Created byВ FindLaw’s team of legal writers and editors | Last updated December 27, 2016
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 doling out 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.
Note: Anyone with a winning lottery ticket may redeem it, so make sure you sign and secure your ticket once you discover you’re a winner. Also be aware of deadlines for claiming your 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.
Setting Up a Lottery Trust: Overview
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.
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.
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. Keep in mind that trusts are established in accordance with state law.
Won the Lottery? Talk to a Lawyer About Lottery Trusts Today
While the prospect of attaining unimaginable wealth is no doubt exciting, lottery winners are advised to take it slow and plan for how that money will be managed and dispersed. But don’t delay, as states typically impose deadlines for claiming prizes. Consider talking to a trusts attorney licensed in your state as soon as possible.
If you've won money through the lottery, FindLaw.com has helpful information on how lottery trusts work and how to set one up.
How To Remain Anonymous If You Win The $1.5 Billion Powerball Lottery
If you think the odds of winning this week’s record breaking $1.5 billion Powerball lottery were low (1 in 292 million), try remaining anonymous if you win! The Multi-State Lottery Association, which runs the Powerball Lottery, explicitly states that there are only five states in which you have the legal right to remain anonymous. If you don’t buy the winning ticket in one of those states, are you out of luck? Not necessarily. Here is an excerpt from my new book, The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth.
Gallery: 10 Steps To Take When You Win A Lottery Jackpot
If you want to remain anonymous but didn’t purchase the winning ticket in one of those states, it makes the job harder, but there are strategies and legal entities you can create that will help you remain more private if you win the lottery. There are two different strategies. The first is using a “blind” trust.
Remaining Anonymous After Winning the Lottery: Using a Blind Trust
There are a lot of misconceptions and potential problems with blind trusts. Federal officeholders, such as senators or governors, are required to either fully disclose all their financial holdings and any possible conflicts of interest, or place their holdings in a blind trust with a financial institution as the trustee. To prevent the perception that they are voting on legislation from which they could personally benefit, their assets are managed independently and by a third party, without their knowledge or control (i.e., the politician is blind to their investments). But you’re not a politician and you don’t want to give up control of your assets to someone else.
Recently, the term blind trust has grown to include a trust or entity that attempts to hide the true ownership from the public and asset searches. In this case, “blind” refers not to the owner of the trust but to everyone else.
Here you create an entity, a trust or LLC, and name it something other than your name. For example, one of my actor clients titled his trust using an obscure quote from a former president of the United States. Unlike a politician’s blind trust, he has 100% control of the trust, assets, and decisions. This doesn’t completely cloak the account, but it can make tying the trust to my client more difficult in an asset search. For example, Louise White, the winner of a $210 million lottery, named her trust the “Rainbow Sherbert Trust” after the ice cream flavor that led her to the grocery store where she purchased the winning ticket.
Remaining Anonymous After Winning the Lottery: Using a Trust Within a Trust
For high profile lottery winners who want even greater anonymity, a trust within a trust structure is recommended. This is an advanced strategy that should only be taken with competent and experienced legal counsel.
One of my sudden wealth colleagues, Jason Kurland, is a “lottery lawyer” and partner at Certilman, Balin, Adler, & Hyman, LLP. Jason has represented several of the largest Powerball jackpot winners and specializes in protecting the anonymity of lottery winners. Jason is an advocate of the trust within a trust structure because it not only shields winners from requests for money, but also protects them from others.
The trust within a trust requires two trusts:
First Use a Claiming Trust
It’s called the Claiming Trust because this is the entity that claims the prize. As the winner, you assign the ticket to the trust. The trust, which now holds the winning ticket, can claim the prize. The Claiming Trust is a short-term trust that simply claims the prize and then distributes the win to the Bridge Trust. To keep your win as private as possible, the Claiming Trust should have a unique title not at all related or traceable to you. For example, you wouldn’t want the trust to have your name, address, or other identifiable information as the title.
Handing over ownership of a million dollar winning ticket to a trust that is not in your name can seem reckless and scary. Why is this strategy recommended? Rest assured, even though the name of the Claiming Trust won’t have your name, the trust will be directly tied to you. The Claiming Trust, like most trusts, include three types of people: (1) grantor – this is you, the creator of the trust and the individual whose assets are put into the trust, (2) trustee – this is also you, the person who manages the trust and makes decisions regarding investments and distributions and (3) beneficiary – again, also you, the person for whom the trust was created and who receives the benefits of the trust.
The astute reader may be wondering how anonymous the Claiming Trust is when your name is listed as grantor, trustee, and beneficiary throughout the trust document. It’s possible to create an irrevocable trust and name a trusted family member, attorney, or financial advisor as trustee whose only function is to immediately transfer the trust assets into the Bridge Trust for which you will have control. For the winner who wants to remain as private as possible, this is a potential strategy, but for most, I don’t recommend giving up control.
Although most revocable trusts use the Social Security Number of the grantor (i.e., you – the person setting up the trust), you want to avoid this. Why? State lottery commissions are state agencies, and as such, all of their records are subject to the Freedom of Information Act, which makes it easy for a reporter (or anyone else!) to request these documents and trace the Social Security Number back to you. For greater anonymity, depending on the state lottery commission’s rules, you may be able to have a limited liability company (LLC) act as the grantor.
Using this strategy, the winning lottery ticket would be owned by the LLC and the LLC would be the grantor of the Claiming Trust. If a nosy reporter gets a hold of the Claiming Trust, they wouldn’t see your name but would see the name of the LLC instead. However, some states have reporting requirements when forming an LLC that would identify the name of the person who owns the LLC. For example, in California, a Statement of Information for domestic and foreign corporations must be filed within 90 days of forming the LLC, which requires the complete name and addresses of its managers and officers. This is where it is important to work with an attorney well versed in the laws of your state.
Second Use a Bridge Trust
The lottery proceeds are paid into the Claiming Trust and then almost immediately transferred into the Bridge Trust. The reason the lottery proceeds aren’t simply paid to the Bridge Trust is because the Claiming Trust helps to shield the true identity of the winner – it is cloaked to avoid determining the true owner. The Bridge Trust, however, is not designed to protect the identity of the winner. The details of this trust are not subject to Freedom of Information Act requests, so your name can be listed as grantor and trustee, but because the trust name will be listed as beneficiary of the Claiming Trust, which is subject to Freedom of Information Act requests, it’s best not to name the Bridge Trust with personally identifiable information.
It’s called a “bridge” trust because this is the vehicle that holds and manages the assets for you while you determine if there needs to be more complex estate, charitable, and asset protection trusts/entities. But if you do not need more complex planning, the Bridge Trust is perfectly sufficient as your “living trust” and to serve as your main estate planning document, because unlike the Claiming Trust, it will have all of the necessary estate planning provisions.
Connect with me on Twitter @rpagliarini, my financial planning blog, or email me. This discussion is not intended as financial, legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified professional.
Here are several tips on how you can remain anonymous if you just won this week’s $1.5 billion Powerball lottery.