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Transforming lottery winnings into lasting wealth

 Find out how to convert your lottery winnings into long-term wealth.

Transforming lottery winnings into lasting wealth

Winning a lottery jackpot is undoubtedly a life-changing moment. But along with all the excitement, it can be overwhelming to be on the receiving end of sudden wealth. It's also difficult to imagine what's to come.

According to the National Endowment for Financial Education, 70% of lottery winners run out of money within a few years due to poor spending habits. This is the reason why one of the best initial investments you can make is hiring a financial advisor. Here are some tips for working with a financial advisor to make sure your dream come true doesn't turn into a curse.

Why it's important to collaborate with a financial advisor

When you win the lottery, before you rush out to buy your dream home or luxury car, finding a financial advisor is the first step to planning safely and effectively what you are going to do with your winnings. Robert Pagliarini, Ph.D., CFP®, EA, is President and Chief Financial Advisor of California-based Pacifica Wealth Advisors, Inc. and author of The Sudden Wealth Solution. In an exclusive interview with Lottery USA, he points out how easy it is to get in over your head very quickly after a lottery win.

You are experiencing everything for the very first time – the taxes, the legal issues, the press, the questions, the concerns. You want someone in your corner who has experienced this process dozens or even hundreds of times so they can steer you away from common mistakes and help you make the best decisions possible.

Maintaining your anonymity

Some states allow lottery jackpot winners to claim their money while retaining their anonymity. But if you live in a state that does not, but you want to keep your identity secret, a financial advisor can help you. The easiest way to do this is by setting up a blind trust. A blind trust for a lottery winner prevents the public from knowing your true identity. Only the name of the trust and the trustee (your attorney or financial planner) become public. Typically, your financial advisor can help you with this as part of your estate planning.

The main advantage of a blind trust is that it protects your assets from the public eye and creditors. Your financial advisor will explain to you the legal and tax regulations regarding a blind trust, to may sure that you comply with the requirements.

Choosing a lump sum or an annuity

When you win a lottery jackpot, you will have to decide whether to take a lump sum payout or have your winnings paid to you over time. There are pros and cons to each option, such as:

Annuity pros:

  • An annuity protects you from spending all your money too quickly.
  • The investment returns and costs of the annuity will grow over time.
  • You will have a consistent stream of income for the next three decades.

Annuity cons:

  • Annuities are typically inflexible and can be difficult to change.
  • Annuity payments may limit your ability to make investments that would accrue you more money.
  • Over the next thirty years, you may have unexpected financial crises, or your life circumstances may change drastically, and your annuity payment may not be enough to handle such an emergency.

Cash option pros:

  • If you invest wisely at the outset, you may be able to make your money grow considerably.
  • Depending on the tax rate when you win, you could potentially get a better tax break by accepting the cash option.
  • A lump sum payment can be advantageous for your beneficiaries when you are planning your estate, particularly if they are older.

Cash option cons:

  • If you don't practice caution and self-control, you can end up broke in a few years.
  • Accepting a lump sum may make you feel added pressure about sharing your winnings with others.

Tax issues will also play a deciding factor in which option you choose. For example, the tax owed on the lump-sum cash option will be calculated at the time of your win. Once that amount is paid, the remaining money is yours to spend and invest as you choose. Your financial advisor will be able to explain all these issues to you so that you can make an informed choice about which option is right for you.

Other ways a financial advisor can help

Financial professionals have the knowledge and experience to also help you with:

  • Paying your taxes and debts: Once you have claimed your lottery winnings, the most sensible thing to do is pay taxes and clear all your debts. That way, you know exactly how much money you have left to enjoy and invest.
  • Long-term financial planning: It's a good idea, once you've paid your debts, to look ahead and see how you can benefit most from your winnings over time. You may want to buy a new house and car and go on a dream vacation for now, but you also need a plan for down the road. Your financial advisor will explain your options, such as paying yourself an annuity if you have opted for the lump-sum payment option.
  • Handling requests for money: The more people who know you have won a lottery jackpot, the more requests for money you are likely to receive. They may be from your friends and family, charities, or even people who claim to know or be related to you. Your financial advisor can protect you by investigating any financial requests that you receive.
  • Estate planning: This involves making an advance plan for what will happen to your belongings and assets after you die. With the help of your financial advisor, you will be able to draw up a legal document that allows you to bequeath your money and assets to those who are dear to you.
  • Setting up an investment portfolio: A financial advisor can create a customized long-term financial plan that will meet your expectations and comfort with risk.
  • Organizing charitable donations: If you wish to support a philanthropic cause, your financial advisor can help you develop a charitable donation strategy, ensure that you maximize your donations in line with taxation, and incorporate your philanthropy into your large financial planning.
  • Advising you on liability insurance: Now you are a millionaire, you are a larger target for liability lawsuits. If you don't protect yourself, your lottery winnings can quickly become depleted if you have to defend yourself against a liability claim for bodily injury or property damage.

One of the most important factors for lottery winners is ensuring that you don't blow through your money but instead convert it into lasting wealth. A financial advisor can explain your options and help you strategize and manage your new wealth so that you can make the most of its potential and establish long-term security for yourself and your family.

How to choose the right kind of financial advisor

Choosing the right kind of financial advisor is crucial because you need someone who understands sudden wealth and its implications and is dedicated to serving your best interests. Robert recommends always choosing a fiduciary financial advisor. A fiduciary is more than just a typical financial advisor.

A financial advisor is, as the name suggests, a person who provides financial advice. There is a wide range of financial advisors, some of whom offer specialized services. The most common type is a Certified Financial Planner (CFP). This type of financial advisor is not held to an accountability standard. This means that they can recommend investments or services to you that help them earn a commission, even if they're more expensive for you.

A fiduciary financial advisor, on the other hand, is held accountable for fiduciary duty. This means that they have pledged to only make recommendations that are to your financial advantage. They cannot recommend investments that will benefit them.

Robert adds:

A fiduciary financial advisor has to provide advice that is in your best interest. I'm not sure why anyone would ever choose a financial advisor who isn't a fiduciary.

Important questions to ask before hiring a financial advisor

Asking these questions can help you get a feeling for the financial advisor that can benefit you the most:

  • Are you a fiduciary?
  • How do you approach financial planning?
  • What type of services do you offer?
  • Do you have experience working with lottery winners?
  • What information do I need to give you to develop my financial plan?
  • Will you collaborate with the rest of my advisory team, such as my attorney or tax accountant?

By all means, enjoy the excitement of your lottery win, but don't rush into making any decisions. Take some time to shop around for the best advisors and compare their services and fees. This way, you can be sure that you have the best opportunity to transform your lottery winnings into lasting wealth.

Enjoy your wealth wisely!

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