Okay, I know three folks have already won this lottery, but it was pretty exciting while it lasted. If you had won, naturally you wouldn’t receive $1.6B. You’d have to split the prize with two other winners and pay federal taxes. (Fortunately for the winners, their states either have no income tax or no taxes on lottery winnings.) You’d also need to accept an annuity stream (rather than a lump sum) to approach the $1.6B mark. So, there are a number of things to consider should you hit the big one in a future lottery.
While your chances of winning a big lottery are very small, your chances of other forms of sudden wealth are much more likely. Inheritance and selling your business are examples of sudden wealth. Any form of sudden wealth requires some special financial considerations. Let’s take a closer look at inheritance to learn a bit more about the financial decisions you’ll need to make.
When you win the lottery, you have to makes some important financial decisions quickly. However, an inheritance often appears while you are grieving for the deceased. That’s why it’s best to have a period of inaction after the death of a loved one. Your judgement may well be temporarily impaired and there’s typically no need to rush out and do anything. After your grief has diminished, there are a few things you’ll need to attend to. Let’s have a look at them.
If you inherit an IRA, you’ll need to decide whether to take a lump sum or an annuity stream in order to satisfy IRS required distributions. An annuity stream allows the principal to grow and also defers the tax bill. For these reasons, many people choose the annuity approach.
Taxation is another area to consider. Many people aren’t completely clear on estate versus inheritance taxes. Estate taxes are the federal taxes and they are paid by the estate’s executor. Inheritance taxes are state taxes and they are paid by the beneficiary. Fortunately, only eight states have an inheritance tax and Colorado is not one of them.
Another important thing to look at is the form of the investments. It’s not uncommon for you to have a different investment approach than the deceased person had. For example, they might have a very conservative profile due to advanced age and you might be younger and benefit from a more aggressive investment approach. Another situation is diversity. You might inherit a handful of stocks or even a single stock and you’ll probably want to invest those funds in a different manner.
If you are planning for an inheritance, you may want to read our earlier blog entitled The Role of a Financial Advisor When a Spouse Dies. Whether your sudden wealth comes from inheritance, hitting the lottery jackpot or something else, it’s wise to have some experienced advice. Guidepost Financial Planning has helped other clients with these types of decisions. Please visit our website or give us a call at 970.419.8212 so that we can discuss your financial goals in a no-charge, no-obligation initial meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.