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Doc
Doc
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August 11th, 2010 at 2:39:58 PM permalink
Quote: konceptum

You're right Doc. Things have changed since I was ever involved in a lottery pool. But it's also important to note that your quote does state that some lotteries may not split up a jackpot. Probably a good idea to make sure an individual lottery will do a split before you enter into a pool.

I don't think the quote from powerball.com actually says that some lotteries may not split up a jackpot. It indicates that the individual lottery's rules apply and that there may be some restrictions. I suspect those restrictions are to prohibit the unreasonable requests; eg., suppose AARP purchased a lottery ticket that won and asked a state lottery to divide and distribute the (very small) checks to each of the members on an annual basis. I doubt they would agree to do that. I think if you are dealing with a moderate size pool, perhaps 20 or 30, there would be no problem at all. If you have a pool of 100, I don't know how receptive they would be.
Wizard
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Wizard 
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August 11th, 2010 at 5:00:13 PM permalink
Based on some initial analysis, it is looking like my hypothesis was wrong, at least for the Powerball. It seems even when the jackpot grows exceptionally high, the probability of winning is so small that it is unlikely that more than one person will win. Here are some facts:

Since 2008 the average Powerball jackpot has been $73.6 million.
The highest it has been since 2008 is 275M, on 3/15/08.
Ticket sales that week were $72,525,664 , not counting the Powerplay add-on.
Tickets are $1 each.
The probability of winning is 1 in 195,249,054.
Expected winners that week were 0.371452.
The probability of two or more winners was 0.0540655.
Estimated loss in expected value (overall) due to jackpot sharing, before facting in annuity or taxes: 4.01%.

So, even with the record high jackpot (since 2008), there was only a 5.4% chance of it being split.

Source of sales and jackpot amounts: lottoreport.com/powerballsales.htm.

Quote: konceptum

Basically, if you are participating in some type of lottery pool, you should know that only one legal entity can win the lottery.



I don't think that is the case. Have a look at the history of Powerball winners. You see such entires as "22 Postal Workers" on October 4, 2008.
It's not whether you win or lose; it's whether or not you had a good bet.
Ayecarumba
Ayecarumba
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August 11th, 2010 at 6:31:15 PM permalink
Quote: Wizard

So, even with the record high jackpot (since 2008), there was only a 5.4% chance of it being split.



Doing some quick figuring, from the Powerball chart, there have been 91 draws that produced at least one jackpot winner. Of the 91, 7 were split between two (and in one case three) winning tickets. 7/91 = 7.7% This is in line with a binomial distribution assuming a 5.4% chance of success. However, I think the 7.7% may actually be closer to the true value, given that many ticket buyers choose from the same subset of numbers (1-31, the calendar dates). This behavior increases the likelihood of a split should the numbers draw that way.
Simplicity is the ultimate sophistication - Leonardo da Vinci
teddys
teddys
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August 12th, 2010 at 6:08:16 AM permalink
Quote: Wizard

I don't think that is the case. Have a look at the history of Powerball winners. You see such entires as "22 Postal Workers" on October 4, 2008.

But the "22 Postal Workers" could be the name of the legal entity they created to receive the funds. You see other groups like "the FEMA team" and "The End of the Rainbow Trust." I think konceptum is one to something. By the way, that is a very interesting link. I especially like the groups of government bureaucrats winning those payouts -- freed from the white-collar prison!
"Dice, verily, are armed with goads and driving-hooks, deceiving and tormenting, causing grievous woe." -Rig Veda 10.34.4
Wizard
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August 12th, 2010 at 8:16:52 AM permalink
Quote: teddys

But the "22 Postal Workers" could be the name of the legal entity they created to receive the funds. You see other groups like "the FEMA team" and "The End of the Rainbow Trust." I think konceptum is one to something. By the way, that is a very interesting link. I especially like the groups of government bureaucrats winning those payouts -- freed from the white-collar prison!



I suppose, but what if the 22 postal workers could not agree on how the trust should be set up? If multiple people owned the winning ticket I don't see the downside to paying them individually. Forbidding that doesn't pass the logic test to me. There would be no upside to the winners or the lottery to enforce such a limitation.
It's not whether you win or lose; it's whether or not you had a good bet.
Doc
Doc
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August 12th, 2010 at 9:14:57 AM permalink
Earlier, I posted the quote from powerball.com, indicating they will split the prize between individuals. Now I just add some issues that I think I have heard but don't have an official citation for.

I think that the lottery will not award the money to a "legal entity" other than individual people. I think that you cannot have a corporation receive the award and potentially pay lower taxes. I know nothing about family trusts, so I don't know how one goes about using a trust to protect the funds, such as reducing/delaying estate taxes in the event of a winner's death prior to the full annuity being paid.

Perhaps there is someone on this forum who knows the facts about such issues. Surely we don't need a lot of speculation with no more foundation than my comments in this post.
konceptum
konceptum
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August 12th, 2010 at 9:58:52 AM permalink
It would be interesting to find out more about this. I think the ability to have a trust purchase the lottery tickets and receiving the winnings would add significant differences in the way people would buy lottery tickets, if they knew this was available. Especially older people, who already have established trusts for their children, and are already playing the lottery.

However, my guess is that it is correct to state that the lotteries will only make payments to individuals. If nothing else, the IRS would be eager for this to remain the correct and only way for the payouts to be made. As for splitting the payout, I agree that there is probably no reason why a lottery would want to antagonize people by not allowing splitting, but at the same time, it still remains a possibility that some lottery may have in their regulations that splitting isn't allowed.

The only reason I could see for not allowing splitting comes from the point of view of the IRS. Obviously, splitting a large lottery payout would have relatively no effect on reducing taxes, but I could see potential situations in which, if the payout is low enough, and the number of winners high enough, that the overall effect for the IRS is receiving less money. Of course, anything that gives the IRS less money is probably a good thing.
konceptum
konceptum
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August 12th, 2010 at 10:05:16 AM permalink
Sorry, just found this website: http://www.professorbeyer.com/Articles/Lottery.htm. Of course, I have no idea of the accuracy, completeness, and whether or not it only applies to Texas lotteries, but the author does say:
Quote: http://www.professorbeyer.com/Articles/Lottery.htm

The best entity to form for an individual winner is a revocable trust. See Kimberly Adams Colgate, Win, Lose or Draw: The Tax Ramifications of Winning a Major Lottery, 10 Cooley L. Rev. 275, 293 (1993) (providing extensive discussion of this technique which forms the basis of the discussion in this section). The lottery winner should create a revocable trust and apply for an employer identification number. The winner should then transfer the ticket into the trust and the trustee should redeem it for the benefit of the trust.

The winner receives a variety of benefits by creating a revocable trust. (1) Probate of the lottery proceeds will be avoided. Instead, the remaining payments are distributed to the beneficiaries according to the terms of the trust instrument. (2) No transfer occurs for gift tax purposes when the winner places the ticket in the revocable trust. (3) The transfer of the ticket prior to redemption is unlikely to trigger compliance with the special procedures needed to assign lottery winnings. (4) The settlor-winner may amend the trust without the approval of the lottery commission. With this freedom to amend, the settlor may later decide to relinquish his or her power to revoke a certain percent interest of the trust, thereby reducing the settlor’s taxable estate by that percentage. For example, the settlor could relinquish his/her power to revoke a two percent interest in both the trust income and principal, making someone else the irrevocable beneficiary of that two percent interest. The two percent interest would then be distributed and taxable to that irrevocable beneficiary. By making the complete transfer of a two percent interest in trust property, a taxable gift is triggered, however, as long as the settlor lives three years after relinquishing the right to revoke the two percent interest, his/her estate would include only ninety-eight percent of the value of the future lottery payments.


The interesting thing of note, at least for me, in this entire page is that it appears nothing really needs to be worried about until AFTER you find out you're a huge winner. In other words, my original advice of hiring an attorney and an accountant upon finding out you won, but BEFORE you redeem the ticket is probably still the best sequence of events.
konceptum
konceptum
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August 12th, 2010 at 10:15:06 AM permalink
Another website I read stated various things, such as:
Quote:

The winner is the AB Revocable Living Trust. Texas law allows one and only entity to claim a winning lottery ticket, but allows an individual, trust, partnership or corporation to claim the ticket.
So if multiple people win, as probably happened here, they pretty much *have* to use a trust or similar entity to avoid being screwed.
Probably if you do win the lottery regardless of which state it is, even if your an individual winner, it'd be best to set up a trust and have the trust claim the prize.


Quote:

Someone (or some group of people) won $265 million in the Mega Millions lottery in Ohio recently and used a trust to claim the prize without revealing the identities of anyone involved.


That website was more concerned with keeping your identity anonymous when claiming a lottery prize. But it does appear that trusts have been able to collect on lottery winnings in the past. Do all lotteries have to keep a history of prize winners? If so, it wouldn't be hard to find out if a trust has ever been the winner of a particular lottery, which would show that it has be done, and thus that it could be done.

Further, I almost think that a trust would be a better option for pooled lottery groups, rather than splitting up the money. A blind trust could be established, with all the pooled members as beneficiaries, and an attorney as the executor of the estate. For a small fee, the executor would ensure fair and even payments to each of the beneficiaries. Of course, you'd still have to get all the people in the pool to agree to a blind trust, agree to the choice of executor, and agree to the payments and how they would be made so that it is fair to everyone in the pool.

Again, I'm not an attorney, so I don't know if this is really the best way to go, but I do know that this is the general way in which blind trusts operate. Also, there's still no telling if a particular lottery allows payouts to trusts.

Why am I even thinking about this? I don't play the lottery. *sigh*
Ibeatyouraces
Ibeatyouraces
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August 13th, 2010 at 7:34:50 AM permalink
deleted
DUHHIIIIIIIII HEARD THAT!

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