You Just Won the Lottery. Here’s the Very First Thing You Should Do.

The first thing lottery winners hear is “Congratulations!” The second thing they often hear is “Can I have some money?” What they really should be told is “It’s time to hire a financial advisor.”

This is a situation someone likely soon will have to face, as the jackpot for the Mega Millions lottery has soared to $1.28 billion, which would be the second-largest payout in the lottery’s history. The next drawing is set for Friday night, which means that someone’s life could change dramatically, very soon.

The headline jackpot number may be $1.28 billion, but if the winner opts to take the money in a lump-sum cash payout, it drops to a mere estimated $747.2 million before taxes. 

After the initial euphoria has faded—maybe after a night of revelry, maybe the next day—the lottery winner should probably look for a financial advisor to help them navigate the many unforeseen contingencies they will face now that they have suddenly reached a stratospheric level of wealth. 

“You don’t know what you don’t know,” says Stacy Coffey, senior vice president of wealth strategies at Wealth Enhancement Group, a large registered investment advisor based in Minneapolis with offices around the country. “We have to talk about what this money really means. I’m assuming in 99.9% of cases, a $600 million check will be life-changing.”

Investment advisors are always quick to tout the benefits of working with a financial professional—they believe in what they do, after all. But in a case like a lottery winner or some other recipient of sudden wealth, it’s hard to argue against the wisdom of seeking the services of a reputable fiduciary advisor—one who is legally required to work in their clients’ best interest.

“Not even as a financial planner, even as a lay person, I would think, ‘Oh my goodness if you come into a lot of money having a professional who is a fiduciary on the same side of the table as you would be essential,’” says Evelyn Zohlen, president of Inspired Financial, an RIA in Huntington Beach, Calif.

For advisors, even those who’ve never worked directly with a lottery winner, it’s a familiar scenario. Advisors frequently work with clients who come into a sudden windfall of money, maybe through an inheritance, selling a business, or some other major financial event.

“The lottery isn’t as common, as you can imagine, but windfalls are pretty regular,” says Ryan Viktorin, vice president and financial consultant at Fidelity Investments in Framingham, Mass. “In the case of the lottery winner, after taking a breath and slowing down for a minute after that happens, the first thing you should do is assemble a team that is going to construct a full financial plan.”

The playbook is the same. Advisors say they would move quickly to gather specialized professionals for the newly wealthy client—an accountant to help with the tax issues, an attorney to handle estate planning.

Taxes loom large in this kind of situation. And, in the event the winner takes the lump-sum payout, that bill is going to come due for the current tax year, which puts a little more urgency behind tax-mitigation strategies than longer-term spending plans. “Whoever gets this big lottery may or may not be aware of the tax bill that’s going to come along,” Zohlen says.

As an alternative to the $747.2 million lump-sum payment, lottery winners have the option of taking annuitized payments over 29 years of the entire $1.28 billion jackpot. Most winners opt for the lump sum, which some advisors see as a smart move, thinking that they can put that money to work for the clients with investments right away. On the other hand, there is an argument for taking the larger prize as an annuity, especially if the winner is relatively young.

Charitable contributions can help offset the winner’s tax liabilities, but scrambling to find an array of worthy causes before the tax deadline can be daunting. Instead, advisors suggest parking the money the winner wants to set aside for charitable giving in a structure that will allow them to bank the tax deduction while postponing the detailed decision making about giving to specific causes.

“If you have any charitable intent, the year they win that lottery they can make a sizable donation to a donor-advised fund,” Zohlen says. “You don’t have to make a decision about who the actual recipients will be until you want to.”

A lottery winner could accomplish the same end by setting up a private foundation, though that’s a much more drawn-out process than giving to a donor-advised fund, which is an established vehicle managed by a sponsoring organization that holds the assets and disburses them over time at the direction of the donor.

Tax mitigation is only the beginning of the financial plan a lottery winner should develop. The core of the financial plan—a client’s goals, time horizons, cash flow management—isn’t fundamentally different for the ultrawealthy as it is for typical clients. Viktorin starts with a who/what/when format: who were the people in your life (before winning the lottery) that mattered; what do you hope to accomplish, and when.

An overnight windfall of hundreds of millions of dollars obliterates some of the normal concerns of a financial plan (such as saving enough money for retirement), but some fundamental considerations still apply.

“Previously your goals might have been to retire at age 60. Now your opportunity is you can retire tomorrow,” Coffey says. “But what does that mean for you?”

She suggests advisors try to help clients visualize what their life would be like—day to day—if they immediately exited the workforce. “Maybe you really enjoy work. Maybe you started your own business and you don’t want to retire,” she says.

Winning the lottery could have a multiplier effect that doesn’t alter a client’s primary objectives, but makes it possible for them to widen the lens. Think about saving for children’s college tuition. Winning the Mega Millions will probably be enough to comfortably send all of your kids to the college of their choice. But what about their kids? Working with an advisor, a lottery winner could set up a structure designed as a “self-perpetuating fund for anybody in your family who wants to go to college,” Coffey says.

“You can change not just your own life but your family’s life,” she says. “Your goal hasn’t necessarily changed. It’s just broadened.”

In drawing up a financial plan for the newest millionaires, advisors will want to talk to clients about their spending goals and how they envision their lifestyle changing. It might not be the first—or second or third—conversation they have with a suddenly wealthy client, but at some point they will want to start plugging hard numbers into the cash-flow analysis component of the financial plan.

“If the lifestyle you want is going to cost you $25,000 a month before taxes for the rest of your life, I can calculate that,” Zohlen says. “We can say this is how much you can protect. This is how much is off limits.”

Outside of that core level of assets, she tells clients they can spend “anything you want but you must, must protect this if you don’t want to go back to work or be one of those sad stories you read about in the paper.”

And those stories abound. As exciting as the prospect of winning the lottery is, it can also bring copious amounts of unwanted attention, especially if you don’t live in one of the 11 states that allow multistate lottery winners to remain anonymous.

“One of the common things that happens when someone has something like a lottery windfall is friends and family come out of the woodwork with their hands out,” Zohlen says. “There are some things the planner can do to help the recipient of that to put some structure around that.”

For instance, in 2022, the federal limit on individual gifts is $16,000. Any amount above that, the giver must notify the IRS—not that the gift itself triggers an immediate tax event, but it will count against the lifetime estate and gift tax exemption. 

There’s also the general awkwardness of being in a position of great and sudden wealth, and feeling beset by requests for money. Most people want to be generous, but within reasonable limitations.

The “structure” Zohlen suggests building around giving could include setting up a written process for submitting requests for money, sort of like applying for a grant from a foundation, but at an individual level.

Alternatively, lotto winners could get in front of the process and make a list of important friends and family, give each one the maximum gift of $16,000, and make it clear that that’s the end of it. Zohlen says that discussion would end along the lines of: “I love you. God bless you. Have fun with it, but don’t ask me for more.”

It’s tempting to view a payout of almost $750 million or some comparable sum as forever money. And it should be. But if there is no plan to manage the cash flow, and no guided strategy for handling investments with all the considerations advisors bring to the table, even nine-figure windfalls can dissipate quickly.

“The number one thing that can happen is you stick your head in the sand and you don’t plan at all, and then it just kind of gets away from you,” Viktorin says. “When there’s no plan, that’s when it can erode really quickly. And it’s sad to see.”

A sudden, massive wealth event can move quickly from euphoric to scary, she says. “Sometimes you can feel like you’re in the eye of the storm that’s happening.”

But advisors can both aid clients with the challenges that can come with sudden wealth and help them keep perspective.

For Coffey, that starts with a reminder of the obvious: Cheer up, you just won the lottery!

“Ultimately this is a great thing. While there’s a lot of responsibility with it, maybe take off a piece and go have some fun with it before you get into the rest of these topics,” she says. “You should be able to have some fun with it as well as taking on this responsibility.”

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