structured lottery payouts after the payee has died

I've heard before that if you pass away before receiving all your payments(say in a lottery win where you get a million a year for 20 years) that the state will refuse to pay the relatives of the deceased the remaining payments.

I spoke to a friend of mine who actually won a $3 million lottery and receives payments for the next twenty.

He told me there is a mis-understanding with that. The payments after the payee is deceased are still awarded to next of kin(or I suppose whoever is legally named in the will) BUT, the taxes off those winnings become due and payable immediately.

The result is the winnings are deducted in total from each payment until the taxes are satisfied so a family's payments will stop until the governments due is completely paid off.

A family can be worth millions but not receive payments for several years as the taxes are now due up-front(instead of portions which come out each year when the original winner is still alive.)

Anyone else hear about this? Just curious. I assume it must have something to do with tax laws - the taxes cannot be passed on to relatives nor can a dead person report taxes so they become due and payable immediately is my guess.

Anyway, let me know.

Quote: darkoz

I've heard before that if you pass away before receiving all your payments(say in a lottery win where you get a million a year for 20 years) that the state will refuse to pay the relatives of the deceased the remaining payments.

This will depend. Some lotteries are "$2,000 per week for LIFE" with say a million guaranteed. Others are a flat amount, say $5MM. So if you pass away before the guarantee some next of kin will get something. If you made the guarantee, well, life means life.

Quote:

I spoke to a friend of mine who actually won a $3 million lottery and receives payments for the next twenty.

He told me there is a mis-understanding with that. The payments after the payee is deceased are still awarded to next of kin(or I suppose whoever is legally named in the will) BUT, the taxes off those winnings become due and payable immediately.

The result is the winnings are deducted in total from each payment until the taxes are satisfied so a family's payments will stop until the governments due is completely paid off.

A family can be worth millions but not receive payments for several years as the taxes are now due up-front(instead of portions which come out each year when the original winner is still alive.)

Anyone else hear about this? Just curious. I assume it must have something to do with tax laws - the taxes cannot be passed on to relatives nor can a dead person report taxes so they become due and payable immediately is my guess.

Anyway, let me know.

Based on my mostly-limited tax sense I say "maybe" you will have to pay it upfront. First, most state lotteries are that-state-tax-exempt so you only need worry about the IRS. Even with as greedy as the government is today, I would say they would have to take the Present Value (PV) of the annuity the lottery payments are and tax you on that if they wanted it upfront. Then you would be tax-free on it forever. This would give the IRS far less money over time. If someone needed the money right away they could sell the lottery payout for cash, pay the IRS, and be done with it. Simple to do.

Win For Life can be handled differently in different states.

I believe that in NJ, it's a minimum of 20 years.

No matter what, if you win, don't claim it yourself if you have children over 18. Since chances are they will outlive you, let them claim it and give you the money.


Jackpots that are paid for X years, get paid to SOMEONE for those years.

Quote: AZDuffman

Even with as greedy as the government is today, I would say they would have to take the Present Value (PV) of the annuity the lottery payments are and tax you on that if they wanted it upfront.

I think you misunderstood. I think he's saying the Feds take 100% EVERY YEAR, until the full tax bill is paid. THEN you start collecting again. Probably because dead people can no longer collect income, or some other similar rule.

I am asked about this from time to time. I briefly addressed the topic in my Dec.' rel='nofollow' target='_blank'>https://wizardofodds.com/ask-the-wizard/219]Dec. 8, 2008 column. If anyone can provide proof taxes must be pre-paid by an heir, I'd be happy to amend my answer to that question.

Quote: darkoz

I've heard before that if you pass away before receiving all your payments(say in a lottery win where you get a million a year for 20 years) that the state will refuse to pay the relatives of the deceased the remaining payments.

I spoke to a friend of mine who actually won a $3 million lottery and receives payments for the next twenty.

He told me there is a mis-understanding with that. The payments after the payee is deceased are still awarded to next of kin(or I suppose whoever is legally named in the will) BUT, the taxes off those winnings become due and payable immediately.

The result is the winnings are deducted in total from each payment until the taxes are satisfied so a family's payments will stop until the governments due is completely paid off.

A family can be worth millions but not receive payments for several years as the taxes are now due up-front(instead of portions which come out each year when the original winner is still alive.)

Anyone else hear about this? Just curious. I assume it must have something to do with tax laws - the taxes cannot be passed on to relatives nor can a dead person report taxes so they become due and payable immediately is my guess.

Anyway, let me know.

Either something is amiss here or your friend was given a questionable analysis. Anybody in this position absolutely MUST see a qualified estate planning attorney. The winner will most likely want to set up an inter vivos trust, and there are complicated possibilites involving life insurance trusts that could preserve this money for generations to come. The tax consequences of poor planning as to these rather complicated forms of income are dramatic.

But, I know of no law, rule, or regulation that would have the unusual affect on this form of income as you describe. If the payout to the winner takes the form of an annuity, income taxes are paid by him only when he realizes (receives) the income. Upon his death, assuming the annuity has been transferred to an heir, the heir similarly realizes no income except what is actually paid out. i.e. no change in tax treatment besides the identity of the taxpayer.

And if the payout is not an annuity, but rather constitutes monthly payments from the beginning, you get the same outcome. The only realized income is on the amounts actually paid each period.

disclaimer: The above is not tax advice and no party should rely on it without consulting a qualified attorney.

Doing a quick search I found this from the following link:
http://www.professorbeyer.com/Articles/Lottery.htm

Here is an example of what may happen without proper planning, both when purchasing the ticket and upon discovering it is a winner. In May 1995, Johnny Ray Brewster won $12.8 million in the Texas lottery. Johnny died of a heart attack ten months later after receiving only one annual payment of $463,320. Johnny’s sister, Penny, was the sole beneficiary of his estate which included as its primary asset the right to the remaining lottery payments. The estimated federal estate tax totaled approximately $3.5 million. Because the estate did not yet have these funds, the IRS agreed to a ten year payment plan with annual payments of approximately $482,000, that is, $18,680 more than the annual lottery payments. Under this arrangement, Penny would need to put $18,680 of her own money toward the taxes for ten years. Only in the eleventh year, would Penny finally be able to benefit from her brother’s lucky ticket. See Lotto Texas Heirs Cry For Help With Federal Tax Bills, San Antonio Express-News, July 12, 1996, at 6B. (Luckily for Penny, the Lottery Commission allowed the estate to cash in the remainder of the prize at its present value. Commission Moves to Aid Estate Handle Large Inheritance Tax Bill, San Antonio Express-News, Aug. 29, 1996, at 20A. Note that the 1999 Texas Legislature authorized court-approved assignments of the right to receive prize payments. If this situation were to arise today, perhaps Penny could sell her right to future payments, raise enough money to pay off the taxes, and have funds left over for herself.)

So, if I understand that correctly, it is the IRS collecting upfront an estate tax from deceased heirs or what is otherwise known as an Inheritance tax that causes the upset.

Also, it looks like the Texas legislature ruled the lottery winnings could be cashed in or sold in or something, but that might not be the case for NYC.

Here is a link to a very long article with a lot of legalese but basically, it seems the IRS demands a huge chunk of the money for estate tax plus the remaining amount owed as income from money awarded but not spent yet.

It's resulted in people owing more per year than the payouts.

http://www.nysscpa.org/cpajournal/2007/607/essentials/p52.htm

The distinction to be made is among income, estate, and inheritance taxes. All three may come into play when one dies when owed future lottery payments. But, the big culptrit is the federal estate tax. It is a tax on the estate in the hands of the administrator, trustee, etc. This is to be contrasted with the inheritance taxes, imposed by some states but increasingly unpopular, which is a tax on money and property in the hands of the inheritors themselves.

Whether the survivors of a big winner are immediately subject to a huge federal estate tax liability depends on the form of the payment and the structure of one's estate plan. Any wise winner will immediately start making lifetime gifts to others in order to reduce his survivors' estate tax liability (note: this has to be done VERY carefully and with the guidance of an attorney). He will also set up one or more trusts, especially if married, that will significantly reduce the liability.

Now, here's an interesting fact that should convince you that Congress is playing games. If a winner dies in 2010, THERE IS NO ESTATE TAX LIABILITY WHATSOEVER, to anyone. But, if he dies in 2011 or after, all amounts in excess of one million dollars are subject to an estate tax of up to 55%!!! There has been speculation that Congress would change this before 2011, but that really should have happened by now. So, if you're a lottery winner, do your heirs a favor and die this year.

On another note, the federal estate tax is, and always has been, more expensive to administer than it yeilds in revenue to the government, meaning it is a NET DRAG on the GDP. Any rational Congress would do away with it, but of course politics are not rational.

Quote: Jumboshrimps

Now, here's an interesting fact that should convince you that Congress is playing games. If a winner dies in 2010, THERE IS NO ESTATE TAX LIABILITY WHATSOEVER, to anyone. But, if he dies in 2011 or after, all amounts in excess of one million dollars are subject to an estate tax of up to 55%!!! There has been speculation that Congress would change this before 2011, but that really should have happened by now. So, if you're a lottery winner, do your heirs a favor and die this year.

On another note, the federal estate tax is, and always has been, more expensive to administer than it yeilds in revenue to the government, meaning it is a NET DRAG on the GDP. Any rational Congress would do away with it, but of course politics are not rational.

I agree we need to get rid of the estate tax as taxes were already paid as the estate builds up. In lotteries there remains the problem that the steram of payments is not realized yet. So the IRS could still tax you on the PV of the thing.

The lesson here is:

1. Take "lump sum option" if it is available.

2. Put that lump sum into a family trust of some sort so it can pass to your heirs.

Jumboshrimps, your posts are very enjoyable to read. I'm curious, what area of law do you practice in? Why are you spending your time writing mini-treatises here instead of billing hours? :) *(Just kidding. Please don't stop writing your posts.)

Quote: teddys

Jumboshrimps, your posts are very enjoyable to read. I'm curious, what area of law do you practice in? Why are you spending your time writing mini-treatises here instead of billing hours? :) *(Just kidding. Please don't stop writing your posts.)

Ha! Thanks. I'm a commercial litigator, and I'm on vacation.

I think there is some value to the estate tax in that it does spur donations and bequests on worthy organizations that otherwise might not have happened, and continuation of the estate tax would also allow the continuation of the step-up basis rule. (The step up basis rule basically means that when someone inherits something, the value of their property is assessed on the day of the death rather than when it was acquired. This eliminates a lot of hassle of heirs trying to determine the basis of property inherited, like searching through old stock records or finding out how much that additional room on the rental house cost 20 years ago.) The screwed up aspect of the law is that the gift tax exemption hasn't changed, but the "temporary" estate tax limits keep going up. I would re-unify the gift and estate tax exemptions at the 2009 level ($3.5 million), increase the annual gift limit to $20,000 per person with a $100,000 annual "free pass" on top of this amount (which recognizes the complications nowadays with domestic partnership and cohabitation), and maintain the rules relating to step-up in basis to help those who inherit property.