Powerball: What to do if you won

Updated on Nov. 29, 2012.

(MoneyWatch) When the Powerball jackpot swelled over $550 million, the largest in the lottery's history, ticket holders around the country were mulling a common, if almost impossibly fanciful, daydream: What do I do if I win? (Winning tickets were sold in Arizona and Missouri, according to lottery officials.)

First, the grim truth: The odds of winning the Powerball jackpot are roughly 1 in 175 million. To put that into perspective, the chances of getting hit by lightning in your lifetime is 1 in 5,000, according to Tim Norfolk, a University of Akron mathematics professor who teaches a course on gambling.

Of course, the jackpot has already defied the odds by rolling over 16 consecutive times without anyone hitting the big prize. And even with a reduced up-front, lump-sum cash value of $384 million, even the most jaded are tempted to purchase a $2 ticket. The previous biggest jackpot was $365 million in 2006, which was won by eight employees in a Nebraska meatpacking plant.

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How the Powerball lottery works

After all, if somebody has to win, why not you? Earlier this year, three lucky winners from three different states shared a $656 million "mega millions" jackpot. That prize dwarfed the previous U.S. record of $390 million and now stands as the world's largest ever lottery payout.

For these winners, sudden wealth brings a whole raft of considerations about what to do with the windfall. If lightning strikes during Wednesday's Powerball drawing and you find yourself an instant multimillionaire, here's what you should do (based in part on my experience as a former investment advisor who once had a client who won the lottery):

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1) Read the rules on the ticket and on the lottery's website. Sign your name on the back of the ticket, unless the rules forbid it. Then make a copy of it and put it in a safe deposit box. Don't feel compelled to tell the world just yet. Try to refrain from telling anyone beyond your immediate family. You can take your time before contacting the lottery authorities, but be aware that ticket expiration periods vary from state to state, from 90 days to one year. The back of your ticket will likely detail the expiration period for your state.

2) Assemble your team (and not an entourage, thank you very much!) You need to interview estate attorneys, accountants and financial advisors. My jackpot-winning clients did something clever when they approached potential professionals: They went through the interview process by discussing their situation, but didn't disclose how much they had won until late in the meeting. That way they could tell whether an adviser treated all his or her clients with respect or just the rich ones. An important caveat: Don't hire only one money manager. You can assemble anywhere from three to six with different areas of expertise.

3) Determine whether you will accept the payout as a lump sum or in installments. At this point, the lump sum for the $500 million prize is $327 million before federal taxes are applied and $245.2 million after-tax. Conversely, you could choose to receive annual payments over 29 years, which would amount to $16.6 million a year pre-tax and $12.5 million after taxes. This does not include state or city taxes, which would further reduce your take. You have 60 days, after you claim your ticket, to make the decision.

You mostly hear about winners taking the lump sum, because they want to control the entire amount of money. This year, there could be a tax edge in taking the lump sum, since odds are good that taxes will rise next year.

The big problem with a lump sum is that winners often end up blowing the entire amount doing dumb things. Don McNay, author of the book "Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery," says nine out of 10 winners go through their money in five years or less. "It's too much, too fast," he says. "Nobody is around them putting the brakes on the situation."

The stream of income ensures that you won't blow through your entire jackpot (which is why I'm a big fan of the annuity option). That said, there's a major caveat to going this route -- if you die before collecting the entire amount, the remainder of your winnings may or may not pass to your heirs. This depends on the rules of the individual lottery and the state where you win.

4) Determine the legal structure of your investment holdings. Your attorney will help determine whether you should utilize trusts, limited liability companies or even corporations. Depending on your state of domicile, each may have advantages and disadvantages in terms of taxation, as well as privacy.

Speaking of privacy, soon your secret will be out and you may be surprised by who will be sniffing around looking for "help" or offering you "fabulous investment opportunities." I advised my clients to provide for their children and to say "no" to everyone else until a financial plan is in place for your newfound wealth. There will be ample opportunity to show your largess down the road, so it's wise to keep the money under lock and key for at least a year.

That said, it's fine to splurge a little. The key is to not go crazy -- initially, keep it under $100,000. That means don't buy a new house or a Ferrari for a while, but do take your family on a fabulous vacation. And when you return, remember that you have a new job: Responsibly managing your money.

[Winner3913]

I'm so tired of the advice given by attorneys and finacial planners, it's always the same. Make sure they get their cut. If you have good money managements skills, you will have them after, if you don't then you'll continue. A team of lawyers and financial analyst would cost you 3 to % of your winnings as they charge you 500 bucks an hour. If you take the lump sum they already take the tax out, calculate your state and local taxes if there are any and pay them and you are all set. Buy some high yield bonds, mutual funds and high dividend stocks, keep diversified and DON'T "give" or loan money to anyone. hire a good CPA and you are all set. Don't let slimy lawyers and financial planners rob you blind. Remember life is short, some people are paralyzed by winning and stop living afraid to get hurt or pass on. Live it up, you could go tomorrow.

[Curmudgeon236]

First thing I'd do if I won a jackpot that big is book myself on the longest ocean cruise available at the time and put the rest of the money into a Treasury Direct account. That way, I'd be free from being bothered by all the salesmen, charities, and freeloaders who would otherwise accost me. And on such a cruise, I'd sit down and soberly consider my new financial situation. Upon my return, I'd put my financial plan into play and tell anyone who would upset that plan to (expletive) off ... hiring a private security firm to keep such people at arm's length if need be until my jackpot win became "old news."

[BreauxOnTheBayou]

Okay, everyone. Think about all of the things you said you would do with the Powerball winnings if you had won. I know many of us said we would do good things for people in need. Start schools in Africa, help missionaries in emerging countries, get your church out of debt, etc. The only problem is, you didn't win. Here's a thought:

Do it anyway.

We all want the ability to give out of our excess (Powerball winnings) but the fact is, the Lord wants us to give like the widow who gave of her subsistence.

Find a charity that is doing the work you said you would do with your winnings and send them something. Don't worry so much about how much is going to salaries and overhead in the charity, or whether your money will be spent exactly the way you want, but just give something, let it go, and know that you've placed it in the hands of the Lord.

Peace,
Lynn

[onefeather2]

If I won, take care of family first, buy a cd player for my 26 year old lincoln[i would keep my car]. Set up funds for animals in need of homes and medicine. Help the poor and homeless.There are about 5 people who write and speak up for what is truth, i would help them. for myself, i could buy some great books and a new computer and hire someone to help with a web site and find a way to start something that would give people Jobs. To be thankful and Thank the Lord i am able to do it. Of course if I don't win i still will work on helping others, saving for my new computer and cd player, take care of what i can for family and Thank God I have a new and beautiful day and a awesome stary night.My real treasure/gold is not of this world anyway, but it does help and would be great to have enough to spread around.

[gborgford]

Have all my teeth pulled and replaced with giant diamonds.

[griffon49]

I always said if I win the lottery, the first thing out of my mouth will be, "If you ask me for money, I don't care who you are, you will not receive one red cent!"

[rscnet5]

even to immediate family members? it's no wonder you haven't won the lottery... you're a bitter old man.

[Curmudgeon236]

GRIFFON49 - That's a good idea. Everyone around you should be aware that you are a winner, not Santa Claus. After that, soberly create an estate plan - or have a financial planner do it if you don't trust your own judgement. Afterward, tell people that you've created an estate plan and will not deviate from the plan. Charitable giving to people or agencies can be part of such a plan - but make certain others know that you won't deviate from it. Real friends and loved ones who really love you will understand. If others don't, that's their problem not yours.

RSCNET5 - All kinds of people win the lottery. In my state, the first state lotto winner was a retired securities analyst who was already a millionaire. When asked what he'd do with the money, he said he'd buy a 2nd vacation home (he already had one vacation home) and invest the rest. Hey, it's his money so why not? Immediate family members? Puhleeez. Check out William "Bud" Post. He's dead now (natural causes). But when he won his Pennsylvania lotto jackpot, his own brother hired a hit man to kill him ... hoping he'd be mentioned in his brother's will. The hit man turned the brother in (grin) and the brother went to prison.

[rms316]

Lock up my ticket and have a glass of Jameson's to calm down.

[vegasboyyoshi]

Pay debts and make my own business gave jobs people need work.

[auburnannie]

Pay off all family debt (ours, the kids, and between us, ten siblings.) Fund education for the grandkids. Donate to local food pantries, literacy programs, animal shelters, set up a dental clinic for the uninsured, provide restoration funds for a local theater, visit relatives overseas, buy a couple of vacation homes for family members to use whenever, set up trust funds for family members to draw on as needed, donate to a religious order's retirement fund for the sisters, donate to local domestic violence group. Keep it local.

[esnation]

If I win the lottery, I will buy Wallstreet, and burn it down.
Then I'll create a PAC, buy a congressional seat, do nothing, maybe even become a republican, then make millions after I retire from my single term, if I don't resign first, then make even MORE money on speaking engagements and writing my memoirs using a ghost writer, cause I don't even want to spend too much time writing or researching why I did the things that I may or may not admit to doing. I'll hire a double for the speaking engagements cause I don't really like to talk to anyone.
If money doesn't buy happiness, then I'll RENT one heck of a good time...