Lottery Winnings, Help Please.

[anonmous]

I have posted for budget help before, so if you can figure out who I am, please don't 'out' me. And I am not trying to brag or be rude. DH and I have literally been living paycheck to paycheck, frequently with help from his parents or mine to even make our monthly bills, so we really just have NO idea where to start.

I have a lottery ticket that won $1M. I know, SHOCKED. Obviously not quit our jobs type of money, but can definitely make us more comfortable. We have no state tax, so I only have to consider the 25% federal tax.

Which means we will be getting a check for $750,000. Our plans are as follows:
$100,000 each to my parents and his (a combination of gift/repaying loans bc we've been having a REALLY hard time and they've been helping to support us)
$135,000 to debt payoff ($125k of this is student loan debt ranging in interest rates of just about 2.5% to almost 8%; the remaining is CC/Consumer debt)
$5,000 Start a 529 account for our child (not sure how to go about this/if there is a max. contribution bc we've never had the money to do it)
$10,000 Open/max out Roths for each of us (we are in our early-mid 30s with no retirement savings)
Those are our only "MUSTS"

Now come the questions!
We are left with $400,000. Both of our vehicles will need replacing in the next 3-4 years (sooner if we are decide to TTC). We have NO e-fund right now (I know, I know.....but we've both been under or unemployed for 2 years.
We want to invest as much as possible for retirement. DH suggested just putting everything into an agressive portfolio and if we need the money (ie, to get a car) we can pull out what we need to use?
Should we split the money into separate accounts (E-Fund, Car Fund, Baby Fund, etc?)
We were both recently hired and will be starting positions in the new year. Its not stellar money, but once we pay off all that debt, our expenses will go down by approximately $1350.
Is it smart to TTC? It would obviously add to our daycare cost (in this area, probably $1000 or $1200 a month)
Do winnings like that count as income that precludes you from contributing to a Roth? At what level is interest income taxed at? What if it is automatically reinvested?
We haven't done anything yet bc we aren't sure of the tax ramifications (our under/unemployment for 2012 means we owe no taxes this year).

I know, we have to speak to a money manager and/or banker. Any advice or wisdom you could give me is appreciated.

[shortstax]

I would talk to a trusted financial advisor. stat.

I'm not sure I would pay off the loans at the 2.5% interest rate. That's ridiculously low, so i'd hold on to those to free up more money to invest.

Do you own a home? mortgage?

[anonmous]

We don't own. And are not sure where we want to, just that it is not where we currently rent.

Why not pay off the loan at 2.5%? We only owe about $12k on it. I know nothing about the stock market, would we be making more then that if we invest it?

We don't have a financial advisor. How do you find a trust worthy one?

Why would we need a lawyer?

[jennistarr1]

Congrats...yes definitely talk to a finanacial advisor. He/she can even advise how much you can give as gifts before your parents have to pay taxes on it.

If it were me, I would pay off all debts ASAP. Assuming that these bills were part of your monthly expenses anyways, I would put the money that typically would have went to these debts to savings to the savings goals you described. If you have left over winnings, I would invest some and save the rest.

While a million dollars seems like a dream to me, I would try and avoid altering your lifestyle...if you do you'll blow through that money fast and end up in even bad debt trying to continue that lifestyle.

[Kore]

I believe there's a gift tax on monetary gifts more than something like $13-15k per person. You & your H could individually each give &13k to your parents--so $52k total--before the gift tax is applicable. You will have to pay taxes on anything over that.

[Deleted]

25% sounds too low for the tax. I'm thinking it will be closer to 35% if you claim on Monday. If you claim next year, it would be closer to 45% in taxes.

I agree with koosh on not giving $100k each to your parents. You're not in good position to give away that much.

Find a lawyer and a financial advisor.

[dr.girlfriend]

You need professional advice. But, just keep in mind what kept you living hand-to-mouth in the first place, and make sure you don't fall back into that trap. Three-quarters of a million and you've spent half of it in three seconds in your head.

www.statisticbrain.com/lottery-winner-statistics/

[dr.girlfriend]

Dec 29, 2012 21:25:08 GMT -5 Kore said:

I believe there's a gift tax on monetary gifts more than something like $13-15k per person. You & your H could individually each give &13k to your parents--so $52k total--before the gift tax is applicable. You will have to pay taxes on anything over that.

And (I think?) usually stuff like that is per year, so you could do some in 2013, some in 2014, etc.

[Willis Jackson]

Is that how the lottery works? I thought you could get the full amount paid out over many years, or a significantly smaller lump sum.

[kwynn]

Congrats and be careful! What state so we can recommend financial planners/attorneys?

I would not give any money to family right now. It's how so many people get into trouble.

Also, if you win 1mil, isn't that the annuity amount? And the lump sum is even less? And then taxes are more than 25%?

I'd speak to a financial advisor as fast as possible due to tax implications. Just do not make any rash decisions and don't change your lifestyle right now.

[anonmous]

Dec 29, 2012 21:24:50 GMT -5 @gypsy said:

Dec 29, 2012 21:21:43 GMT -5 anonmous said:

We don't own. And are not sure where we want to, just that it is not where we currently rent.

Why not pay off the loan at 2.5%? We only owe about $12k on it. I know nothing about the stock market, would we be making more then that if we invest it?

We don't have a financial advisor. How do you find a trust worthy one?

Why would we need a lawyer?

you said $125k above

I said "$125k of this is student loan debt ranging in interest rates of just about 2.5% to almost 8%"

What would be the cut-off for people paying/not paying back the SLs? We have loans @ 2.5%, 3.5%, 6.5%, 7%, and 8%.

Jenni, Thank you. We have no intent on changing our current lifestyle, with the possible except of TTC #2 sooner. We are not planning on moving or getting new vehicles. We will probably add some fun money from the amount we are no longer using for debt payoff, be we currently allow ourselves $10-20 a month (either an ice cream date or a movie date). However, we completely plan to put over 50% of our post-tax amount into savings.

Kore, Thank you for that information. If they were ever to reclaim their loans, we'd owe my parents around $45k and his around $52k. I guess we'd have to write separate checks for loan repayment v. gift. That would probably be a question for a laywer.

Dori, according to the website of the lottery, it is 25%. That is why I used that number. See about about how much would be repayment vs. a gift to our parents.

[Deleted]

If I won the lottery, first thing I'd do is pay off all debts, including any to family. I am a bit debt averse (maybe just because I have so much of it?) so I don't care what the interest rate is, I'd want it GONE. The more debt I carry the less monthly income I have available, KWIM?

Then I'd put 6 months to a year income in an e-fund. If it is 6 months I'd probably keep it in a regular savings account, if it is more than that maybe invest some of it in something relatively stable and easily accessible.

I think maxing your Roths is a great idea. Can you set aside money to do that a few years in a row?

I can see wanting to give your families some money. Would it be possible to put some into a Roth for them, pay off a house, or do some other financially helpful thing without just handing them cash? Aside from repaying any debts to them, of course.

I don't know what I'd do with the rest. I guess I'd talk to a financial planner about investing it. I'd also set aside some money specifically to replace those cars that you'll need to replace soon. I might not put too much of that into investments unless they are pretty stable, since you'll need that money relatively soon and I would hate to see you lose any of it due to market downturns.

Congrats! I am happy for you and imagine that even though this isn't enough to live off of forever, it is a nice amount to change your life!

[moolarkey]

We have friends that won 13 million from the lottery. Get a financial advisor ASAP, before you even accept the money. Set up a joint revocable trust and put the money in that trust. A joint revocable trust can be revoked at any time that the two of you decide. If it still exists when one of you dies, it goes in to a sole revokable trust IMMEDIATELY upon death, no inheritance taxes, for the survivor. If you have kids by then, the survivor should set it up to be a revokable trust spit among your children upon their death. Also put your house, cars, boats, motorcycles, CDs, savings/checking accounts, investments in to the trust. Do not do anything until you've talked to a financial advisor and no offense to CPA's, I'm not talking about a CPA. I'm talking about a financial advisor. You mentioned you'll have 400k left - you don't have to blow it all at once. Be very wary of family & friends wanting you to pay off debt, buy them cars etc. Set up a substantial emergency fund, invest for retirement. As you have children, set up accounts for their college funds. You don't want to blow thorough it all now and find you need it later.

With so many mega lotteries, 1 million doesn't seem like a whole lot and you can go through it REALLY fast. I inherited 500K and while we have many things to show for it, we've used all of it.

Another reason to save - years ago a guy I worked with won 1 million in the state lottery, first big lottery winner I ever knew. He and his wife moved to Hawaii (darned expensive state to move to) and got in to real estate. Things looked really good for them - self-employed & living in Hawaii. She got cancer, they didn't have good insurance and they used all of their lottery winnings for her treatment. I know they were glad to have that money. My point is - don't blow through it all, you may need some of it for something like this too. I hope not but things to do happen.

[6fsn]

TLC had a "lottery changed my life" marathon today. Pretty much everyone that won a million ended up taking home in the $250k range so you may want to start rethinking your values.

[jenjen]

I would research a financial advisor and a tax lawyer all day tomorrow and try to get an appt on Monday morning. Maybe google to see if there are any ones who have represented lottery winners. The problem is that Monday is the end of the year and 2013 is unknown on the tax horizon. The huge powerball winners claimed their money in 2012 so that the tax implications would be known.

I agree with others, repay your debts to your family and loans. Don't go crazy giving them money right now. That can all wait until next year (gift tax exclusion amount will be $14k each next year). You also should figure out what or where you need to go to claim your winnings. In my state, I believe it's the headquarters in the capital city.

Congrats and good luck!

[Jinx]

Congrats! You've got some excellent advice in this thread, with the rights choices you can really make the most of your winnings.

I think you should set aside a small amount of money ($5,000 to $10,000) to "blow". Take an awesome vacation, buy some new clothes, furniture, jewellry, etc. This will allow you to enjoy some of your winnings while still being responsible with the balance.

[Deleted]

Dec 29, 2012 21:37:28 GMT -5 anonmous said:

Dori, according to the website of the lottery, it is 25%. That is why I used that number. See about about how much would be repayment vs. a gift to our parents.

The lottery only collects a certain percentage which may/may not cover your federal tax liability. With $1M, most of that will be taxed at the highest tax bracket for 2012 which is 35%. This is one reason you may also want to find an accountant or tax lawyer. And if you claim in 2013 and taxes increase, most of that $1M will be taxed at ~40% (or more depending on what Washington decides).

[dr.girlfriend]

Dec 29, 2012 21:34:16 GMT -5 Willis Jackson said:

Is that how the lottery works? I thought you could get the full amount paid out over many years, or a significantly smaller lump sum.

Yeah, I thought the "lump sum" amount was about half of the "over x years" amount which is the "prize value".

[gt7301b]

I would seek the help of professionals. If I was in your shoes I would seek the help of a financial advisor, CPA, and lawyer. I'd ask your friends and family to see if they have any recommendations.

I also would do more research on what rate the money will be taxed at, just because the lottery withholds 25% that doesn't mean that is the rate you will be taxed at when you file your taxes.

I'd also wait to make any big final decisions for six months or so, I wouldn't want to rush into anything that you regret a year or two later.

[vanillacourage]

I cannot fathom expending $750k based on the advice of a message board. Seriously?

Get yourself to a professional. If you can find someone you trust, try to get a plan set up before close of business on the 31st.

[SJ]

You have gotten some very solid advice here. I would just reiterate not to do anything until you have talked to a lawyer. You really need a solid three part team- a lawyer, an accountant, and an investment manager- but I'd start with the lawyer to advise regarding estate situation. There are very good reasons why you probably will want to claim this in 2012 vs. 2013.

As far as your spending plan- I would stick to the annual exclusion gift amounts. You could give each set of parents $56K in 2013 (I would not try to give them money on Monday- it is too soon to be spending the cash). Don't spend a penny until you have talked to the three professionals and have a solid, tax-efficient plan.

If you tell us what state you are in, we can help with referrals as this needs to be done by Monday.

Personally I would pay off consumer/CC debt. I wouldn't worry at all about the student loans under 5% but that is only if you have found a good investment manager with a an you are comfortable with.

[allaboutme]

I know of a good FP in Colorado that I can give you her info if you PM me, we use her and I would highly recommend. Just throwing that out there if you are in CO.

[whiskeytails]

The Feds will probably take closer to 50%, not 25%. If you gift more than $13,000, you will need to file a gift tax return. You won't have to pay taxes on the gift due to the Lifetime Gifting Exclusion.

[whiskeytails]

Also you will pay taxes on the money in 2013 as you are a cash basis taxpayer and you pay when you receive, not earn. I know since I work for a tax research organization.

[Deleted]

I would try to consult someone Monday to find out whether you should take the lump sum or annual payouts because of tax reasons.

I would not plan to spend the money yet. I'd set it in something safe - money market or GIC - and take my time planning the best use of the money between paying off debts, setting up emergency savings, retirement savings and other long term/short term financial goals. There's no reason to plan to spend all of it or designate all of it for spending right away. Take your time with making any decisions - even if it means the money "just" collects interest for 6 months or a year.

[pacificrules]

Congrats!!! That's really exciting. You've gotten good advice on here. I totally agree with what incogneato said. Sloooooow down! You want this money to work with you for your lifetime, so don't do anything quickly.

[moolarkey]

I also watched a bunch of the lottery marathon show that 6 xmentioned and she's right. It seemed like most that took lump sum payout for a milion ended up with about 250k. I was surprised it was that low.

[czarcasm]

Dec 29, 2012 21:29:13 GMT -5 carrotsmakemefat said:

I'd not buy anything big right away. Put some money aside for cars/baby. Beef up the E fund and invest. When one car dies pay with cash.

This. I'd payoff the debt you mentioned, reduce the gift to your parents as previously mentioned, and then sit on the money before making any big decisions while talking to a financial advisor, CPA, and attorney.

Congrats on the windfall!

[ondaflipside]

I have no other suggestions but I just want to say congrats! Great free money and a good way to end 2012!

If you think you'd get a cash out of 75%, make sure you save another 25% for additional taxes, etc. just in case.