How Does a Blind Trust Work for Lottery Winners?

By Laura Payet

How Does a Blind Trust Work for Lottery Winners?

By Laura Payet

For most people, winning the lottery is a dream that will never come true. For those lucky few who do win, however, the dream can become a nightmare of scam artists, grasping relatives and friends, and uncontrolled spending that leaves them worse off than before. If you've won big, there is a way to avoid this fate. By committing your winnings to a blind trust, you can sidestep the temptation to go on a spending spree, remain anonymous, and enjoy your winnings for years to come.

Person filling out a lottery ticket

Creating a Blind Trust

A blind trust is a kind of irrevocable living trust. A typical living trust holds the trust creator's assets for their benefit during their lifetime to be managed by a designated trustee, who can also be the trust's creator. After the creator passes away, a successor trustee distributes the remaining trust property to beneficiaries designated at the trust's creation. This type of living trust is revocable, meaning the creator can change its terms or even revoke it entirely at any time. Many people create a living trust as part of their estate plan.

A blind trust for lottery winners differs from a typical living trust in two significant ways. First, a blind trust is irrevocable—the creator cannot change its terms or revoke it. Second, the creator cannot serve as the trustee of a blind trust. With a blind trust, the trustee makes all the trust's asset management decisions and the creator does not know what property the trust holds or what investments the trustee makes.

To create a blind trust, start by drafting a trust instrument, sometimes also called a trust deed, according to your state's laws. The trust instrument lays out all the trust's terms, including naming the trustee, establishing a payment schedule, and naming beneficiaries to receive any remaining trust assets after you pass away. Because the trustee has complete authority over asset management, it's a good idea to name an investment firm, trust company, or an attorney to act as trustee. Donate your winning lottery ticket to the trust, and the trustee can then collect your prize in the trust's name and invest it. You can still choose to accept the funds in a lump sum or installments, but they will be paid to the trust instead of to you as an individual.

Advantages of a Blind Trust

A blind trust offers several advantages over opting to simply take the money and run. First, because the trustee collects the winnings on the trust's behalf, you can remain anonymous, even in those states that do not allow lottery winners to keep their identities confidential. Next, having the money in a trust allows you to preserve and grow it over time, as you can establish a schedule for payouts when you create the trust and the trustee can invest the funds for your benefit. That way, you can avoid spending too much at one time and you can honestly tell any long-lost relatives who turn up that you just don't have access to the cash.

An irrevocable blind trust is also the best way to maintain fairness and harmony among multiple winners. For example, if you purchased your winning ticket with a group of office mates, as long as everyone is in agreement, you can set up a blind trust with all the winners as beneficiaries. The trust instrument should set out the terms regarding payouts, with the trustee having ultimate authority to resolve any disputes that may arise. The trust instrument can also provide for what should happen in the event of a beneficiary's death.

One thing a blind trust cannot do is exempt your winnings from taxes. The Internal Revenue Service requires withholding of 25 percent from a lump sum payout, and only a few states don't tax lottery winnings.

Winning the lottery is a blessing but one that comes with pitfalls aplenty. Before you cash in your winnings or set up a trust, you'd be well advised to consult an attorney, a financial planner, and a tax professional to avoid missteps and keep yourself on the path to success.

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