What Legal Issues are Involved in Winning the Lottery?

1542 days ago by
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By:  LINDSEY O’NEILL, ESQ

The Georgia couple who just won the $270 Million lottery seem to be the media favorite right now for the nicest couple to ever win the lottery!  With big lottery jackpots like this, many of us wonder just what it would be like to actually win the lottery….  Since this is a legal website, I started wondering about the legal aspects of winning the lottery.  Actually, there are many legal issues lottery winners must address at one point or another.  Know this – if you win the lottery, it is highly recommended you consult with an attorney prior to claiming the winning ticket so that the various legal issues can be addressed and winning the lottery can be a good thing …. and not turn into nightmare.  Some of the legal issues include the following: 

1.  What about privacy and the identity of lottery winners?  Most winners’ names are published in the media, which can translate into a loss of privacy previously enjoyed.  Some argue that the winners’ names should be published so that the public can be assured the state isn’t just keeping the money.  Others argue that the celebrity created by a lottery winning can have negative consequences on lottery winners in terms of unwanted publicity.  Depending on the circumstances, you may be able to protect your privacy by the way in which you choose to recieve the winnings.  For example, there may be legal entities that can be created to in an effort to help mask your identity and save you from a fifteen-minutes-of-fame-gone-wild situation. 

2.  What about taxes on the winnings?  Lottery winnings are considered taxable income.  Whether received as a lump-sum payment or in multiple annual payments, the winnings are taxed as received.  A trust may be a good option to hold the lottery winnings.  Some of the tax advantages of a trust may include avoiding probate of the lottery proceeds upon death of the winner and minimizing taxes on the estate. 

3.  How must lottery winnings be split if the ticket was purchased jointly or by a pool of individuals?  Many times lottery tickets are purchased with pooled funds from friends or colleagues.  Was there verbal agreement to share the winnings with another person?  Can that agreement be enforced under applicable state laws? (Some states prohibit contracts for gambling.)  If multiple individuals own the winning ticket, a partnership may be a good entity to form to receive the winnings on behalf of all of the partners, rather than one individual receiving the checks. 

4.  Must the winner share the winnings with a spouse or a live-in significant other?  Lottery money may be considered a marital property acquired during the marriage, particularly if the ticket was purchased with marital funds, and may be subject to division upon divorce.   Even if the parties are not married, but are significant-others who live together, share living expenses, and have a regular practice of buying lottery tickets each week, there may be a joint-right to the winnings.  Courts typically focus on the facts and circumstances surrounding the particular situation including the intent and understanding of the parties in order to ascertain the legal rights of the individuals. 

5.  Can the winner(s) gift some of the money to family and/or friends?   A lottery winner can make a gift of some of the lottery winnings up to the annual exclusion limit without incurring gift tax liability.  Making annual gifts in this fashion is a good way to share the winnings with family members and friends while mitigating the tax implications.  Gifts made to another person’s education or medical care may have favorable tax treatment as well.  Finally, gifts to charities can have certain attractive tax advantages for the lottery winner.

When a person wins the lottery, the advice and consultation of an experienced estate planning and tax attorney can be a huge advantage when dealing with the various legal and related issues.  Ideally, a lawyer should be consulted prior to claiming the lottery prize so that the appropriate legal mechanisms can be put in place to minimize the hassles that may otherwise be associated with collecting the winnings.   Use the attorney locator service on LawInfo’s home page to find an attorney in your area:   http://www.lawinfo.com/.

For more information see also:  Estate Planning, Asset Protection Attorneys, Taxation, Partnership, Find a Lawyer. 
 

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  • CJ

    That’s really! Especially if your husband supported you during your marriage.

  • Jamie

    Why can’t you claim the money and then set up checking accounts with your name and the name of the person you want to give money to as the second name. Then they will have access to the checking account and not have to pay taxes.

  • rameez

    if i win large sum of money and i have visit visa b1 b2 then can i collect the money or what

  • donald versluis

    i am told i have won a lottery, out of country, they say i need tto pay boarder tax, before i caan collect, scam or not.

  • donald versluis

    i have won a lottery from out of country. they say i owe a boarder tax, scam or not

  • Eric

    Sounds like a scam. Did you even play the lottery there?

  • stunner

    i am 40 years old an i am dissabled. i recieve a ssdi check every month. if i win a big lotto say in the mill. will my ssdi and insurance stop?not that im worried about the check , just the ins. i know buying my own with my condition would make me broke in no time lol. thx for any help.

  • Bren

    If you win the lottery and take the lump sum payment, the government automatically takes there share out immediately, that I understand. But…do you also have to claim the winning amount won on your tax return for that year and pay additional taxes on it?

  • MICHAEL MCCOLLUM

    IS THIS ALL COOL THAT IF I PAY TO PLAY AND WIN ANYTHING CAN I HAVE MY WINNINGS WIRED TO ME HERE IN THE US ? WHAT IS THE BEST WAY FOR ME TO COLLECT IT FROM ANOTHER COUNTRY / INTERNATIONAL LOTTERY , IS IT LEGAL ? i DONT SEE WHY NOT , IT IS PLAYED ALL OVER THE WORLD ? THANKS !

  • Ivan Gutierrez

    I am a U.S. citizen staying in a foreign country in South east Asia. If I win the lottery here, what should I do?

    I am a tourist and do not have a work permit or “second home” so I cannot open a bank account. I would have to somehow transfer the monies into my U.S. bank, but do I owe the IRS a piece of that because I am making an international transfer of lottery winnings?

    Do I owe the IRS, being a U.S. citizen, if I win the lottery in Southeast Asia?

    Thank you very much!

  • Jean Shonay

    A social security number is not required to claim the lottery. You do not have to be a resident of the United States to win the lottery. The IRS has ITIN numbers that is used by foreigners to pay income taxes. You complete a Form W-7 to obtain the tax identification number to pay the taxes.

  • Vinocent

    For example, Texas does not have state taxes on lottery winnings! Only the Fed takes taxes! And if one feels he/she doesnt wanna be taxed, let them play in states that are tax free! And I agree with you, I mean, why complain and it cost you as little as a dolar to get your millions! Come on!

  • Keenan Burgess

    No they only take out what you owe if you’re behind on your payments…

  • Frank

    If someone receives a large prize and pays tax on it, and then wants to give large payments to family, those payments will be (gift) taxed again, double taxing those payments. How come that does not receive more press?

  • myron golden

    i have a few question’s
    1. if u are disabled an draw a check an win the lottery can they cut your check off an your medical benefit’s to.
    2.say i won 45 million after taxes if i wanted to give my brother 1mill i heard it would cost me 700 hunderd thousand in taxes is this correct? an if so could i just loan it to him? without worring about pay back.
    3. how much are u allowed to win without paying taxes?

  • jerry

    Can a felon in idaho play and collect lottery winnings if no longer on parole.

  • woody3691

    most winners don’t realize that in order to make the winnings last they need to put themselves on a budget. If you chose lump sum and taxes are already paid, living on 2 or 3% of the winnings would be enough to keep you living well for the rest of your life. If gifts and expenses and business ventures were to come out of the interest instead of the principal, no winner would ever go broke.

  • woody3691

    You’re right. winning a large jackpot is like painting a big target on your back. It’s advertising to every crook and moocher where they can find easy pickings. However, knowing this an individual can do some fairly unsophisticated things to insure he keeps his winnings and limit his exposure to crooks.

    Deposit the winnings in an offshore account. Do monthly wire transfers to give yourself an allowance. Simply notify the IRS of the account and report any interest made on tax return.

    Live off of 3 to 4% of the winnings after taxes. In Whittaker’s case that would have been several millions a year.

    Inform friends and relatives the money is in a charitable trust that you have no control over. In other words lie. But keep it simple.

    Don’t invest in any businesses. You’re not Donald Trump, just a schmuck who was lucky.

  • woody3691

    If you’re behind on child support they will take it out of your winnings. But, since your income went from say $30,000 annually to $1,000,000 annually, winning a really big prize, your ex will undoubtedly have her lawyer file for an upward modification of the support which could be as much as 17% for one child. If you form an LLC and a family trust, you may minimize the impact. A lawyer skilled in this can help navigate this dilemma.

  • woody3691

    Have a lawyer set up a family trust. Or allocate how much you want each friend or relative to have and present it to the Lottery Commission when you claim the prize. i.e. joe blow, ss # xxxxxx, .005%. Each person would be taxed once and would be responsible for their own taxes. And maybe they will leave you alone afterwards.

  • woody3691

    The government runs the lottery, so like the casino in Vegas, they get their share. It’s just that the casino won’t take 50% between Fed and State.

  • greg

    If a person wins a lottery in another country and deposits the winnings in a US bank is it hit with a US tax?

  • Jennifer

    Yes a felon can play and win the lottery is not owned by the cops lol.
    And being a felon does not make you non eligible to play.

    Everyone pays taxes unless you purchased the ticket in a state where you live that doesnt require, which WA is one of them the list is given on the lottery website.
    If you purchased a ticket in WA and live in Idaho you will have to pay your state and federal taxes for the state you reside in

    Everyone needs a lawyer to claim a large sum, so they know what taxes they are paying into and also so the lawyer can pay off any bad credit you may have and also a lawyer protects your money and assets from greedy collection agencies from suing you for more then what you owe if you owe anything at the time of the win.

  • Jennifer

    you can win up to 5k without paying taxes anything higher taxes are taken out.
    If you won 45 million and gave your brother 1 million after taxes been taken, you do not owe any more taxes whoever told you 700k is talking out of their ass lol.

  • Randy

    What are the rules governing someone taking the annuity payments over 20 years and the winner dies? Who gets the money if the person is married and has two kids?

  • KC

    If you win a large lottery prize (millions of $), can you just hold on to the ticket, move to a state without state income tax, sign an apartment lease and get a job in the new tax-free state and then turn in the lottery ticket in your new tax-free state a few months later?

    In other words, does it matter where you “resided” at the time you purchased the ticket or does it matter where you have been “residing” (for a few months anyway) at the time you turn in the winning ticket?

  • Susan

    Would the LLC or the Family Limited Partnership need to be set up before claiming any winnings, or can that be done afterwards.

    Thanks

  • Greg

    I just want to know if I’ll win the lottery 2nite? Then I’ll use all this advice. No one on here has won the lottery. If they did, they would be asking a lawyer these questions, not my uncle Kelly.

  • ALVIS JENKINS

    Ignorant people who have no knowledge of the Internal Revenue Code will not oppose withholding of federal income tax from lottery winning’s. Where is the income tax mandated in the Code? In subtitle A, the only subtitle on income taxes, you will note that everything is in place for this tax except one thing and that is the legal term “Liability”. No liability, no tax owed. All state lotteries post on their websites that the IRS “requires” them to withhold. But does the lottery ever cite the “law” that requires them to withhold? No. Why not? Is is because of the fear factor? FEAR stands for : False Evidence Appearing Real. The IRS acts under color of law and ignorant people believe that they are liable for the tax. In subtitle C of Title 26, the caption of Chapter 24, Income Tax Collected At Source, reveals just who an employee is that might pay the income tax. Please see Title 26 section 3401(c) the definition for employee. Also note that in this same subtitle section 3402(q) relates on certain gambling winning’s but note section 3402(q)(7) which says that payments which are “subject” to withholding under this subsection shall be treated is if they were “wages” paid by an employer to an employee. Since the tax withholding is on income of an employee, who is defined as the employee that is subject to income tax? A Federal employee, of course and no one else. Now, note Chapter 35 of Title 26. Taxes on wagering. Note the legal terms “State” and “United States”. These legal terms must be defined when used or they take on the definition in section 7701 of Title 26. In chapter 35, the legal term “State” and “United States” is not defined and as you will see, both terms do not define them as the 50 satates of the Union. That means the lottery is conducted only in federal jurisdiction. In summary and very simply said, the state lotteries of the 50 states are acting under color of law when they require withholding of federal income tax on state lottery winning’s and can be sued in “state court” for the acts of extortion and conversion of funds.

  • ALVIS JENKINS

    Previous comment find in last sentence states is mispelled. Also note that federally operated lotteries are the only lotteries that may collect the federal income tax in federal jurisdiction. State lotteries of the Union states do not generate “federal income” and cannot be obligated to federal withholding.

  • ALVIS JENKINS

    Reply to Bren.
    The Government does not automatically take their share of a lottery winning. The Lottery withholds the federal income tax in violation of Internal Revenue Code at subtitle A where there is absolutely no provision of law making “anyone” LIABLE for the tax. Know the law and sue the lottery for extortion and conversion of funds.

  • lucas hernandez

    I believe to be a recent winner to a 16.5 million dollar jackpot however my signed/lost ticket can’t be found I. Am currently dealing with the lottery security, however I was reminded of the bearer instrument rule and that a ticket was needed to put a claime I have furnished them with all the possible info what is your advise? will I get payed once its proven or will I need the ticket

  • lucas hernandez

    Bearer instrument once signed no longer a bearer instrument, their for I lay claim to that ticket, so as long as no one comes forward by the expiration time why would I not be able to lay claim to the winnings without the ticket? Claim time is 365 days from draw date. I have also read that you can request a duplicate ticket. Any advice on my situation and am I on the right subject.

  • Stephanie Matuba

    I would like to create a revocable trust for my inheritance. I would like to name my law firm as the trustee of my estate. After my money has been deposited into an account, can i change the trustee name from my law firm’s name to my name? Thanks

  • Nana

    OK, I’m still not understanding the “gift tax” issue..Let’s say I won the lotto (ex 20 millions) I’ve already have both my states and federal taxes taken out; am I going to pay taxes in any amount given to relatives that’s over $13,000?

  • Nana

    Also let’s say I won the lotto. how do I go about giving money to relatives that are living in foreign countries and are not American?

    Also, if you’re going to claim the prize trough a trust is it better to sign the back of the ticket before you see a lawyer or not? (IN case if the information should match) Sorry I’m very clueless:(

  • Breezey Willis

    I’m 67 yrs of age on SSI if by chance i win the lottery will there be a problem for me in collecting the money. I was told that person on SSI can’t collect all the winings. Is this a fact?

  • Scott

    If I have a winning lottery ticket can I sell it for a fraction of it’s value to a third party so I don’t have to deal with the loss of privacy that so many lottery winners have to deal with. For example, say I have a mega millions winner for 50 million, I don’t need that kind of money and I don’t want anyone to know I won so I’m willing to sell it for say 5 million after taxes. Can I do that?

  • carol

    my husband is cheating on me and hiding money in an account if for instance i won publishers clearing house million dollars a year for life would i have to spit it with him in a divorce if it was proved he was cheating and verbally abusive?

  • hootowl@hughes.net

    Why is applicable law not quoted as to the authority to withhold tax on lottery winnings? Subtitle A of Title 26 is about the income tax but not one section of the 1,564 sections makes anyone liable for the tax. Subtitle C of Title 26 is about collection of income tax at source but only collected from federal employees by a voluntary agreement. Nowhere in the entire Internal Revenue Code is there authority to collect, withhold the income tax on the private sector employee. Also note that the Lottery is acting as a federal employer when it withholds the tax and violates the law unless the winner, a federal employee,authorizes by voluntary agreement to have the tax withheld. But who would want the tax withheld if the law does not provide lawful authority to withhold? No one in their right mind. Simply said, there is NO liability for the income tax in subtitle A of Title 26. To see a proof of that fact, look in the Index of the Code and look under the caption of: “Liability for tax” and look for the subject “income” to see if it is listed. You won’t see it.
    Lotteries are simply violating the law by withholding federal income tax for where no such liability exists.

  • hootowl@hughes.net

    Well, whether your husband is cheating on you and hiding money from you should be no concern to you if you win a large sum of money. You hold the money but don’t tell him you won, just let him find out. You put the money in a place where he can’t get his paws on it. Winning prizes from Publishers Clearing House or a state run lottery will result in the unlawful withholding of federal income tax. The tax is on federal income and prizes are not income and if they were it would be income generated by federal employment which can be taxable but only voluntarily by a federal employee with his/her federal employer. This is fact of law found in subtitle A and subtitle C of the Internal Revenue Code which most people have no clue of the applicable law and to whom it applies. If you wish to pay the tax on a prize, consider it a gift to the federal government because that is what it is, a gift. However you commit perjury if you file a federal tax form.That makes you a criminal but don’t worry, the federal government has never prosecuted anyone for sending in that free gift by committing perjury. Ever heard of the Federal Mafia?

  • Randall Newnum Sr.

    What do you do if you have a verbal family agreement about dividing the money and years later everybody in your family passes away except myself and the one family member in charge of the money!? and threatens to take it away? Also this person told us all to quit our jobs and would divide the monies equaly and then when it was time for the first check he changed his mind and said he would take care of us because in his own words we would kill ourselves with that much money. So now that hes killed everybody except me he threatens cutting me out! It ruined my familys life in so many ways I could write a book or a movie. What legal actions is best for me to do??? THX.

  • chris4fun71@yahoo.com

    im a little confused of what type of lawyer to get to collect my winnings.can somebody refer me to a good lawyer near cerritos,lakewood,los alamitos or even tustin,ca. area,please!…thanks

  • http://www.lawinfo.com Chris Blankinship, Esq.

    You’d want to consult with an experienced estate planning attorney – someone who can help develop and manage trust accounts. Find Lead Counsel Rated estate planning attorney in Cerritos here: http://www.lawinfo.com/attorney/estate-planning/california/cerritos/. Good luck!

  • bill

    You don’t want to do that. If you win $50 million you’ll wind up with about 25% after cash value and taxes so now we’re talking about $12 million. Why give $7 million away. And there really is no such thing as having too much money. If you want privacy, the best you can do is to seek an attorney’s advice to set up a trust or limited liability corporation, move, cancel your phone and if you feel it necessary hire a secretary to field searches for you. You can leave the country if you’re being hunted and pretty much get lost in Europe, Asia or Australia.

  • bill

    If you follow hootowl’s advice, say hello to Wesley Snipes in jail. The IRS will withhold taxes on lottery prizes. It isn’t considered gifted income. You’ll be required to file state/city tax forms and pay the respective tax. If you take the cash value you’ll wind up with about 25% of the winnings after taxes. If you’re married or in a long-term relationship and the prize was won during the relationship, your spouse/partner will be entitled to a share of the winnings. If you are sure you’re going to get lucky soon and are married to a person who is cheating on you and secreting money from you, divorce this person or end the relationship and move out.

  • twowheelerf4i@aol.com

    Don’t know where you come up with the 25% after tax sum. It says right on the California Lottery website that they withhold and you pay only federal tax to the sum of 25% of the winnings. Winnings are EXEMPT from state taxes. If a Californian were to hit tonights 241mil Mega the cash payout is 170mil and after tax amount is 135mil.

    This is directly from the lottery winners hand book.

    “You’ll be happy to learn that Lottery prizes are exempt from California state and local personal income taxes. However, the Internal Revenue Service (IRS) requires the California Lottery to withhold federal taxes from many prizes.The withholding rate for federal income tax is based, in part, on a claimant’s resident status. The Lottery is required to withhold federal taxes of 25% for U.S. citizens and resident aliens providing a social security number, and 28% for U.S. citizens and resident aliens not providing a social security number. Claimants who do not mark the citizenship status on the Lottery Claim Form will have 30%withheld from all prizes. Federal tax rates are subject to change.

  • twowheelerf4i@aol.com

    I would say there is such a thing as too much money, it only takes so much, not to just live, but live well. If I were to win a large jackpot most would be given away leaving me with enough to live the way I want and travel the way I want for the rest of my life. Nobody NEEDS 100 million dollars, they may want it, but certainly do not need it. The problem with people today is they seem to think their wants are needs and they’re not. If a person can not manage a few million dollars and make it last then deserve to go bankrupt as so mnay fools that have won have.
    10 million is more than enough for any person with half a brain to live on and take care of their kids educations and so on. I have an education in accounting and finance and the exoerience to know that I could.

  • twowheelerf4i@aol.com

    Excuse the typo’s

  • lamont

    If a lottery is won by a group with one winning ticket, how does claiming and taxes apply to all in the group?

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