1. Winning is a very long shot. Most of us realize that we’re more likely to die in a shark attack than win the lottery. The chances of hitting the Powerball jackpot are about one in 175 million. (You could play Pick 3, which offers odds of one in 1,000 for a perfect match, but you’d have to settle for $500 in prize money.) Still, the fantasy of spending a multimillion-dollar jackpot keeps hope alive.
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2. A tale of two winners. If you are among the lucky winners, your life is guaranteed to get more complicated. “I work more since winning than I ever did before,” says Brad Duke, who won a Powerball jackpot in 2005. His goal is to turn that $125 million lump sum into $2 billion, and, he says, he’s on the way to reaching his goal. But there are many cautionary tales, such as that of Jack Whittaker, who won a $315 million jackpot in 2002. After a series of ill-advised financial moves, he saw his fortune fade and his family fall apart.
3. You are going to be famous. Your state may have you hoist an oversize check over your head at a press conference. That’s great advertising for your state lotto, but it’s terrible for you. You are likely to become a target for scams, requests for handouts from total strangers and nuisance lawsuits. Only five states (Delaware, Kansas, Maryland, North Dakota and Ohio) allow winners to collect their reward in complete anonymity. Other states let you mask your identity by claiming prizes through entities such as a corporation, limited liability company or trust (also helpful for claiming tickets bought with friends or through an office pool). Some states, such as Florida, will release your name, city and winnings whether you like it or not.
4. Assemble your A-team. You’ll have several months to cash in your ticket. So photocopy your ticket stub, put it in a safe-deposit box and start assembling your financial dream team. Your brother-in-law’s tax preparer down the street won’t do the trick this time. You’ll need an investment adviser, estate-planning lawyer, insurance expert, certified public accountant and maybe a certified financial planner or private banker. Look for professionals who have handled more money than you’ve won.
5. Got discipline? You may have a choice between collecting your winnings as a lump sum (minus taxes) or receiving disbursements over 20 years or more. There are pros and cons to each. The lump sum will swell with smart investing and simplify estate planning down the road. On the flip side, the annuity works as a hedge against problems with self-control. “If you go through the entire payout in the first year, you have 19 more chances to get it right,” says Don McNay, author of Life Lessons From the Lottery. But if you die before your payments end, it could trigger complex tax issues; your heirs may need to pay estate taxes on your remaining winnings before receiving the unpaid portion of your disbursements.
6. Don’t play Santa Claus. It’s tempting to hand out wads of cash to whoever asks. But that kind of charity can wreak havoc on relationships and your bank account. Setting up a trust or family foundation can simplify the giving process. Brad Duke started the Duke Family Foundation. “It acts in part as a buffer,” he says. “We have strict guidelines on who we want to work with and how we work with them.” And sometimes cash isn’t the best way to show your benevolence. Your advisers can help you set up donations of tax-smart assets.