A few weeks ago I received a call from someone here in Palm Harbor who became a new client. This lucky guy had just won millions of dollars, not from a weekly lottery drawing, but from a Florida scratch off ticket, of all things. Did you know you can win up to $5 million on a Florida Lottery scratch off?
“Paul” is a middle-aged single dad who was never a big wage earner and I couldn’t have been happier for him. He was seeking my legal representation and I was eager to help him out. Not every lottery winner needs legal representation, but it’s a good idea for larger amounts.
Why hire a lawyer? There are lots of reasons.
Attorneys can be a good shield from those with immediate hands’-out after friends and relatives hear you won the Lottery. As I’ve always told my clients, make me the bad guy: “Sorry, my lawyer told me not to make any loans at this time……..”, “I’d love to invest in your company, but on the advice of my attorney….” In short, blaming your professional can keep peace in the family and allow the client to preserve his assets while minimizing the risk of hurt feelings among friends. However, the better course is to keep your winnings a secret from all but immediate family until everything is set up. That avoids the issue completely.
My first rule for clients who’ve won big money – before you redeem your winning prize ticket have all your homework done. Lottery winners are generally very anxious to get rid of the ticket and convert it to cash, but it’s best to learn about protecting and preserving your money before you get it. This is why sometimes it takes weeks for Lottery winners to come forward. There’s lots of work going on behind the scene.
Questions to be answered: Should the winnings go into your individual name, or the name of a corporation, LLC, Living Trust or Family Partnership? Should you take lump sum or stick with the annual distributions? Is the lump sum amount that will be wired to your bank safe when the FDIC only insures up to $100,000 per account? What are the tax implications? Do you have any outstanding judgments or liens? All of these issues should be addressed.
If you’ve ever wondered about the calculation for those who take their winnings by lump sum rather than annual payments, the value of his winning ticket was immediately diminished by around 30%. There are many variables in how much a lump sum amount lessens the face value of the winning number, but for Paul, his take home was about 70% of the original winning amount.
We consulted with a good accountant. While the Florida Lottery takes out an immediate 25% of the lottery winnings, those who take their winnings lump sum are almost always in the highest tax bracket – currently 39.6%. In my client’s case the difference between the 25% that was automatically withheld and what he will owe the IRS next tax season (an extra 14.6%) amounted to an additional few hundred thousands of dollars on top of what Lottery withheld!
For those keeping score, between the reduction for lump sum and the taxes owed after the lump sum is calculated, Paul ended up walking away with around 53% of the amount he “won” on his ticket. It’s quite a bite, but still a pretty good day.
The big question: Is this money enough to change your life forever? In Paul’s case, it might, but not immediately. After taxes are paid, he’ll have a few splurges (bigger house, new car), but after assessing everything with a financial investor, he decided he would continue working. Since his annual income is low he will need access to some of his winnings for all the new responsibilities of home ownership, real estate taxes and insurances. With the right investments, the money should be growing faster than his small monthly withdrawals so this will not present a problem. He might retire early and be very financially sound after a decade of growth.
As you can see, a good lawyer will act as a financial quarterback. For my part, I took care of Paul’s Estate Planning to protect his assets and his family in case something happened to him, along with his health care directives. He still has minor children living at home and they are his top priority.
All winning tickets larger than $250,000 must be claimed in the Tallahassee headquarters of the Florida Lottery Office. I made sure to accompany Paul there after jumping on a day-flight and I’m glad I did. The Lottery officials needed many answers and I was able to provide specifics that might have confused Paul with all the legalities that were completely foreign to him.
A lawyer representing a Lottery winner must have many conversations with his client to be assured that the client is adequately protected from all financial angles. For instance, Paul and his family had no health insurance. One devastating illness had the potential to wipe out his newfound modest wealth. So, I accompanied Paul to the health insurance agent’s office to help him through the maze of insurance options for himself and his family. That new home purchased also required a meeting with another insurance agent for homeowners, flood and sinkhole insurance.
Finally, if you’re lucky enough to win the Lottery and smart enough to hire legal representation, make sure to hire a lawyer who charges by the hour – not a percentage of your winnings. Believe it or not, some online articles actually discuss this which I think is unconscionable. There are enough people after a Lottery winner’s money – those who represent the Florida Bar shouldn’t add to it.
But make no mistake, the odds of winning the Lottery or Lotto are still astronomical and it is a huge mistake to play beyond your financial means. However, if you do win big, protect yourself and your family as best you can.
Image credit: stockbroker / 123RF Stock Photo