If you win big in Friday night’s drawing, you should be prepared to field an onslaught of requests for a piece of the bounty. While it can feel good to share your newfound wealth, doing so also can eat up more of your windfall than anticipated.
“Some people give away too much money to family and friends, and they do it to a point that it damages their own life goals,” said certified financial planner Jim Shagawat, president of Windfall Wealth Advisors in Paramus, New Jersey. “When the gifting starts, it’s difficult to stop.”
For starters, remember that you won’t really have the advertised amount once you pay taxes on your winnings.
The winner gets to choose between taking an immediate lump sum or receiving annual payments over 30 years. Either way, Uncle Sam will shave 25 percent off your check (or checks).
On top that, you face state taxes unless you live in one of a handful of places where lottery wins are tax-free. In states that do take a piece, the range is from a high of 8.82 percent in New York to a low of 2.9 percent in North Dakota, according to lottery site USAMega.com.
Your final tax bill to both your state and the IRS could also be much higher, depending on your individual situation.
Of course, you’ll still be far wealthier than you were before winning. To protect the amount remaining after taxes, you should create a financial plan to ensure the winnings last and allow you to meet your life goals.
Part of that means knowing how to say no.
Appoint a gatekeeper
The more people who know about your newfound wealth, the greater the chance you’ll be approached. This means you should maintain your anonymity if possible, which is easier in some states than others.
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“I tell clients to tell all of their friends and relatives that they can’t make any donations, gifts or investments without running it by me as their advisor,” said Jason Kurland, a partner at Rivkin Radler, a law firm in Uniondale, New York.
The big no-no’s
Shagawat advises clients not to cosign a loan. While your wealth may enable a family member or friend to qualify for, say, a loan on a pricey car, you have to assume you’ll eventually be on the hook for it.
Basically, if the person couldn’t qualify for financing on their own, there’s a good chance they won’t be able to keep up with the payments.
He also recommends saying no to investing in a friend’s business venture, highly pitched investments and any investment that you cannot explain to your spouse.
The important thing is to avoid becoming a lottery winner who unintentionally fritters away their windfall.
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