Which Should A Lottery Winner Take: The Annuity Or A Lump Payment?
The question has been asked many times: "Should a lottery winner take the annuity, or take a lump payment?"
Well, someone in Wisconsin gets to make this decision after they won the estimated $768,000,000 Powerball drawing last night (I could have typed "$768m" instead, but I like dreaming about all of those zeroes!).
There are advantages and disadvantages to both the lump payout and the annuity. According to The Motley Fool's website, one of the advantages of taking the annuity is a guaranteed income for you or your family for the next 30 years. You, as the winner and now the most popular person in the neighborhood, would receive an immediate cash payment, and then every year after that a cash payment (with an increase of 5% each year to adjust for cost of living) until the total amount has been paid, in 30 payments.
One of the disadvantages of the annuity is that, since you pay taxes each year's amount, there is a real risk of taxes going up. The website points out that the current tax on lottery winnings is around 39%; back in the 1980s, it had reached 70%. If the current taxes go up, it could really dig into your winnings.
That leads us to the (possible) tax advantage of taking the lump sum payment of paying taxes on that payment just once, then you are done - kind of: you are still responsible for any interest/capital gains, etc., on the investments you make with that money (because you WILL invest it, right?)
The biggest disadvantage of the lump sum payment is that, as it has been shown in the past, some people go crazy with their new-found wealth, and, quite often, it's ALL GONE within a matter of just a few years.
The best advice, according to the lawyers is, of course, hire a lawyer as soon as you win the lottery. Don't hire your lawyer brother-in-law; hire a lawyer in a large city at a respected firm who is well-versed in dealing with mucho dolares. Ask that lawyer about setting up a trust (Legal Zoom thinks that's the best plan, and they lay out their reasons, along with the pros/cons, here).
Which would I choose if I ever won the lottery? Well, you'll never know. (If I knew how to insert an evil grinning smiley face emoji right here, I would. It would also have an unbrella-ed drink in its hand, it would be laying on a beach, sitting next to an emoji that looks a lot like my girlfriend.)