Estate taxes on a lottery annuity.

Overlooking the fact that the lotteries have their own rules relating to payout and assignments......

The various circuit courts of appeal don't agree on valuing the estate. Some circuits agree with the IRS that it should be valued using the actuarial tables prescribed under IRC § 7520. Other circuits agree with the taxpayer that it should be valued at FMV (e.g., the 2nd Circuit).

Either way, the estate will get valued and estate tax will be due. If an estate does not pay the tax, then the beneficiaries are on the hook for the tax. The IRS will negotiate installment payments with the beneficiaries of lottery winnings. It is quite possible that the amount of the installment payment that the IRS is willing to accept is larger than the annual annuity payment from the lottery. This is why some of the state lotteries offer the option of a lump-sum payout upon the death of the annuitant or will allow assignment of the future revenue stream so the beneficiaries can sell the asset.

Since the rules vary depending on which lottery you are interested in, and which state's laws apply in the state you live in, it is pointless to solicit speculation from the general Internet population. Instead, look up the *actual* rules on the appropriate website.

Here are the Powerball rules for New Mexico from

"A Lottery prize is like any other asset. Per the New Mexico Lottery Act, prizes may be paid to a deceased winner's estate or to a person designated by judicial order. In the event of the death of a Lottery winner during the annuity payment period for the Powerball, Mega Millions or Hot Lotto game, the remaining annuity payments may be paid each year to the estate. Or, upon the petition of the estate to the New Mexico Lottery, with the approval of the Multi-State Lottery Association (MUSL), the Lottery may accelerate the payment of all the remaining Lottery proceeds to the Estate. If such a determination is made, the cash value of the securities and/or cash held to fund the deceased Lottery winner's annuitized prize may be distributed to the estate."

Let's assume that this annuity is non-transferable and has a present- value of $11 million, which generates an estate tax of $3.5 million. How can an estate with no current assets pay the estate tax? ===== Not really a tax problem. Get a loan, sell something else, or pay in installments.

Even if the annuity is non-transferable, presumably the estate could take out a loan "collateralized" by the annuity and use the loan proceeds to pay the estate tax.

The non-transferability would mean the lender couldn't directly seize the annuity if there was a default, but I further assume in the resulting lawsuit the court would simply order the executor/estate representatives to hand over the annuity payments as they came in.

Heck, even if there was no estate tax due I could imagine the heirs might want to factor the annuity like that.

In between the interest rate anti-arbitrage (the loan is present-valued at a low rate, the loan is at a much higher rate) and the fact that the proceeds are taxable, it's possible that there won't be anything (or not much) left after taxes and loan payments.

Seth

How would the taxation apply if the annuity was made payable to a family trust

-- perhaps administered by a bank trust department-- with the annual proceeds distributed to the family beneficiaries as directed by the trust document?

A family member beneficiary dies, and his/her share transfers to the remaining beneficiaries. Is his/her uncollected portion subject to estate tax? If so, who pays it?