About 1,500 people become new millionaires every single year, thanks to a winning lottery ticket. So, what happens when you win the lottery? Winning a large jackpot is a life-changing event for most people. If your lucky numbers have been picked, and you do not know what to do if you win the lottery, keep reading.

What to Do if You Win the Lottery: Payout Choices

When a person wins the lottery, there are two choices on how to receive the payout in most states: A lump sum payout, or receiving fixed annual payments from an annuity account.

In a lump sum payout, the lottery winner takes all the money in a single payment, minus the state or federal taxes owed. Federal and state taxes tend to take a steep bite — up to 40 percent depending on the state you live in — off the top before the winner receives the rest of the money. If a person were to win a $100 million Powerball jackpot, for example, they would receive about $60 million in a lump sum after approximately $40 million is taken off the top to pay the state and federal income taxes on the money.

If that same winner chooses to receive the money in the form of annuity payments, they could receive more than $100 million over time. These types of annuities are sometimes referred to as “lottery annuities.” An annuity is a type of financial account which pays out a fixed amount on either a monthly, quarterly, or yearly basis. When you win the lottery and choose the annuity option for the payout, you receive a fixed amount each year over a roughly 30-year period.

Every state and every lottery company has slight variations on how payout options are handled with lottery annuities depending on the game played. Some will pay the winnings directly from the State Lottery Commission and others will purchase a private annuity from one of the leading insurance carriers. Here’s one thing to keep in mind, however: Prize annuities are fixed immediate annuities. Under the terms of a fixed immediate annuity, your payments are guaranteed to not go up or down; you will receive exactly what the contract stipulates. Here are two examples of how the largest lottery companies handle the payouts:

Powerball: If a person wins a Powerball jackpot, they can take a lump sum payment, or receive 30 annuity payments spread over a 29-year period.

Mega Millions: Winning a Mega Millions jackpot, a person can take the lump sum, or receive 29 annual payouts in which the annual amount increases by five percent each year.

The choice over whether to take a lump sum payment or to opt for an annuity is up to the individual. But here is one key difference: Funds held in annuity accrue interest. Because of this, the choice to receive guaranteed annual payments from an annuity to receive the winnings will always pay more money in the long run. It also eliminates the temptation for a winner to extravagantly over-spend on a lump sum of winnings, which frequently results in bankruptcy

Lottery Annuities & Beneficiaries

What happens when you win the lottery, and then you die before all the money is paid out? There’s actually an urban legend about this exact question, which goes like this:

A person wins the lottery and then chooses to receive the winnings in the form of annuity payments. Unfortunately, they pass away a year or two later. In that scenario, the government then keeps the remainder of the winnings.

This is simply not true!

You are allowed to name a beneficiary in your annuity contract, such as a spouse, who will receive the remainder of any unpaid payments at the time of your death. Another potential option is to have the remainder of the money paid as a lump sum to your estate, so that it can be disbursed to your heirs according to your wishes after any applicable federal and state taxes are paid. This is why it is incredibly important to get your will written and filed in the event that you do win the lottery. Regardless, there is almost no scenario in which the government will take the remainder of your winnings, no matter what state you live in.

Choosing a Lump Sum vs. Annuity Payments

Depending on which lottery contest a person wins, they can have between 60 days and a full year to cash in their winning ticket. This gives a bit of time for a winner to make certain financial decisions, including whether to take a lump sum payment or opt for lottery annuity payments. The decision is up to each individual. We can’t recommend which choice is right for you. All we can do is note as a factual matter that the vast majority (more than 95 percent) of all lottery winners make the choice to go with annuity payments.

There are two main advantages with choosing a lottery annuity. First, it reduces the risk of blowing through the winnings in a short period of time. Most people on working class or middle-class salaries are not accustomed to managing a staggering amount of money that can result from winning the lottery. It’s a sad fact that due to this lack of experience, new winners tend to make extravagant purchases and live lavishly for a few years, only to end up filing for bankruptcy. Opting for annuity payments guarantees a fixed income for up to three decades.

Secondly, receiving annuity options keeps a person in a lower tax bracket than if they were to receive a large lump sum, thus allowing the remaining funds to earn interest over time. Lottery winnings that remain in an annuity account can earn a sizable amount of interest over three decades, resulting in more money in the winner’s pocket over time.

You Can Sell Future Annuity Payments

Many lottery winners choose to receive your lottery winnings in an annuity but as time passes their situation changes and they need access to a lump sum of cash. As of this writing, 28 states allow lottery winners to sell future winnings to structured settlement companies like Peachtree Financial. There can be any number of reasons why this might be advantageous to you. Selling future payments allows you to receive one or more future annuity payments from your lottery winnings to receive a lump sum of cash right now. Here are some of the most common reasons why people choose to work with Peachtree Financial to sell future lottery annuity payments:

• Buying a new home or new vehicle
• Startup capital for a new business
• A significant investment opportunity arises
• Unforeseen costly medical treatments
• Paying for college for a child
• Paying off debts or student loans

Whatever your reason might be, Peachtree Financial is here to work with you in order to come up with a plan that will help you utilize your future lottery payments to achieve your financial goals.

The Annuity Payment Sale Process

If you decide that selling some or all of your future lottery annuity payments for a lump sum is the best course for you, the process works similarly in most of the states that allow lottery payment sales. Here is how it generally works:

• Contact us at Peachtree Financial Services to discuss your options. Selling future annuity payments might not be the best solution for achieving your financial goals. Our representatives will discuss your situation and goals, so that they can offer you a quote that meets your needs. If you decide that selling future lottery annuity payments is right choice for you, we will move forward from there.
• Peachtree Financial will then write out a contract which will explain the transfer of future payments. You will then be able to review the contract with your attorney before agreeing to sign the contract. If you agree to the terms of the contract, and it is signed, the process is not over.
• A judge will examine the contract and make a ruling on whether the sale of future annuity payments is really in your best financial interests. This is a necessary step in the process, to ensure that no one is taken advantage of if they choose to sell their lottery winnings in exchange for a lump sum.
• If the sale is approved by a court order, we will work to get your funds to you as quickly as possible. Applicable state and federal taxes will be assessed on the lump sum that you receive from the sale of annuity payments.

The procedure may vary slightly based on which state you live in, but our experts representatives at Peachtree Financial are dedicated to following the laws of each individual state. We will work to get your lump sum from the sale of future lottery annuities to you as quickly as possible. We are currently able to assist lottery winners with this process in 25 of the 28 states that allow the sale of future lottery payments. (For the full list of states, see our FAQ page on lottery winnings.) It generally takes about 60 days from start to finish completing the process of purchasing some or all of your future winnings for a lump sum.

It’s also important to note that Peachtree Financial does not charge any fees, hidden fees or closing costs in the process of purchasing future lottery annuity payments from our customers. This is not like a real estate transaction where the final cost of a purchase can sometimes be murky. You will know exactly what the sale of your annuity payments will get you in the form of a lump sum. We pay all the costs associated with the transaction, other than your attorney fees.

All transactions are at Peachtree’s sole discretion and are subject to court approval and other underwriting requirements. Peachtree does not provide legal, tax, or financial advice. Please consult with appropriate independent professionals for such advice.