Someone bought a winning lottery ticket for the $1.05 billion Mega Millions prize. Here’s what happens next.
Here’s what you need to know.
The winning lottery ticket was purchased at a Kroger grocery store in Novi, Michigan. The winner or winners of the Mega Millions lottery prize — who can claim their cash prize within one year — has several decisions to make before they enjoy their newfound wealth, including if they want the $1.05 billion now or later. If you’re the winner, pay attention:
1. Choose between lump-sum and annuity payments
If you’re the Mega Millions winner, you’ve won the third largest lottery prize in U.S. history. You must choose either an upfront, lump-sum cash payment or annuity payments.
Lump-sum cash payment
If you choose the lump-sun payment, you won’t get $1 billion. With the lump-sum payment, you receive $776.6 million in cash (pre-tax) now in a single payment. Why choose the lump-sum payment? “A dollar today is worth more than a dollar tomorrow” goes the financial lesson about the time value of money. The lump-sum payment is preferable if by investing the lump-sum today you think you’ll end up with more than the (after-tax) annuity payments over 30 years.
If you choose the annuity payments, you won’t receive all the money upfront. Rather, you will get the $1.05 billion (pre-tax) over a 30-year period. Why take the annuity payments? If you’re concerned about spending your money too quickly, then choosing the annuity payments may be more prudent. It’s not necessarily the best financial choice, but it may keep you organized and clear of financial loss.
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2. Understand the tax consequences
When you win the lottery, you owe income tax on your lottery winnings. This is true whether you choose the upfront, lump-sum payment or you choose the annuity payments. Here’s the breakdown.
According to the Michigan Department of Treasury, the winner or winners will owe 4.25% tax to the State of Michigan. They will also 24% in federal taxes as well as any local tax, if they reside in a locality with income tax. (Their complete tax liability may be different based on their personal financial situation).
Lump-sum cash payment
Under the lump-sum cash payment, the state will impose $33 million in taxes. That amount is split between the state’s General Purpose Fund ($25 million) and the state’s School Aid Fund ($8 million). The winner or winners will owe $186 million in federal tax.
Under the annuity payments scenario, the state will collect $42.7 million in taxes. The taxes also will be split proportionally between the General Purpose Fund and state’s School Aid Fund. The winner or winners will owe $241 million in federal income tax.
3. Build a team of lawyers and financial advisers
If you win the lottery, it’s not always as simple as cashing your ticket, becoming a millionaire, and sailing off into the sunset. There are multiple legal and financial realities that you must confront. That’s why it’s essential to understand your legal rights, financial options, and wealth management goals. For example, if you are a lottery winner who lives in one of six U.S. states — Delaware, Kansas, Maryland, North Dakota, Ohio and South Carolina — you can choose to remain anonymous. If you decide to remain anonymous, one way to protect your identity is to accept your lottery prize through a legal structure such as a trust. An attorney can help you establish the appropriate legal entity. At a minimum, your team should include a financial, legal and tax adviser to help manage your investments, tax planning, insurance and estate planning, among other important aspects of managing your wealth. While you can rely on your team, remember this: sign your own checks. Only you are in charge of your money.