Not a real case, but I just wonder if someboy wins a lottery, is there any way to avoid paying income tax on that? ... e.g. by puting the proceed to a trust etc?
- posted
17 years ago
Not a real case, but I just wonder if someboy wins a lottery, is there any way to avoid paying income tax on that? ... e.g. by puting the proceed to a trust etc?
Nope.
No. In some states you have a choice whether to take large lottery winnings paid out over time (e.g. 20 years) or receive the current value of that income stream all at once. Spreading out the payments may result in lower taxes, but may not be the best thing to do in the end. You might be able to claim that various family members all bought the ticket together, so it's a partnership and each gets his share. That could reduce taxes a bit, too, but then you really have to share the money. Stu
"My interest" wrote
If you can get away with convincing the lottery board that the trust bought the ticket, then go ahead. The tax rates for the trust are 18-46%, so a $2 million lottery winning would get whopped with $780,000 in taxes. That same $2 million winning by an individual would be subject to 35% tax or $673,251 in tax maximum. So you now have a trust return to prepare and file (not to mention the accounting issues), you pay about $100,000 more in taxes, and you don't have use of the money. What's that? You're the beneficiary of the trust? Then you have taxable income of the trust income or distributions, depending on the type of trust you establish. Either way, you're creating a costly monster.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
NO!!! Although there may be an option to take the payout over a number of years. The income would then be taxed in the year it is received. Of course, if one is able to itemize, one may be able to deduct gambling losses in an amount not exceeding their gambling winnings. If your lottery win came about as a result of playing your home state lottery, although taxable by the feds, those winnings are usually not taxed by that state.
Nope
No.
A CPA told me once several years ago that one possible option would be to create a charitable trust and let the trust claim the lottery. As a charity it would not pay taxes on the lottery winnings or taxes on the income from investing said assets. You will of course pay taxes on the income from the trust but a much smaller amount is exposed to the highest marginal rates and you get to help a lot of people through your charity. Since you won't have access to the money you won't be able to buy a Learjet or some small country in the Caribbean but you will have a comfortable and secure livelihood for the rest of your life and not turn a huge amount of it over the government at the time of the win. I'm not a tax expert but this seemed reasonable to me. Comments?
It's only possibly reasonable if the trust held the ticket before the drawing. Even then I'm not too sure.
Frankly, I wish I would have so much income this year that my federal income tax would be several millions of dollars, tens of millions even. Giving up first class travel and first class living accomodations in order to spite the government seems very similar to cutting of one's nose to spite one's face.
My brother (who is also a CPA) and I discussed this a few years ago. We agreed someone doing this would have the following problems:
Why would the IRS do this? On $20 million in lump sum paid to the trust, you will have ripped off about $8 million in taxes from the Fed and the State - and they wabt it back.
For that kind of money, I suggest paying the taxes and live like royalty on a 5% annual return of $600,000. Find a nice place to live where nobody knows you won a lottery and relax in the quiet enjoyment of your life.
Dick
The charitable trust idea would almost never work, unless you already had a well-aged, bona-fide charitable trust up and running and expressly made the purchase of the lottery ticket in the name of the trust. Further, while the structure above might (emphasis on "might") work for tax purposes, it may, however, subject the trustee to liability under applicable state law for violating your fiduciary duties as trustee of a charitable trust - I rather doubt if investing in lottery tickets would meet the prudent investor rules that typically apply to trustees. Finally, you might try the gambit of setting up a bona-fide charitable trust, aging it well, and then buying the ticket yourself and then contributing it to the trust prior to the drawing. At that point, the value of the lottery ticket is, presumably, the amount you paid for it. However, unless you do this consistently over a long period of time and contribute a substantial number of losing tickets to the trust in a well-documented manner, the IRS and the courts are liable to simply look through your single contribution of the winning ticket and find that, in substance, you personally bought the winning ticket and won the money, and then contributed your vested right to those winnings to the trust. Lastly, in order to have a bona-fide charitable trust with which to play this game, you will most likely have to start it up with a not-insubstantial amount of seed money; otherwise, you may find your local attorney general shutting the charitable trust down (depending on applicable state law).
Just make sure that you set up the trust BEFORE YOU BUY THE TICKET..... Jerry Doblie
14045 Sunnyside Ave N Seattle, WA 98133 206-365-0143
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.