I have had a number of discussions with clients over the years on what to do if they were to win the lottery. One in particular was quite insistent that I do the math and post the results here. So here they are:
I actually took this client’s file and processed it to see what would happen if they won $7,000,000 in the lottery and followed my instructions.
The first instruction is not to cash in the winning ticket. Especially depending on the time of year. This is because the next step is to open a legal Private Foundation. This will be a legitimate foundation that will be allowed to collect contributions and make distributions based upon its purpose. This process can take some time to file all the necessary forms to complete the incorporation process and get the IRS approval.
Once the foundation is in place you collect the winnings and donate half the proceeds to the foundation. Based upon the $7,000,000 lottery proceeds, there would be a donation of $3,500,000 to the private foundation. Based upon this client The tax liability of the winnings minus the donation would be $1,230,904. Without the donation the tax liability would be $2,446,582. So the foundation has a tax benefit of over $1,200,000.
So you get to keep an additional $1.2 million, but now you have a Private Foundation to run. Or you can have your kids run it and pay them on salaries. You also get to donate the proceeds based upon your plans.
This is just how I would would handle it. There are many other options out there. Just remember the most common is to piss all the proceeds away and be broke within five years. Either way if you win get a professional consultant to help you manage your winnings (like my firm).