Won the Lottery? What’s Next: Estate Planning for New Millionaires

By Matthew S. Dana, Esq, CPA , LLM in Taxation

So your odds of winning were worse than being struck by lightning twice in your lifetime, yet here you are. What a blessing, don’t let it turn into a curse. The average lottery winner ends up bankrupt within 3 years. Where did they go wrong?

The first important decision is who do you need as professional advisors. I have always lectured my wife as to who she should call if I die and she collects $5 million in life insurance. Now I am going to lecture you as to the team of advisors you need to put in place.

Estate Lawyer who represents high net worth individuals.
CPA – who is familiar with both Federal and multiple States Income Tax laws.
Financial Advisor – well-versed in stocks, bonds, and money management

These are the “big three” that you need almost immediately. We may involve other professionals like Real Estate brokers as we go. This article will explain why you need a team. And if you can get all three “under the same roof”, even better.

The most pressing issue immediately is deciding on a Lump Sum vs an Annuity. I am a huge fan of the lump sum for lots of reasons. But the best reason is that good Income Tax planning and good Estate Planning require cash and cash flow. Many of the things the CPA is going to talk to you about is creating Income Tax deductions in the year of the winnings to offset the Tax Liabilities. Those are discussed below when you get to the CPA section and the Income Tax Deductions. These strategies require an upfront investment that you can’t do with an annuity.

Also, from an Estate Planning standpoint, you need to be able to split up the winnings into different buckets to be held in different Trusts for different reasons. You can’t split up the Annuity. Those issues will also be discussed below.

And last, I like the lump sum because I believe that with good financial advice, you can generate a much larger return on your investments than the Lottery uses to calculate the annuity amount given each year.

Now, let’s discuss a few strategies that can be used to create large Income Tax Deductions. The first is the Charitable Lead Annuity Trust. (CLAT) We have specific Articles on our website and YouTube videos that go into great detail about CLATs. The big thunder is that you create a huge upfront deduction. The downside is that you don’t have the use of that money for a period of years.

Another Income Tax strategy is to invest in Real Estate and take advantage of what is called “cost segregation”. This is where you invest in things like Airbnb’s, and get a deduction upfront that is almost equal to the amount you paid for the real estate. This could be a commercial office building, an apartment complex, or even an Airbnb. I am a huge fan of Airbnb’s because you get a great vacation destination for the family, yet get some great tax benefits along the way. I personally have 2 Airbnb’s and am looking to purchase a third one.

Another real estate strategy is to invest in “Opportunity Zones”. This is also an entirely separate discussion beyond the scope of this article.

And there are multiple strategies that involve charitable planning. Such strategies would include creating your own Family Foundation. Also, the Charitable Remainder Unitrust and the Charitable Lead Annuity Trust provide some great income tax deferral or elimination. Once again, most of these strategies are discussed in our YouTube videos as well as on our website at Dana Whiting Law.

Now, let’s shift gears to the Estate Planning side of things. You must realize that there is a Federal Estate Tax that will tax 40% of your wealth over $15 million at your death. This amount is due in 9 months after death. And, some States also have their own version of a State Death Tax. This is why I like the lump sum discussed above. There are many different Trusts that can be created to save the Estate Taxes at death. They include, but are not limited to, the following:

The Spousal Lifetime Access Trust (SLAT)
Creating a Family Limited Partnership to create creditor protection and “valuation discounts”.
All types of Charitable Trusts discussed above.
The Generation Skipping Trust.
The Grantor Retained Annuity Trust (GRAT)
The Intentionally Defective Grantor Trust (IDGT)

Once again, most of these strategies are discussed individually on our website and our YouTube videos. With proper Estate Planning, the Federal Estate Tax can be greatly reduced, if not entirely eliminated. We represent some of the wealthiest families in the country. Take a look at Tier 4 on our website.

And last, how do you invest the proceeds, and what entities need to be created for such investments, LLCs? S-Corps? That’s another advantage of working with our law firm. We represent wealthy families that have created wealth in multiple ways, not just traditional stocks and bonds. Some have made large amounts of wealth in Real Estate. Others have started very successful businesses. We have represented sheep farmers, duck farmers, developers, landlords, etc. And, my personal philosophy for my own personal finances is to be 50% real estate and 50% stocks and bonds. That’s why it is important to let our firm “quarterback” the entire team of professionals. I think it is a mistake to just talk to a traditional financial planner who is going to discuss only traditional stocks and bonds. There are many ways to create wealth, and I have personally seen most of them. My father used to always teach me that “he that is only good with a hammer, views everything around him as a nail”. The moral of the story is that you need lots of tools in the toolbox. You need diversity of investments.

And, another thing about creating wealth that has fascinated me, is the fact that those that have the wealth are very conservative in their investing. They are not buying crypto or gold mines in Mexico or investing in making a movie or a video game. There is a huge difference in “wealth preservation” vs “wealth creation”. You already have the wealth. You have created it. Now, your job is preserving the wealth. And this can be extremely difficult for the person who hasn’t had wealth in the past.

Who can you trust with your wealth and as your advisors? This is a very difficult thing. Everyone around you will all of a sudden have an opinion, or “have a guy”, or want you to talk to their “brother-in-law”. Shut out the noise, and listen to the advice I am giving my own wife. Trust your CPA, your lawyer and your financial team. How do you pick them, let us help. We know most of the good ones in the States that we practice, and we can help you find the good ones in the States that we don’t practice. I am a big believer in the Bible, where we are taught how to recognize a true prophet. “By their fruits ye shall know them”. You don’t have to be a Christian to know that this is good advice. Take a look at our fruits. Our website, our YouTube videos, the number of high-net-worth clients we represent, the States we practice in, and the testimonials of some of our clients on our website. You can’t “fake” this knowledge and these results and these clients.

We have represented other Lottery winners and we want to represent you. We have also represented many executives at start-ups like Nvidia, SpaceX, Pure Storage, to name a few. These people went from modest means to multi-millionaires in the last 5 years. Like you, they are “new money”. They have the exact same issues that you have as a Lottery winner. We are more than happy to provide you with some references that you can contact. Contact me directly at matt.dana@danawhitinglaw.com for a free introductory zoom or face-to-face. And, if your winnings are large enough, I will fire up a jet and meet you. Or submit a website submission or call our office.

So you Won the Lottery: What’s Next

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