Winning the lottery gives a lucky person access to substantial financial resources that can help them achieve their financial goals and dreams. But what happens when a lottery winner passes away? Can a beneficiary inherit these winnings?
In short, yes, lottery winnings can be inherited. However, the complete answer largely depends on the state where the winner lives and how they choose to receive their winnings. Most lotteries allow winners to choose between two different options: a cash lump sum or an annuity.
Whether the winner goes with the annuity or the cash option, lottery winnings can typically be inherited or transferred to the winner’s beneficiaries and heirs. Since the cash option is paid immediately, any winnings that remain when the winner passes away will be passed to their heirs and beneficiaries along with the rest of their estate.
Choosing the annuity option makes inheritance issues a little more complicated, but in most cases, lottery winners who elect the annuity will be able to pass on their winnings to their heirs.
Understanding Lottery Inheritance
Lottery winnings are inherited similarly to any other assets left by an individual for their heirs upon their death. For lottery winnings to be inherited after the winner passes away, the remaining winnings must be transferred to the estate and then distributed according to the terms outlined in estate planning documents, such as a will or trust.
This guide will cover what you need to know. We’ll outline this process even further by following a hypothetical scenario that may help illustrate the complexities that can arise in the process of distributing lottery winnings.
This scenario may highlight potential challenges as well as possible legal
mechanisms and outcomes. Every case is unique, and it is important to consult with an experienced probate litigation attorney to determine the best course of action for your situation.
This scenario follows the story of Dean, a middle-aged father of two. Dean was a diligent man who believed in planning for the future, so he established a comprehensive trust that included his house, investments, and other significant assets. This trust would protect his assets and ensure they would be smoothly transferred to his chosen beneficiaries upon his death.
Dean then surprisingly won a $5 million lottery. He took these lottery winnings and placed them in a separate bank account while he consulted with financial advisors and estate planners. However, he suddenly passed away before he could transfer the money into his trust, leaving his distraught family in a complex situation.
Can You Inherit a Lottery Annuity?
Yes, in most instances, you can inherit a lottery annuity. Typically, lotteries allow for the inheritance of annuities through the estate administration process in one of two ways. Some lotteries will pay a lump sum to the winner’s estate upon their death, while others will simply continue to make the annuity payments to the named beneficiary.
Lotteries are governed by state laws, so you’ll need to check with the laws in your state to determine the applicable rules about lottery annuity payments.
In California, representatives of the estate can contact the Lottery’s Prize Payments Annuity Desk to transition payments to the named beneficiaries. When this process is complete, any remaining payments will be paid to the designated heirs of the estate.
In Texas, the circ*mstances work similarly. According to Texas Administrative Code §401.310, the personal representative of the estate of a deceased lottery winner can petition the lottery commission for any remaining payments to be paid in a lump sum payment to the estate. To do so, the representative must have a probate court order and an endorsem*nt from all beneficiaries.
Is a Mega Millions Annuity Inheritable?
Yes, a Mega Millions annuity is inheritable.
When someone wins a Mega Millions jackpot and elects to take the annuity option, they will receive one immediate payment and 29 subsequent annual payments where each payment will be 5% bigger than the last.
If the winner passes away before receiving all 30 payments, Mega Millions will continue to make the scheduled annual payments to either the designated beneficiary or the winner’s estate.
How Are Lottery Winnings Inherited?
After the personal representative of the estate contacts the lottery commission and has the assets transferred to the estate, they will then be responsible for distributing the appropriate shares to beneficiaries. How these assets are distributed depends on whether the deceased leaves estate planning documents.
If there is a will or trust, the winnings will be distributed to the beneficiaries identified in the document and according to the terms outlined in the will or trust.
If there is no will or trust, the winnings will be distributed according to intestate succession, which is the process of distributing assets to heirs who take priority following state intestacy law.
In Dean’s case, he created a trust to distribute some assets, but he passed away before he could add his lottery winnings to his trust. Fortunately, he created a pour-over will, a legal document designed to transfer any assets not included in the trust at the time of his death into the trust posthumously. According to the terms of his pour-over will, the lottery winnings would be transferred to the trust, ensuring that the estate plan would be honored.
Still, if he did not have a will, his winnings would have been distributed through the more complicated and time-consuming process of administering his estate through probate court following intestate succession. In this case, a state court would have appointed an estate administrator to determine how to distribute his winnings to his surviving spouse and children, who are the heirs entitled to take according to his state’s intestate succession laws.
How Do I Avoid Inheritance Tax on Lottery Winnings?
In most states, you will not be required to pay inheritance taxes on inherited lottery winnings or any other type of inheritance that you receive. This is because only six states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania) impose inheritance taxes on the state level.
However, large estates, such as those belonging to lottery winners, are often subject to federal estate tax and, where applicable, to state-level estate taxes. Unlike inheritance taxes, which are paid by the person who receives an inheritance after they obtain it, estate taxes are paid by the estate before any assets are distributed to the beneficiaries.
In 2024, the minimum estate size for federal estate taxes to apply is $13.61 million. The District of Columbia and 12 states (Connecticut, Hawaii, Illinois, Maine, Massachusetts, Maryland, New York, Oregon, Minnesota, Rhode Island, Vermont, and Washington) also assess estate taxes. The minimum estate size for state estate taxes is typically lower than the federal threshold.
What if Someone Contests My Lottery Inheritance?
If a deceased lottery winner has left you some or all of their winnings and someone is attempting to contest your right to inherit those winnings, they typically will need to prove that the will or trust leaving you the money is legally invalid in order to succeed.
Common reasons one may contest a lottery inheritance include ambiguity in the estate planning document and disputes over the allocation of assets among beneficiaries. It is essential that you discuss your situation with a knowledgeable probate litigation attorney as soon as possible—this is especially important when a sizeable inheritance is at stake.
The rightinheritance dispute lawyercan help assess whether your grounds to contest a lottery inheritance are valid and build a case to help you win your contest. An inheritance dispute attorney can also help support you through a mediation or negotiation process and represent you in courtroom litigation.
Still, keep in mind that inheritance disputes are much more complex than a typical estate administration case, so you will want to make sure you partner with a lawyer who has experience in litigating these types of cases in court. Inheritance cases, like those involving lottery winnings, are far more unique than just any probate case. An estate planning attorney who normally just writes wills and other documents will not be able to adequately defend your interests in a high-stakes inheritance conflict.
Financial Planning Considerations
Winning a lottery jackpot comes with unique financial circ*mstances, which require a unique degree of planning. Receiving such a hefty lump sum of money can pose challenges for a lottery winner or a beneficiary of a winner’s estate.
A lottery winner who is planning to leave a share of winnings for beneficiaries may want to consider how to best allocate them in order to protect their financial health long-term.
Some common financial planning considerations for lottery winners include:
- Investing in diverse portfolios
- Hiring a qualified team of financial advisors or planners for support with money management and investing
- Paying off any outstanding debts
- Establishing a budget for how to sustain and use funds responsibly
In Dean’s case above, financial planning was crucial. He made a respectable financial decision by developing a trust and a pour-over will that protected his assets for his heirs. Unfortunately, Dean passed away suddenly, but he made the right choice by consulting financial advisors and estate planners after winning the lottery.
If Dean had time to place his assets in an investment account and complete beneficiary designation forms indicating which beneficiaries should receive the account assets, it would have allowed him to put his family in an even better financial position and make the distribution process even easier.
Charitable Giving and Estate Planning
With the money earned from a lottery win, a trustor may choose to set some aside for charitable purposes. This is a great option for individuals who hope to leave a lasting legacy, and it can have several benefits.
Contributing some of your winnings to others can be a great way to give back to your community and support organizations in need of resources to make a positive impact on others. Charitable giving also features unique tax benefits.
Under federal law, you can contribute up to 60% of your annual adjusted gross income to support federal deductions. However, California limits these contributions to 50% of your AGI. In either case, charitable contributions can decrease the size of your taxable estate and reduce overall estate taxes.
If you are thinking about charitable giving as part of your estate planning process, you may want to consider the following:
- Consider listing charitable organizations as beneficiaries in your trust or will.
- Consider outlining specific terms in the trust, designating the amounts to contribute and how often you want payments disbursed.
- Discuss the pros and cons of various charitable giving and account options, like a charitable lead trust or charitable remainder trust, with your estate planner or financial advisor.
Post-Inheritance Administration
Executors, trustees, and other personal representatives are responsible for administering these inheritances while complying with state law. The first step in the administration process is marshaling and inventorying the assets and having them transferred to the estate:
- In states like Texas, the executor will have the responsibility of petitioning the lottery commission to have lottery payments disbursed in a lump sum to the estate, securing a probate court order for the petition, and gathering a consensus from all heirs and beneficiaries.
- In California, the process is similar, but less involved, as the personal representative of the estate only has to notify the lottery commission to have annuity payments for a lottery winner distributed to the estate in a lump sum.
Often, after acquiring the assets from the state, the personal representative must move through the probate process to distribute assets. Responsibilities include allocating assets as outlined by the trust document, paying any necessary creditors and expenses, and distributing the remainder to beneficiaries and heirs.
Dean’s case of lottery winnings illustrates how this process might look in a real-world scenario. In his case, even with a pour-over will, his assets had to pass through the probate process, following these steps:
- Initiating Probate– Dean’s executor filed a petition for probate that included the pour-over will with the probate court. The court then appointed the executor to to oversee the administration of the probate estate.
- Validating the Will– The court validated Dean’s will, ensuring it met all local legal requirements.
- Identifying and Valuing Assets– The executor identified the lottery winnings in the separate bank account and had them valued.
- Paying Debts and Taxes– Before distributing the assets, the executor paid off any of Dean’s outstanding debts asserted by his creditors, paid administration expenses, and calculated and paid any estate, income, and property taxes owed.
- Transferring Assets– Once all debts and taxes were settled, the court approved the transfer of the lottery winnings into Dean’s trust.
Once the trust has been administered, the trustee can then shift their focus to distributing the assets to the appropriate trust beneficiaries. A trustee has a fiduciary duty to act in the best interests of the trust beneficiaries, so in this process, they should be sure to carry out the wishes of the trustor or settlor to the best of their ability.
Find Support in Your Probate Process
If you are a beneficiary who is concerned about the distribution of an inheritance of a lottery prize or a personal representative or trustee trying to protect the decedent’s wishes, you need a qualified attorney to support you.
Our team ofinheritance disputeandtrust administrationattorneys at RMO will listen carefully to learn more about your circ*mstances and understand the nuanced details of your case. We have decades of experience navigating a wealth of unique trust and probate-related cases, including those involving lottery winnings.
If you are inheriting lottery winnings after a loved one passes or if you are trying to prevent avaricious heirs from attempting to take what is not rightfully theirs,contact us for a free consultation.
