How to Create a Trust to Claim Lottery Winnings

By Tom Streissguth

Winning the lottery is just the beginning of your financial adventures. To manage that jackpot, and protect your winnings from your many new-found friends and family, a trust may be just the ticket. There are several advantages to a trust, including anonymity, asset control and professional management. There are a few steps necessary, however, before your lottery trust is legally underway.

Winning the lottery is just the beginning of your financial adventures. To manage that jackpot, and protect your winnings from your many new-found friends and family, a trust may be just the ticket. There are several advantages to a trust, including anonymity, asset control and professional management. There are a few steps necessary, however, before your lottery trust is legally underway.

Cashing the Ticket

When your numbers come in, your first task is to sign the ticket and secure it in the safest place available. A lottery ticket is an anonymous "bearer" instrument that can be cashed by anyone who holds it; signing the ticket gives you some protection in case it's lost or stolen. If your state gives out the names of lottery winners (as does New York, for example), you are also well-advised to stay out of the public eye as long as possible, or at least until you've set up a way to protect the money.

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Lawyers and Planners

Each lottery sets a deadline for claiming prizes. Before you cash in, hire advisors. A lawyer practicing in estates and trusts can draw up the paperwork for a lottery trust, in which you appoint a trustee to manage your winnings at your direction. A financial planner will also be helpful, especially when making the decision between taking the jackpot as a lump-sum payment or spreading it out in the form of annuity payments. There are tax and estate-planning consequences to this decision that require professional guidance.

Trust Details

In drawing up a trust, you must appoint a trustee -- the person responsible for managing the assets and making payments as instructed in the document. You can serve as the trustee or have a professional financial manager carry out this task. A trust also has at least one beneficiary, the person (or entity) that receives the money as per instructions. Lottery winners have been known to set up separate trusts for each of their children, or separately for family and charities. This is supposed to keep funds separate and minimize conflict between beneficiaries.

Taxes and Probate

Your lottery trust will distribute money to your beneficiaries as you direct. The trust must take into account the federal gift tax: a limit on the amount of money you can gift to any individual tax free ($14,000 in 2013). There are exceptions in which certain money is not subject to gift taxes, such as gifts to a US-citizen spouse, tuition payments, medical expenses, political organizations and charities. In addition, there is a lifetime gift-tax exclusion of $5.25 million (as of 2013). If your gift to a non-exempt beneficiary exceeds the limit and the exclusion, you will owe taxes on the excess amount. Upon your death, the trust does not have to go through probate, but the assets are subject to estate taxes -- another complex area of tax law that is best handled by a professional adviser.

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How Does a Blind Trust Work for Lottery Winners?

References

Related articles

What Is a Reversible Living Trust?

In order to shelter assets from the probate courts and taxation, many people choose to create a trust. In a trust, a grantor transfers property to the care of a trustee and names a beneficiary who will inherit the property. There are many different kinds of trust, but two main forms affect how a grantor may handle the assets. These are revocable (or reversible) and irrevocable.

What Assets to Put in a Living Trust?

The greatest advantage to establishing a living trust is that it avoids having your assets pass through probate when you die. Another plus exists if your beneficiaries are not especially frugal or haven’t yet reached the age of majority. Your trust can distribute their bequests in installments or when they reach a certain age. Before these things can work in your favor, however, you must fund the trust by transferring your assets into it.

Can an Executor of an Estate Distribute Gifts From a Trust?

An executor is to a trustee what a cat is to a dog -- they’re both animals but different species. Executors and trustees are both fiduciaries, but they’re different kinds of fiduciaries. One works under the direction of the court to settle your probate estate while the other deals with assets you’ve placed in trust. Your executor cannot distribute gifts from your trust unless you named her as both the trustee of your trust and your estate’s administrator.

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