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.
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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.
Are Lottery Annuity Payments Transferable?
Winners don’t necessarily have as much flexibility as you’d think.
Winning the lottery can be a dream come true. But it also involves making some smart financial decisions. If you make a mistake, you can miss making the most of your golden opportunity. In particular, those who choose to take their lottery winnings in regular periodic annuity payments rather than as a lump sum can have difficulty if it turns out they need their money sooner than expected.
One chance to choose wisely
Most lotteries give you two choices. You can take a one-time lump-sum payment that in some cases will be less than the reported amount of the jackpot. You can instead choose to take a series of annual payments that in the long run will add up to the total jackpot amount. The exact structure of the lump-sum or annuity options depends on the lottery.
For instance, the Powerball lottery gives you the choice of either taking the full cash amount of the jackpot as a lump sum or taking 30 annual payments. If you choose the annuity, the lottery takes the cash amount and invests it, paying you not only each installment but also the interest earned on the remaining balance. By contrast, the Mega Millions lottery pays out an annuity that is calculated to rise by 5% each year, starting out relatively small but growing substantially over the 30-year payout period.
Selling a lottery annuity
You’ll find numerous companies willing to buy periodic payments like a lottery annuity in exchange for cash up front. Before you assume you can use such a service, you need to look at the specific rules of the lottery that you’ve won.
Most lottery rules only cover transfers due to death, allowing a person’s heirs to inherit any remaining annuity payments under a lottery prize. Some lotteries will give an estate a lump sum, while others will simply continue the annuity payments under the original terms of the prize.
In addition, state law often covers lottery annuity payments under the broader category of structured settlements. Selling rights to structured settlements requires a court order in many jurisdictions, with the idea being that a sale must be in your best financial interest.
Overall, it’s complicated enough to transfer a lottery annuity payment that your best strategy is to think carefully about the future if you choose the annuity option. Once you do so, you should generally stick to it and accept that you won’t have access to all of your money up front.
Winners don't necessarily have as much flexibility as you'd think.