You Just Won the Lottery. Here’s the Very First Thing You Should Do.

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The first thing lottery winners hear is “Congratulations!” The second thing they often hear is “Can I have some money?” What they really should be told is “It’s time to hire a financial advisor.”

After the initial euphoria has faded, the Mega Millions winner should probably look for a financial advisor to help navigate sudden wealth.

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This is a situation someone likely soon will have to face, as the jackpot for the Mega Millions lottery has soared to $1.28 billion, which would be the second-largest payout in the lottery’s history. The next drawing is set for Friday night, which means that someone’s life could change dramatically, very soon.

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The headline jackpot number may be $1.28 billion, but if the winner opts to take the money in a lump-sum cash payout, it drops to a mere estimated $747.2 million before taxes.

After the initial euphoria has faded—maybe after a night of revelry, maybe the next day—the lottery winner should probably look for a financial advisor to help them navigate the many unforeseen contingencies they will face now that they have suddenly reached a stratospheric level of wealth.

“You don’t know what you don’t know,” says Stacy Coffey, senior vice president of wealth strategies at Wealth Enhancement Group, a large registered investment advisor based in Minneapolis with offices around the country. “We have to talk about what this money really means. I’m assuming in 99.9% of cases, a $600 million check will be life-changing.”

Investment advisors are always quick to tout the benefits of working with a financial professional—they believe in what they do, after all. But in a case like a lottery winner or some other recipient of sudden wealth, it’s hard to argue against the wisdom of seeking the services of a reputable fiduciary advisor—one who is legally required to work in their clients’ best interest.

“Not even as a financial planner, even as a lay person, I would think, ‘Oh my goodness if you come into a lot of money having a professional who is a fiduciary on the same side of the table as you would be essential, ‘” says Evelyn Zohlen, president of Inspired Financial, an RIA in Huntington Beach, Calif.

For advisors, even those who’ve never worked directly with a lottery winner, it’s a familiar scenario. Advisors frequently work with clients who come into a sudden windfall of money, maybe through an inheritance, selling a business, or some other major financial event.

“The lottery isn’t as common, as you can imagine, but windfalls are pretty regular,” says Ryan Viktorin, vice president and financial consultant at Fidelity Investments in Framingham, Mass. “In the case of the lottery winner, after taking a breath and slowing down for a minute after that happens, the first thing you should do is assemble a team that is going to construct a full financial plan.”

The playbook is the same. Advisors say they would move quickly to gather specialized professionals for the newly wealthy client—an accountant to help with the tax issues, an attorney to handle estate planning.

Taxes loom large in this kind of situation. And, in the event the winner takes the lump-sum payout, that bill is going to come due for the current tax year, which puts a little more urgency behind tax-mitigation strategies than longer-term spending plans. “Whoever gets this big lottery may or may not be aware of the tax bill that’s going to come along,” says Zohlen.

As an alternative to the $747.2 million lump-sum payment, lottery winners have the option of taking annuitized payments over 29 years of the entire $1.28 billion jackpot. Most winners opt for the lump sum, which some advisors see as a smart move, thinking that they can put that money to work for the clients with investments right away. On the other hand, there is an argument for taking the larger prize as an annuity, especially if the winner is relatively young.

Charitable contributions can help offset the winner’s tax liabilities, but scrambling to find an array of worthy causes before the tax deadline can be daunting. Instead, advisors suggest parking the money the winner wants to set aside for charitable giving in a structure that will allow them to bank the tax deduction while postponing the detailed decision making about giving to specific causes.

“If you have any charitable intent, the year they win that lottery they can make a sizable donation to a donor-advised fund,” says Zohlen. “You don’t have to make a decision about who the actual recipients will be until you want to.”

A lottery winner could accomplish the same end by setting up a private foundation, though that’s a much more drawn-out process than giving to a donor-advised fund, which is an established vehicle managed by a sponsoring organization that holds the assets and disburses them over time at the direction of the donor.

Tax mitigation is only the beginning of the financial plan a lottery winner should develop. The core of the financial plan—a client’s goals, time horizons, cash flow management—isn’t fundamentally different for the ultrawealthy as it is for typical clients. Viktorin starts with a who/what/when format: who were the people in your life (before winning the lottery) that mattered; what do you hope to accomplish, and when.

An overnight windfall of hundreds of millions of dollars obliterates some of the normal concerns of a financial plan (such as saving enough money for retirement), but some…

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Credit: www.barrons.com /

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