If you hit the jackpot and win a lottery prize of several hundred thousand dollars or more, you’ll want to take steps to protect your newfound wealth and manage it effectively. A revocable trust is one option to consider. Creating a revocable trust can be done quickly and is probably among the first things you want to do, along with consulting a tax attorney and financial adviser. To make sure all the intricacies of your living trust are legally sound and address the specific niche of lottery winnings, look for an attorney who specializes in drafting revocable trusts such as an estate attorney.
Creating a revocable trust for your lottery winnings is strongly recommended. You can create a revocable trust and name the beneficiaries of your trust with the assistance of an attorney.
Creating a Revocable Trust
Trusts are legal arrangements created for the purpose of owning and administering assets on behalf of a beneficiary. As the trust’s creator, you become the grantor. You can name yourself as trustee so that you retain full control of assets in the trust. You can even name yourself and your spouse as the primary beneficiaries and designate successor beneficiaries to inherit the trust when you pass away. It’s legal to create a revocable “living” trust on your own, but when large sums are involved, such as a multi-million-dollar lottery prize, it’s usually safer to retain a lawyer with experience in estate and tax law.
Although your attorney creates the actual trust document, which defines all the parameters of your trust, you'll make the decisions of who you'll appoint as the trustee, successor trustee and beneficiaries. Your attorney will also walk you through how to establish an account for your newly created trust.
Act First, Claim Later
You might consider setting up a revocable trust before you claim your lottery winnings. One benefit of this strategy is that it can help you preserve your privacy. If you create the trust and put the ticket in it, you can claim the jackpot in the name of the trust. The trust can be given a name that obscures your identity. The trust's name, not yours, will appear in any public record or announcement of lottery winners.
You might even open an account in the name of the trust at a financial institution before claiming the prize. The account will then be ready to receive the money as soon as you collect it. Keep in mind, however, that state rules for lottery winnings can vary, so check with an attorney before acting to make sure this will work and is permissible where you live.
Advantages of Revocable Trusts
When your lawyer draws up the trust document, you name the trustee and beneficiaries. Because this is a revocable trust, you can change the terms of the trust later, including the people named. In addition to helping to shield your privacy, the trust simplifies estate planning because trust assets pass directly to the named beneficiaries.
No review by a probate court is required. If you name your spouse as beneficiary, the trust can help reduce estate taxes. However, a revocable trust will not reduce income taxes on your lottery winnings.
Options and Alternatives
The flexibility of a revocable trust means you can add other assets such as stocks, bonds and real estate in addition to the lottery money. It may turn out that you need to make other arrangements for your jackpot after you claim it. For example, you might wish to fund a life insurance trust or shift funds to an irrevocable trust to protect heirs from creditors.
Other options include setting up a limited liability company or a family limited trust. If you start with a revocable trust, you will still be able to exercise any of these options after you claim the lottery money.