Financial advisors weigh in: What to do if you win the $1 billion lottery

You are not going to win tomorrow’s $1 billion Mega Millions Lottery.

But, it’s fun to imagine yourself drowning in prize winnings. In fact, it’s dreams like those that keep lotteries in business. It’s not nearly as much fun to visualize the odds stacked against you, which one mathematician likened to choosing the solitary Joker from three football fields blanketed with playing cards.

Yet, sometime somebody wins – and that’s what keeps the dreams alive. No doubt they include visions of private jets, big yachts, parties, and mansions in exotic locales. But what, practically speaking, would you and should you do if the hand of fate suddenly fingered you as the lucky one?

Well, first of all, you wouldn’t really win a billion dollars. Once the taxmen have taken their cuts and you decide on the cash payout instead of the annuity, you’ll be left with something far shy of $1 billion. The government requires 24 percent from lottery winnings, so your Mega Millions jackpot would be reduced to about $600 million in cash. Still, $300-to-$600 million is not a bad payday (and that’s assuming you don’t have to share the prize with someone who chose identical numbers).

After that, financial advisors almost universally recommend running silent and running deep.

‘I wouldn’t tell a soul’

“I wouldn't tell a soul that I won the lottery,” says Robert R. Johnson, professor of finance at Heider College of Business, Creighton University, and co-author of “The Tools and Techniques of Investment Planning,” and “Investment Banking for Dummies,” among others. “By doing so you will have a multitude of people trying to manage your money or sell you investments.”

The first order of business would be to make copies and take photos of the winning ticket, sign the back (leaving room for the name of a trust or LLC) and place it in a water and fire-proof location.

“Don’t rush to claim the prize,” says Michael Ashley Schulman, CFA, chief investment officer for a multifamily wealth management office in Southern California. “But do check how much time you have to claim it.”

Schulman once had a client couple who had won the lottery and he advised changing phone numbers, email addresses, deleting social media accounts, and moving correspondence to a P.O. Box for privacy.

“You want to make it as difficult as possible for unwanted people to come out of the woodwork and find you,” he said.

With the media and lottery itself clamoring to publicize the winner, staying anonymous might be a challenge. A few states permit lottery winners to claim their jackpot anonymously through a trust or other method.

Nevertheless, Schulman advises taking some time to plan what you want and determine priorities.

“Maybe take a little vacation before making huge decisions,” he said. “Lean on your professional financial advisor or multifamily office for guidance and to handle outside requests.”

Before claiming your prize, he advises hiring or speaking with reputable professionals that can help and guide you such as a financial advisor who is a fiduciary that puts your interest first, an estate planning attorney for wills and trusts, a CPA to advise on accounting, or a multifamily office that combines and coordinates all those services under one roof.

Then comes the hard, or serious, parts.

“Whether you take it as a lump sum or annuity would depend on discussions on what you are planning or wanting to do with the money,” says Bob Chitrathorn, CFO/vice president of wealth planning at Simplified Wealth Management. “Then a plan would be designed to see what would be most beneficial to you based on what you want to do and your goals.”

Chitrathorn says next would be strategizing that incorporates taxes, legacy planning, and using various vehicles to help maximize the legacy and minimize estate taxes.

“Insurance policies could be one of the vehicles to help with that, depending on how it is structured,” he said.

Statistically, most people choose the lump sum payment when they win big. But some advisors warn against that regardless of personal circumstance.

High chance to spend 'irresponsibly'

“Suddenly handling too much money can be too tempting and there is a high chance that you will spend it irresponsibly,” says Clint Proctor, editor in-chief of Investor Junkie. “Even the annuity is still too big an amount that a normal person handles, and this way, you are more assured that the money will last for at least 30 years.”

Proctor says start at the bottom when figuring your financial approach. Settle your debts, pay off mortgages, and establish financial security through building emergency funds and acquiring insurance policies.

“From there, you can start investing your money with the help of investment managers, so you'll be sure that your winnings will constantly grow and will help you enjoy your newfound financial freedom,” he said.

Taking the lump sum can make sense, however, because it allows the ability to determine your vision and destiny to use the funds to support your lifestyle, and maybe even benefit the world, says Brian Haney, founder and Vice President at the Haney Compnay. However, he points out that more than half of lottery winners who take the lump sum payout eventually declare bankruptcy.

“Most people that have never had that level of wealth, nor had the subsequent framework for how to handle wealth, simply don't know what to do and end up making just about every financial mistake in the book – the largest of which is mismanaging taxes, which usually comes back to bite them in the end,” he said.  “It’s why so many professional athletes struggle financially. If you were never equipped properly to handle a little amount of money growing up, you certainly aren't able to handle a lot of money that gets dropped in your lap.”

The annuity option makes sense, he said, if you want to protect yourself from the financial burden of responsibility that comes with coming into a small fortune, but still requires you to make smart choices each month with your enhanced level of income.

Opinions vary on how or even whether to invest the winnings. Some point to the stock market, annuities, and even investing in far-flung speculations such as diamonds, art, or even up and coming businesses. Just living off simple interest with a cash cow that big would provide a pretty good living but wouldn’t take many tax and legacy issues into consideration.

Estate tax often overlooked

“The thing most people often overlook is another tax called estate tax or death tax,” said Gerald Grant Jr., financial advisor with Equitable Advisors. “This is another area where meeting with a tax advisor will provide value. As of today’s laws, every U.S. citizen has a lifetime gift and estate tax exemption amount of $12.06 million per individual and about $24.12 million for married couples. Every dollar over that in your estate is subject to a 40% tax upon your death or the death of the last remaining spouse. This is important to know because if you win a drawing this large, overnight you now have an estate tax issue. It’s important that you put a plan in place to minimize your estate tax liability upon your demise.”

“Invest the money into an annuity because it will never fall below zero compared to a stock market account,” said Tim Connon, founder of Paramount Quote Insurance Advisors. “In addition to this, the returns from an annuity are tax-deferred, which makes them an incredibly safe investment vehicle because you will never lose money.”

Despite the overwhelming odds and the likelihood that a huge windfall could ruin your life as easily as enhance it, most of the financial experts contacted for this article said they were indeed purchasing a ticket for Friday’s drawing. One even submitted a detailed list of planed purchases.

“I would buy a $40,000 four-door pick-up vehicle, a 512 GB Samsung Galaxy S21 phone, new clothing, or a laptop from this year,” said Steve Wilson, a financial expert with Bankdash, a publisher of bank and credit union information. “I would purchase a brand-new four-room home, assist my parents in paying off their mortgage and gift each of them $30,000. I would get the most recent smart TV and subscribe to almost all streaming services.”

Good luck everyone.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].