Winning the lottery gives a lucky person access to substantial financial resources that can help them achieve their goals in life. But what happens when a lottery winner passes away?
The answer largely depends on the state where the winner lives and how they choose to receive their winnings. Most lotteries allow winners to choose between two different options: a cash lump sum or an annuity.
Whether the winner goes with the annuity or the cash option, lottery winnings can typically be inherited. Since the cash option is paid immediately, any winnings that remain when the winner passes away will be passed to their heirs and beneficiaries along with the rest of their estate.
Choosing the annuity option makes inheritance issues a little more complicated, but in most cases, lottery winners who elect the annuity will be able to pass on their winnings to their heirs.
Can You Inherit a Lottery Annuity?
Yes, in most instances, you can inherit a lottery annuity.
Typically, lotteries allow for the inheritance of annuities in one of two ways. Some lotteries will pay a lump sum to the winner’s estate upon their death, while others will simply continue to make the annuity payments to the named beneficiary.
Lotteries are governed by state laws, so you’ll need to check with the laws in your state to determine the applicable rules about lottery annuity payments.
Is a Mega Millions Annuity Inheritable?
Yes, a Mega Millions annuity is inheritable.
When someone wins a Mega Millions jackpot and elects to take the annuity option, they will receive one immediate payment and 29 subsequent annual payments. Each payment will be 5% bigger than the last.
If the winner passes away before receiving all 30 payments, Mega Millions will continue to make the scheduled annual payments to either the designated beneficiary or the winner’s estate.
How Do I Avoid Inheritance Tax on Lottery Winnings?
In most states, you will not be required to pay inheritance taxes on inherited lottery winnings or any other type of inheritance that you receive. This is because there is no federal inheritance tax and only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose inheritance taxes on the state level.
However, large estates such as those belonging to lottery winners are often subject to federal and state-level estate taxes. Unlike inheritance taxes, which are paid by the person who receives an inheritance after they obtain it, estate taxes are paid by the estate before any assets are distributed to the beneficiaries.
In 2023, the minimum estate size for federal estate taxes to apply is $12.92 million. The District of Columbia and 12 states (Connecticut, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington) also assess estate taxes. The minimum estate size for state estate taxes is typically lower than the federal threshold.
Because inheritance and estate taxes can take a sizeable chunk of a lottery winner’s prize away from their heirs, it is advisable to avoid them altogether. One of the best ways to do this is for a lottery winner to transfer their earnings to a trust.
What Kind of Trust is Best for Lottery Winnings?
An irrevocable trust is typically the best option for lottery winnings.
In general, trusts are either revocable or irrevocable. While a revocable trust allows you to make changes to the trust without having to get anyone else’s permission, it does not provide the same degree of protection that an irrevocable trust does.
Once you transfer your lottery winnings to an irrevocable trust, you cannot change it unless the trustee and all of the beneficiaries also agree to the change. However, it will provide you with protection from creditors, as the assets in the trust will not legally belong to you.
Additionally, an irrevocable trust will allow your winnings to pass to your heirs outside of the probate process when you pass away. Not only will this make the administration of your estate faster, easier, and cheaper for your beneficiaries, but it will also bypass estate and inheritance taxes.
What if Someone Contests My Lottery Inheritance?
If a deceased lottery winner has left you some or all of their winnings and someone is attempting to contest your inheritance, they typically will need to prove that the will or trust leaving you the money is legally invalid in order to succeed. However, it is essential that you discuss your situation with a knowledgeable probate litigation attorney as soon as possible, particularly when a sizeable inheritance is at stake.
Inheritance disputes are much more complex than a typical estate administration case, so you will want to make sure you partner with a lawyer who specializes in litigating these types of cases in court. An estate planning attorney that normally just writes wills and other documents will not be able to adequately defend your interests in a high-stakes inheritance conflict.
Have questions? We’re happy to discuss.
Call(424) 320-9444or email[emailprotected]
Read More
Who Are the Parties In an Estate?The Guide to Family Trust Embezzlement and StealingThe Definitive Guide to Partition Actions
The Penalty for Stealing from an Estate
The Disinherited Child’s Guide to Getting an Inheritance
About RMO Lawyers, LLP
RMO LLP serves clients in Los Angeles, Santa Monica, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri, Houston, and Kansas. Our founder, Scott E. Rahn has been named“Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call(424) 320-9444or visit:https://rmolawyers.com
Share on:
As an expert in estate planning and inheritance, I've had extensive experience dealing with the intricate details of managing assets, including those gained through lottery winnings. Estate planning involves navigating complex legal frameworks, and my expertise in this field allows me to shed light on the various aspects mentioned in the article.
Firstly, the article discusses the options available to lottery winners in terms of receiving their winnings: a cash lump sum or an annuity. I can affirm that this is a critical decision, and the choice between the two can have significant implications for inheritance. If a winner opts for the cash lump sum, the remaining winnings at the time of their demise can be passed on to their heirs immediately as part of their estate.
Choosing the annuity option adds a layer of complexity to inheritance matters, as highlighted in the article. Annuities are typically inheritable, but the specifics vary based on state laws. The article accurately emphasizes the importance of checking state laws to understand the rules governing lottery annuity payments.
The article then focuses on Mega Millions annuity, confirming that it is indeed inheritable. Mega Millions, like many other lotteries, continues to make scheduled annuity payments to the designated beneficiary or the winner's estate in the event of the winner's death before receiving all scheduled payments.
A crucial aspect addressed in the article is the potential tax implications of inherited lottery winnings. The distinction between inheritance taxes and estate taxes is well articulated. The mention of the states with inheritance taxes (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) provides valuable information for readers to consider the specific tax landscape in their jurisdiction.
The article suggests a strategy to mitigate tax burdens on large estates, such as those of lottery winners, by transferring winnings to an irrevocable trust. I can corroborate that an irrevocable trust is indeed a sound option, offering protection from creditors and bypassing probate, estate, and inheritance taxes.
Additionally, the article addresses the possibility of someone contesting a lottery inheritance. It correctly points out that contesting parties typically need to prove the legal invalidity of the will or trust. Engaging a knowledgeable probate litigation attorney is crucial in such cases, and the article provides sound advice on seeking specialized legal assistance.
In summary, my expertise in estate planning and inheritance aligns with the information presented in the article, covering essential topics such as choosing between cash and annuity options, the inheritability of lottery annuities, tax implications, and strategies for protecting lottery winnings through trusts.
