery winner will vary. Generally, those who choose to form a trust for their lottery winnings will need to do so before claiming their prize.

When You Might Need a Lottery Trust

Not everyone will need or want a new trust through which to manage their lottery winnings, but it’s very important to work with a reputable financial planner. If you’re married and already have a trust set up in you and your spouse’s name, you can simply deposit the winnings into that account. But you may also want to include additional bells and whistles often used by wealthy couples, such as a bypass trust that automatically names the surviving spouse as the beneficiary upon your death and helps reduce your family’s tax obligations.

Factors to consider before deciding on whether to establish a lottery trust include (but are not limited to) the following:

Anonymity – Just a handful of states protect the anonymity of lottery winners; by putting your winnings into a trust, only the name of the trust becomes public.
Multiple Winners – It’s very common for coworkers or family members to pool their resources and enter the lottery using the same number; but since only one entity may claim a lottery prize, the establishment of an irrevocable trust in the name of the winners will ensure fair distribution.
Payments or Lump Sum? – The way in which you receive your lottery winnings will have an impact on your tax obligation; if the winner dies before all payments are made, for example, a trust can help manage those annual tax bills.
Married? – You’ll want to look into the marital property implications of your lottery winnings; consider getting a prenuptial agreement if you get married after winning the lottery.

Set Up a Lottery Trust

If you’ve just won the lottery, you’re probably excited to cash it in as soon as possible and pay off debts, go on a spending spree, and send checks to your relatives. But time is on your side, and it’s important to take a deep breath and consider your options first. A financial planner can help you manage your wealth, while an estate lawyer will be able to draft a lottery trust for you and your family.

As with any other trust, a lottery trust — whether it’s a blind, revocable, or irrevocable trust — is managed by an appointed trustee. The winner may appoint him or herself as the trustee, but appointing another individual will help protect your privacy. You will then name beneficiaries to the trust, which may be your family members or just yourself. Lottery winners often set up individual trusts for each family member, as well as charitable or other types of trusts.

Blind Trusts

When you create a blind trust — in which you (and other named beneficiaries) are not involved in the day-to-day management of the funds — you essentially donate your winning ticket to the trust before claiming the prize. The trust, then, claims the ticket in its name and invests the funds (without your input) as it sees fit. Since the lottery winner isn’t involved in the investment or management decisions, it’s best to appoint someone with expertise in such matters.

Irrevocable Trusts

An irrevocable trust, meanwhile, is considered the best legal entity to use when multiple individuals are claiming a single prize, such as workplace lottery pools. Irrevocable trusts allow the funds to be dispersed to each of the winners in the pool without having to simply rely on a single winner’s honesty (while avoiding the tax consequences of transferring the winnings to multiple parties). And since it may not be revoked or altered, it helps prevent future disputes among the parties.

Other types of trusts or legal structures may be suggested by a trusts attorney, who can help determine the best route by assessing your needs and goals.