Winning the lottery gives a lucky person access to substantial financial resources that can help them achieve their goals in life. But what happens when a lottery winner passes away?
The answer largely depends on the state where the winner lives and how they choose to receive their winnings. Most lotteries allow winners to choose between two different options: a cash lump sum or an annuity.
Whether the winner goes with the annuity or the cash option, lottery winnings can typically be inherited. Since the cash option is paid immediately, any winnings that remain when the winner passes away will be passed to their heirs and beneficiaries along with the rest of their estate.
Choosing the annuity option makes inheritance issues a little more complicated, but in most cases, lottery winners who elect the annuity will be able to pass on their winnings to their heirs.
Can You Inherit a Lottery Annuity?
Yes, in most instances, you can inherit a lottery annuity.
Typically, lotteries allow for the inheritance of annuities in one of two ways. Some lotteries will pay a lump sum to the winner’s estate upon their death, while others will simply continue to make the annuity payments to the named beneficiary.
Lotteries are governed by state laws, so you’ll need to check with the laws in your state to determine the applicable rules about lottery annuity payments.
Is a Mega Millions Annuity Inheritable?
Yes, a Mega Millions annuity is inheritable.
When someone wins a Mega Millions jackpot and elects to take the annuity option, they will receive one immediate payment and 29 subsequent annual payments. Each payment will be 5% bigger than the last.
If the winner passes away before receiving all 30 payments, Mega Millions will continue to make the scheduled annual payments to either the designated beneficiary or the winner’s estate.
How Do I Avoid Inheritance Tax on Lottery Winnings?
In most states, you will not be required to pay inheritance taxes on inherited lottery winnings or any other type of inheritance that you receive. This is because there is no federal inheritance tax and only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose inheritance taxes on the state level.
However, large estates such as those belonging to lottery winners are often subject to federal and state-level estate taxes. Unlike inheritance taxes, which are paid by the person who receives an inheritance after they obtain it, estate taxes are paid by the estate before any assets are distributed to the beneficiaries.
In 2023, the minimum estate size for federal estate taxes to apply is $12.92 million. The District of Columbia and 12 states (Connecticut, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington) also assess estate taxes. The minimum estate size for state estate taxes is typically lower than the federal threshold.
Because inheritance and estate taxes can take a sizeable chunk of a lottery winner’s prize away from their heirs, it is advisable to avoid them altogether. One of the best ways to do this is for a lottery winner to transfer their earnings to a trust.
What Kind of Trust is Best for Lottery Winnings?
An irrevocable trust is typically the best option for lottery winnings.
In general, trusts are either revocable or irrevocable. While a revocable trust allows you to make changes to the trust without having to get anyone else’s permission, it does not provide the same degree of protection that an irrevocable trust does.
Once you transfer your lottery winnings to an irrevocable trust, you cannot change it unless the trustee and all of the beneficiaries also agree to the change. However, it will provide you with protection from creditors, as the assets in the trust will not legally belong to you.
Additionally, an irrevocable trust will allow your winnings to pass to your heirs outside of the probate process when you pass away. Not only will this make the administration of your estate faster, easier, and cheaper for your beneficiaries, but it will also bypass estate and inheritance taxes.
What if Someone Contests My Lottery Inheritance?
If a deceased lottery winner has left you some or all of their winnings and someone is attempting to contest your inheritance, they typically will need to prove that the will or trust leaving you the money is legally invalid in order to succeed. However, it is essential that you discuss your situation with a knowledgeable probate litigation attorney as soon as possible, particularly when a sizeable inheritance is at stake.
Inheritance disputes are much more complex than a typical estate administration case, so you will want to make sure you partner with a lawyer who specializes in litigating these types of cases in court. An estate planning attorney that normally just writes wills and other documents will not be able to adequately defend your interests in a high-stakes inheritance conflict.
Have questions? We’re happy to discuss.
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About RMO Lawyers, LLP
RMO LLP serves clients in Los Angeles, Santa Monica, Orange County, San Diego, Kansas City, Miami, and communities throughout California, Florida, Missouri, Houston, and Kansas. Our founder, Scott E. Rahn has been named “Top 100 – Trust and Estate Litigation” by SuperLawyers, Trusts and Estates Litigator of the Year, and Best Lawyers in America for Litigation – Trusts and Estates. For a free consultation, call (424) 320-9444 or visit: https://rmolawyers.com