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The real Powerball winner could be an insurance agent.
Wednesday’s $1.5 billion Powerball jackpot carries a lot of tax implications. The first decision for the winner or winners is whether to take a lump sum, expected to be $930 million, or a 30-year period certain annuity.
The annuity would pay out $22.5 million annually. Regardless of which option the winner(s) take, they will be in a high tax bracket. That includes hefty estate taxes.
That windfall taken as an annuity “could readily trigger upwards of a $540 million income tax liability if death occurred right away,” said Richard M. Weber, former president of the Society of Financial Service Professionals.
That is known as “income in respect of a decedent,” or income the deceased person has yet to earn. High earners typically purchase life insurance to cover the estate tax bill should it come due early.
“You might consider that as the high watermark of what you might need in the way of life insurance,” Weber said of the $540 million figure.
These types of policies are so large, several companies are needed to do the underwriting.
“You’d want diversification of insurance companies as well as styles of insurance - term, whole life, universal life, guaranteed death benefit,” Weber said.
Otherwise, the Powerball winner(s) will pay a hefty tax bill no matter what. The top federal estate tax bracket is currently 40 percent, while the state of residence may also levy an estate tax. Then there’s the 3.8 percent Medicare surtax for large incomes.
“If I won the Powerball, I would try to have it paid directly to as many objects of my affection as I might consider,” Weber said.
The winning ticketholders can designate who the “owners” are, and what percentage they are to receive. Each owner then has a choice of how to receive their share, either by lump sum, or an annuity.
While it doesn’t lower the tax bill, “what it does do is more efficiently … get money to where you want to go,” Weber explained.
As for the lump sum vs. annuity argument, Weber said the lump sum crowd gets hit immediately with what he called a “tax crash.” In order to come out ahead in that scenario, you better be good at investing to recoup that significant initial loss, he added.
Whomever wins the Powerball, you might not hear from them for weeks, Weber said. Their lives are about to change substantially and they often go “underground” to get a plan in place.
“The first thing you do after you come off your extraordinary high and celebration is you find a trusted financial advisor and … an attorney and a tax accountant,” Weber said. “That combination of three people need to be the very first ones you consult with.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].
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