How can I insure a $50 million lottery win FDIC insurance deposits with a bank only insures up to $100,000 per account holder Will any bank accept a $50 million dollar CD and insure that money The first thing I'll suggest is that with $50 million you can afford to pay for advice from a financial service professional It's just that you'll need more help than you're going to get in this column , or FDIC, insurance on $20 million of the $50 million is to use CDARS, the Certificate of Deposit Account Registry Service You deal with one bank and CDARS works with that bank to ensure that all of your deposit is FDIC-insured I've written about CDARS before and suggest that you read that column and also check out the CDARS Web site Treasury securities are considered risk-free investments when held to maturity You do face some price fluctuations day to day with changes in market interest rates, but the government guarantees the face value of the security at maturity You can own these securities in a brokerage account or in a Treasury Direct account The brokerage firm in most cases will be a member of the Securities Investor Protection Corp The SIPC is much different from the FDIC, but it does provide a measure of protection from fraudulent brokerage firms " SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons The SIPC doesn't guarantee that your investments won't lose value, it just steps in to protect you from theft of your securities or the failure of a brokerage firm Investments held as cash are protected only up to $100,000 If it were my millions, I wouldn't hesitate to invest in U Treasury securities in an account with a national firm, many of the large regional firms, a brokerage account with one of the large mutual fund companies or Treasury Direct Finding a home for this money while you're deciding how to invest is one thing Treasuries will protect your principal, but you can do a lot better without taking on a lot of risk, and you're probably going to want to expand your approved list of investments Municipal securities, for example, can provide tax-exempt income, but alternate minimum tax considerations means you'd want to consult with a tax professional about investing in municipal securities Try to get the big picture about what life goals you want to achieve with this money and what you'd like to accomplish with the remainder of the money after you're gone I'd actually focus on the life goals aspect before getting too deep into the how-to-invest-it part To that end, the Treasuries and CDs are fine for the short-term I wish I had someone to recommend for you on the life-goal side, but I started out telling you that you'd need more advice that I could give you in this column A life coach seems like a reasonable place to start Just don't listen to any advice about investing in a life-coach franchise Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money DonAsk a question  RESOURCES Find out when CD rates hit your target Hey, you Unlucky lotto winners who lost the money  TOP INVESTING STORIES Fame & Fortune: Jennifer Love Hewitt12 investment mistakes couples makeInvesting: To risk or not Which is better -- a rebate or special dealer financing Develop a savings plan Every kind of CD explained Treasury bonds and more Pros and cons of annuities All about IRAs GUIDES Real Estate Guide What will $400K buy This new statute overrides the constructive receipt doctrine and permits lottery winners to consult with their family, attorneys, accountants, and financial planners after winning the lottery in order to determine which payment option is most consonant with their goals and objectives The tax and financial considerations associated with a Section 451(h) election are discussed under "Planning," below The new law, which is effective for individuals winning the lottery after 10/21/98, creates a "qualified prize option" and a "qualified prize "6 A "qualified prize" is "any prize or award which (i) is awarded as a part of a contest, lottery, jackpot, game, or other similar arrangement, (ii) does not relate to any past services performed by the recipient and does not require the recipient to perform any substantial future service, and (iii) is payable over a period of at least 10 years " A "qualified prize option" is an "option which (i) entitles an individual to receive a single cash payment in lieu of receiving a qualified prize (or remaining portion thereof), and (ii) is exercisable not later than 60 days after such individual becomes entitled to the qualified prize " Section 451(h)(1) provides that, for a cash-method taxpayer, a "qualified prize option shall be disregarded in determining the taxable year for which any portion of the qualified prize is properly includible in gross income of the taxpayer " Section 451(h)(3) also instructs Treasury to issue Regulations for the application of the new rules to partnerships or other pass-through entities consisting entirely of cash-method individuals A significant transition rule gives previous lottery winners a one-time option to receive a lump-sum cash payment 105-277 provides that, for an 18-month period commencing on 7/1/99 and continuing to 12/31/00, previous lottery prize winners receiving payment in the form of an annuity may elect a lump-sum distribution equal to the present value of the remaining annuity payments Nevertheless, it is anticipated that most lotteries will begin offering the qualified prize option to prospective lottery contestants and prior lottery winners on 7/1/99 Unfortunately, Section 451(h) creates a class of prize winners who are not afforded its benefits Under the statute, there are three classes of prize winners:Prize winners prior to 10/22/98 ("pre-effective date winners") Prize winners after 10/21/98 and before 7/1/99, the date on which it is anticipated that most lotteries will begin to offer a qualified prize option ("interim winners") Prize winners after 6/30/99 ("qualified prize option winners") Thus, as of 7/1/99, the pre-effective date winners can make the one-time "18-month election" to receive a lump sum Similarly, all qualified prize option winners will be given 60 days to choose between a lump sum or annuity prize But the interim winners are not permitted to make the 18-month election because their lottery prize was won after the effective date of Section 451(h); similarly, they are not permitted to make a 60-day election because the local lottery rules have not been changed to provide for a qualified prize option The omission of the interim winners was most likely unintentional While legislation may be needed to cure the defect, it may be possible for the IRS to rule that it will not apply the constructive receipt doctrine to interim winners who are given an 18-month election to choose between a lump sum or an annuity First, many lotteries already offered a choice between a lump sum or an annuity In order to avoid the constructive receipt doctrine, the lottery contestant had to irrevocably elect the form of the prize prior to purchasing the ticket Regulations should clarify that pre-effective date winners and interim winners who chose to receive their prize as an annuity may nevertheless make the 18-month election to receive a lump-sum payment of the unpaid lottery prize Second, Section 451(h)(2)(b)(iii) requires that the lottery prize in the form of an annuity be payable over at least ten years Regulations should clarify, with respect to pre-effective date winners, that the annuity must be initially payable over ten years, as opposed to having at least ten years remaining on the annuity Example: On 3/15/87, Harold won a lottery prize payable in 20 annual installments On 7/1/99, the lottery board gives prior lottery winners a one-time 18-month election to receive a lump-sum payment Since Harold received 13 annual installments from 3/15/87 to 3/15/99, there are only seven remaining payments with respect to his annuity prize Regulations should clarify whether Harold is entitled to make the 18-month election Arguably, he should be, because his prize was initially payable over 20 years Other Constructive Receipt IssuesThe constructive receipt doctrine has been applied in other contexts with respect to lottery prize winners In Paul, TCM 1992-582, the taxpayer won the New Jersey lottery on 12/29/87 but did not receive payment until 1/22/88 The Tax Court held that winnings were includable in income in 1988, the year in which the payment was actually received In arriving at its decision, the court rejected the Service's argument that the taxpayer could have driven 68 miles to Trenton in the last two days of the year to demand payment "on the spot " The court considered such a requirement a "substantial limitation," thereby negating the application of the constructive receipt doctrine The treatment of the constructive receipt doctrine in Paul raises an issue with respect to lottery winners after the enactment of Section 451(h) If a lottery contestant wins on December 15th and is given 60 days to choose between a lump sum or an annuity, the contestant may argue that she is not required to include any portion of the lottery prize, whether a lump-sum distribution or an annuity installment payment, until the date on which she makes an election, possibly in January or February of the following year The IRS presumably would argue that the lottery contestant is given an election that may be exercised immediately, and therefore the existence of the election does not create a substantial limitation on the lottery winner's control or receipt of the lottery prize, in whatever form Economic Benefit DoctrineThe economic benefit doctrine is a related but separate income tax accounting concept that also should be considered This doctrine provides that income is taxable under Section 61 even though it is not actually or constructively received in the form of cash Unlike the constructive receipt doctrine, it is not necessary that the taxpayer's interest in the property be assignable or for the taxpayer to be entitled to immediate possession; rather, it is only necessary that there be an identifiable property interest over which the taxpayer's rights have vested The Tax Court held that the winnings were taxable to the minor in the year they were deposited into the account for his benefit, not in the year of actual receipt Fortunately, certain restrictions in the lottery statute or rules avoid the application of the economic benefit doctrine Moreover, lottery rules typically provide that the winner has only an inchoate, contractual right to receive annuity payments from the lottery Withholding on Lottery WinningsSection 3402(q)(1) provides that "[e]very person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, making any payment of winnings which are subject to withholding shall deduct and withhold from such payment a tax in an amount equal to 28 percent of such payment "15 Generally, proceeds exceeding $5,000 are subject to withholding Individuals who receive lottery winnings won by someone else or members of a group of winners on the same winning ticket must report their winnings on IRS Form 5754 Many lottery winners, especially large prize winners, are often dismayed to learn that, even after their lottery prize is substantially reduced by income tax withholding, they may be required to pay additional income tax Given the disparity between the 28% federal withholding rate and the 39 Gambling LossesLottery winnings are considered gambling gains " Therefore, gambling losses may not offset other income or be used as an NOL carryback or carryover The gambling loss deduction can be applied two ways:If a taxpayer's gambling activities constitute a trade or business, substantiated gambling losses are deductible in arriving at the taxpayer's adjusted gross income If a taxpayer's gambling activities do not constitute a trade or business, the IRS takes the position that the taxpayer must deduct such losses as itemized deductions A limited federal credit for state death taxes is available Similarly, for lottery winners receiving payments as an annuity, the present value of the unpaid annuity payments is included in the lottery winner's gross estate In addition to the income taxes payable with respect to the lottery prize, Elizabeth's estate is required to pay estate taxes on the lottery prize included in her estate Assuming that the lottery prize is the only asset in Elizabeth's estate, that she made no taxable gifts during her lifetime, and that she is subject to a flat, combined 45% income tax rate, she would be required to pay income taxes of $4 After receiving the first five payments, Ann died on 11/1/98 Under Sections 2031, 2039, and 7520, Ann's estate is required to include the present value of the remaining 15 annuity payments, calculated to be $10,104,600 " This is an annuity, income, remainder, or reversionary interest that is "subject to any contingency, power, or other restriction, whether the restriction is provided for by the terms of the trust, will, or other governing instrument or is caused by other circumstances " Taxpayers have argued that lottery rules which prohibit or limit the assignability of the remaining annuity payments cause the annuity to be a restricted beneficial interest, thereby permitting a departure from the requirements of Section 7520 In TAM 9616004, the IRS rejected this argument, however, noting that Reg Because there is no restriction on the payment of the lottery prize annuity, the taxpayer is required to use the standard Section 7520 annuity factors , 1998), suggests that, for lottery winners dying between 4/30/89 and 12/13/95, departure from the Section 7520 annuity tables may be warranted In Shackleford, the taxpayer died in 1990 after receiving the first three annuity payments of his lottery prize His estate reported the value of the remaining annuity at $2 The court concluded that a factual issue regarding the value of the annuity was in dispute, and therefore denied the Service's motion for summary judgment The taxpayer and her sister-in-law won a state lottery with a lottery prize payable as an annuity over 20 years The taxpayer's sister-in-law executed an affidavit stating that they regularly pooled their money, that they had a preexisting agreement to share their lottery winnings, and that the winning lottery ticket was purchased on behalf of their preexisting partnership The parties formed a limited partnership in which each was a 2% general partner and a 48% limited partner The limited partnership claimed the winning lottery prize After the first annuity payment was made to the partnership, the taxpayer died; it is significant that, as in Shackleford, the taxpayer died before 12/13/95, the effective date of Reg The taxpayer's estate listed the partnership interests on the estate tax return The partnership interests were valued by first computing the sum of the underlying assets, cash and 19 lottery payments receivable The estate then discounted the payments to present value using a discount rate based on the AAA-rated general obligation bond yield, as opposed to the Section 7520 factors The estate further discounted each payment by 39 Finally, the estate took an additional 20% discount for the partnership interests for lack of control and another 25% for lack of marketability The Service rejected the estate's argument that the Section 7520 factors should not be used and found that the annuity payments were not restricted beneficial interests Based on the same rationale used in TAM 9616004, the IRS found that the nonassignability of the lottery prize did not affect the payment of the annuity In addition, the Service found that the right of the partnership to receive payment of the lottery winnings had not been restricted in any way The IRS concluded that the taxpayer's estate was required to use the standard Section 7520 annuity factors to value the annuity payments and that discounts for lack of marketability and income taxes could not be applied to the valuation of the annuity payments The Service expressed no opinion on entity discounts for lack of marketability and lack of control that were applied to the partnership interests Alternate ValuationOrdinarily, assets subject to the estate tax are valued as of the date of the decedent's death Section 2032(a), however, provides that the executor may elect to value the assets in the gross estate on an "alternate valuation date," typically six months after the date of the decedent's death If the property was distributed, sold, exchanged, or disposed of earlier than that date, it is valued on the date of disposition In TAM 9637006, a lottery winner was entitled to receive 16 additional annuity payments of $112,500 each at the time of his death On the day he died, the Section 7520 interest rate was 8 On the alternate valuation date six months later, the Section 7520 interest rate was 9 The estate valued the decedent's interest in the 16 annuity payments as of the date of death, but used the 9 The IRS ruled that an annuity is an interest that is affected by the mere lapse of time Valuation changes due to interest rate fluctuations, however, are not changes due to the mere lapse of time Changes due to mere lapse of time include changes attributable to the time value of money, the depletion of an asset, or the receipt of a benefit by an estate during the alternate valuation period The IRS concluded that the estate properly valued the interest as of the time of death with the adjustment for the difference in its value as of the alternate valuation date due to the change in the applicable federal rate Liquidity IssuesMany lottery winners and their families are discouraged to learn that, along with the return, estate taxes are due nine months after the date of death The estates of winners who received their prizes as an annuity are often placed in the difficult predicament of not having sufficient cash to pay estate taxes Example: The facts are the same as in the previous example, i , the present value of Ann's remaining lottery annuity is $10,104,600 Assuming that this is the only asset in Ann's estate (and that Ann made no taxable gifts during her lifetime), the estate taxes due will be $5,001,510 Ann's estate will not receive another lottery annuity payment until 10/31/99 Because of the illiquid nature of the annuity, there is simply insufficient cash to pay the estate taxes Click Here For More Information Hyperlink Text
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