Can You Put Lottery Winnings in a Trust Fund & Not Pay Taxes on Them?
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So, you’ve won the lottery. Congratulations! Or perhaps you’re still dreaming of winning someday. As exciting as a lottery win could be, though, you’ll be required to pay a portion of your windfall to Uncle Sam, both when you take the payout and at tax time. The first call you should make should be to a financial adviser or lawyer to find out what you need to do to protect your new wealth. Although there are benefits to setting up a trust fund in which to store your winnings, it won’t reduce your tax bill.
Although you can quickly establish a trust fund to store your lottery winnings, this will not exempt you from any tax responsibilities established by state and federal governments.
Taxes on Lottery Winnings
You might not realize it, but if you win the lottery, you won’t be handed a check for the full amount. The IRS takes 25 percent of lottery winnings from the start. So even if you could direct your winnings into a trust fund to avoid paying taxes, that 25 percent would be withheld. The rest of your tax bill comes when you file your next tax return.
What you owe depends on your tax bracket. Under the new tax laws, though, you’ll be in the top income tax bracket if you earn more than $500,000 in a given year – or $600,000 if you’re married filing jointly. That means you’ll owe taxes of 37 percent on the amount you take home. If you live somewhere with state income tax, you’ll also owe for that. In New York, you’ll likely be hit with a tax bill for 12.7 percent of your winnings. There are several states that don’t tax lottery winnings, including California and Delaware, but you’ll still owe federal tax.
Trusts and Taxes
Trusts are designed to protect assets, often in the event of a person’s death. Trust funds are often used when referring to money set aside for a minor to enjoy once they reach a certain age. You won’t escape taxes through a trust, but having your money set aside that way could allow you to distribute it tax-free in the form of a gift to a loved one in the event of your death. You can give up to $11.18 million tax-free in this type of situation.
If you’re just trying to shift the funds into a trust to avoid paying taxes, though, you’ll be disappointed. The IRS doesn’t allow taxpayers to assign their income to another party, so if you shift your tax winnings into a trust, you will owe taxes on that income in the year in which you shift it.
Why Create a Trust Fund?
There are legitimate reasons to shift your lottery winnings into a trust fund. If you won the lottery as part of a group, such as a workplace lottery pool, you can save on taxes by shifting the lump sum into a trust. The funds can then be distributed to the individual winners by the trust, which also eliminates the pressure of having one person manage it.
But most lottery winners turn to a trust fund for privacy reasons. When the winnings are claimed by a trust, the thinking is that the actual winner’s identity will be shielded. This prevents the problem of random relatives showing up at your doorstep, asking for money. You simply set up a trust, claim the ticket in the name of that trust, and continue to live your life as a secret millionaire.
- Kiplinger: How Much Tax You Will Pay on Your Lottery Winnings
- Time: The Next Powerball Winner Could Keep an Extra $7 Million Thanks to the New Tax Law
- CNN: What tax reform means for the next big lottery winner
- LegalBeagle: How to Create a Trust to Claim Lottery Winnings
- IRS: What’s New – Estate and Gift Tax
- IRS: Abusive Trust Tax Evasion Schemes – Questions and Answers
- Today: Mega Millions, Powerball top $300 million each: Here’s how to stay anonymous if you win
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.
Lottery winners pay a large chunk of their winnings to the IRS. There’s no getting around paying those taxes, but setting up a trust fund can be a good idea for a variety of reasons. You can keep your name private, for one, and you also can save money if you’ve won as part of a pool.
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.