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teddys
teddys
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August 13th, 2010 at 7:58:45 AM permalink
Thanks for that info, konceptum. I think a trust is definitely the best way to go if you are a lottery winner. Most people don't know how powerful trusts are for large amounts of money -- the tax benefits can be extraordinary. Plus, you could limit your withdrawals if you made someone else a trustee and yourself a beneficiary -- would keep things under control, and save things for posterity. It would also work for a large group of people because you could have a legal entity disbursing the funds in an equal manner. I bet a lot of wrangling goes into setting up those trusts by figuring out who's in/who's out, etc. But I think a group of rational people would prefer the trust over individual payments once the benefits were explained to them.
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What happened to dlevinelaw and JumboShrimps? We need their legal advice. I am only taking one tax course this year!
"Dice, verily, are armed with goads and driving-hooks, deceiving and tormenting, causing grievous woe." -Rig Veda 10.34.4
Doc
Doc
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August 13th, 2010 at 9:54:54 AM permalink
Quote: Ibeatyouraces

I wont play unless it gets to 500 million. That being said, I have NEVER played the lottery. And yes, I do factor in other possible winners too.

Well, I do play the lottery. And I do realize that it is an even worse deal than casino keno.

If I bought a ticket for every Powerball drawing and every MegaMillions drawing for an entire year and won nothing at all, I would have lost $208. I can lose that much getting my entertainment from one session of craps lasting perhaps a couple of hours -- I wouldn't like that, but it has happened many a time, and I still get some entertainment in those losing sessions. On the other hand, $208 of lottery tickets would give me the entertainment of the "fantasy" for an entire year. I don't play the little lottery games like Ca$h3, because they don't provide an adequately entertaining fantasy.

It's not just the calculated expected value of the money; it's also the pleasure you can derive from the process. I have never won a cent by attending a Cirque du Soleil show, but I don't regret the money I have "lost" in the process of those shows. (Of course, I have never paid to see "Believe.")
Wizard
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Wizard
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August 13th, 2010 at 10:32:28 AM permalink
Here is a preview to a future "ask the wizard" question where I pose the split jackpot question. I welcome all comments.

Ask the Wizard #258.
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 13th, 2010 at 11:21:00 AM permalink
Is it possible to compute, and if so, what is the effect of each additional sale (or perhaps 100k sales) to the split probability? Assuming almost infinite sales, it will, at some point, become more likely that the jackpot will be shared than not.
Simplicity is the ultimate sophistication - Leonardo da Vinci
Doc
Doc
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August 13th, 2010 at 11:27:18 AM permalink
Quote: Wizard

Here is a preview to a future "ask the wizard" question where I pose the split jackpot question. I welcome all comments.

Ask the Wizard #258.

The questions should draw a bit of interest. As for comments, I'm not sure what you mean by "...I assumed 50% is lost due to the annuity, and 30% of the rest is lost in taxes...." I don't really see how the annuity is a loss. If you mean that is the reduction you get by taking the present value in cash instead of spread out as an annuity, I think there would be a better way to describe it than "loss". Taking the present value as cash is likely to increase the tax burden. Of course, the forum has already discussed trusts and such, and I don't think you would want to go into that.
Wizard
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August 13th, 2010 at 11:45:49 AM permalink
Quote: Ayecarumba

Is it possible to compute, and if so, what is the effect of each additional sale (or perhaps 100k sales) to the split probability? Assuming almost infinite sales, it will, at some point, become more likely that the jackpot will be shared than not.



That would be possible. I graphed sales by jackpot, and the relationship is that sales go up exponentially by jackpot size. So the math would get rather involved, and I don't think many people would care.

Quote: Doc

The questions should draw a bit of interest. As for comments, I'm not sure what you mean by "...I assumed 50% is lost due to the annuity, and 30% of the rest is lost in taxes...." I don't really see how the annuity is a loss. If you mean that is the reduction you get by taking the present value in cash instead of spread out as an annuity, I think there would be a better way to describe it than "loss". Taking the present value as cash is likely to increase the tax burden. Of course, the forum has already discussed trusts and such, and I don't think you would want to go into that.



I reworded that a bit. However the advertised jackpots are the total you would get from the annuity. If you take the lump sum option, then the lottery will about cut it in half. The annuity payments are not adjusted for inflation, so given the time value of money, you would get about half that way as well.
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 13th, 2010 at 12:00:47 PM permalink
Quote: Wizard

I reworded that a bit. However the advertised jackpots are the total you would get from the annuity. If you take the lump sum option, then the lottery will about cut it in half. The annuity payments are not adjusted for inflation, so given the time value of money, you would get about half that way as well.


I think your revised wording is better. Taking the lump sum or considering the time value of the money from the annuity is exactly the same thing, if you use the annuity's interest rate as your discount rate. I just didn't feel that either of these should be described as a loss.

Earlier, I made a comment about the fantasy aspect of these giant lottery jackpots. When I think about such a fantasy, I can only see the annuity option as viable, even though I have no delusions about living long enough to collect every future payment. Winning a jackpot should be a positive life-changing experience. Having a gigantic cash payment dropped on me would, of course, have the positive aspects, but it would also present an enormous burden of managing the funds without experience on that scale. And if you ask for help, you might find the equivalent of Bernie Madoff. In my fantasy, I take the annuity, and if I blow the money or get ripped off, I just wait until the next year's payment and try not to make the same mistake again.
rdw4potus
rdw4potus
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August 13th, 2010 at 12:09:19 PM permalink
Quote: Wizard

The annuity payments are not adjusted for inflation, so given the time value of money, you would get about half that way as well.



You'd adjust the annuity for inflation, interest earned (after distribution), and the tax shielding effect relative to taking the cash option. I think the effect of the tax shield is quite powerful. This is especially true in a situation where the majority of the cash option would be in the highest bracket, but the annuity payments are not.
"So as the clock ticked and the day passed, opportunity met preparation, and luck happened." - Maurice Clarett
Wizard
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August 13th, 2010 at 12:21:36 PM permalink
Quote: rdw4potus

You'd adjust the annuity for inflation, interest earned (after distribution), and the tax shielding effect relative to taking the cash option. I think the effect of the tax shield is quite powerful. This is especially true in a situation where the majority of the cash option would be in the highest bracket, but the annuity payments are not.



I don't disagree with any of that. However, I had to assume something. You can see from the Powerball list of winners that almost everybody chooses the lump sum, and they get about half the amount. I'm sure the taxes could be lowered by putting it into a trust, but that is getting beyond the purpose of the split jackpot question. It wouldn't surprise me if the type of person who plays the lottery would want to get his hand on as much as possible, as soon as possible, which would result in the full heavy tax hit.
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 13th, 2010 at 1:01:59 PM permalink
Quote: Wizard

It wouldn't surprise me if the type of person who plays the lottery would want to get his hand on as much as possible, as soon as possible, which would result in the full heavy tax hit.

Perhaps I am not typical of lottery players, but see my post above. I wouldn't want the heavy tax hit, and I wouldn't want the lump sum of cash.

My exception would be in the case of a very small lottery winning, perhaps a "1st week" jackpot that got split many ways. If the lump sum payout is something that I really have a legitimate use for right away and if the annuity payments are so small that they would just get lost in the noise of my other finances, then I might take the lump sum and go on with my life. I doubt that would ever actually be the case, and it's not part of my fantasy.

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