Won the ​Powerball jackpot? Here's some advice for you

The person (or persons) who purchased the single winning ticket for this past weekend's $429.6 million Powerball jackpot has not yet come forward to claim the prize. Waiting to claim a prize like that is a wise thing to do.

Winning the lottery is exciting, but also exposes you to unique risks. When you step forward to claim a big prize, it's newsworthy, it's a public event and -- unless you take specific steps to protect yourself -- there's no way to escape the publicity and loss of privacy. Almost all lottery programs publish the identity of people who publicly claim the prize due to the open records or sunshine laws.

I can't think of any upside to claiming such a large financial prize in a public manner. If you casually promised people you'd buy things or give them money, your new-found riches will be a lightning rod for attracting the attention of family and friends. Everything you say or do will be taken in a much different context than before you became rich. If you don't deliver on a promise, you may find yourself having to defend against a lawsuit claiming breach of a verbal agreement or contract. It's better to keep your lips zipped about your generous intentions and surprise family and friends with generosity.

If you have a winning lottery ticket, and have verified it contains all of the winning numbers, sign it. Then make a copy of the ticket and put the original in a secure location, such as a safe deposit box at a bank.

Most states' lotteries have a six to 12-month statute of limitations before a winning ticket expires. So check with the state's lottery commission to verify how long a winner has to claim a prize. Take a few weeks, or even months, to assemble a team of trust-worthy advisers -- an attorney, a tax adviser, and a financial adviser -- to help you decide how to claim your winnings.

The next step is to work with your attorney, who can represent you and keep your identity as private as possible. A trustworthy and skillful attorney will help you establish the authenticity of your claim while ensuring your identity is not released to the public. The attorney should give you advice about setting up a legal entity, such as a Limited Liability Company, or LLC, or a revocable trust. The purpose of this would be to transfer the ownership of the ticket into the LLC or trust, and minimize gift taxes (in the case of multiple people owning one ticket.) This entity would eventually be used to claim and receive the proceeds of the prize. Your attorney can also help you decide how to claim the prize and represent your claim to the lottery officials.

When you set up the entity, use an unlisted phone number and a U.S Postal Service or commercial Post Office Box. Lottery winners who come forward publicly get barraged with unsolicited mail and phone calls from a cast of characters with every story in the book. These characters have the same objective: to pry some of your new found wealth from you. These steps will help you avoid the majority of these characters.

Most lottery prizes can be paid out in either a one-time lump sum or in annual installments of ten to 25 years. Some lottery games require players to decide how they want to be paid when they buy their tickets. Other lottery games allow you a period of time, such as 60 days, to decide how to receive the prize after you submit the claim.

Basically, the choice is whether to take a cash lump sum or to receive smaller annual payments over an extended period of time. Either way, all payments received are taxed as ordinary income.

Most lottery winners elect to receive their prize in a none-time lump sum. For many, that may be a mistake. One reason for this behavior is some winners are incorrectly advised that their survivors will get nothing or be forced to deal with estate tax problems if they choose installments. This simply is not true. Under lottery commission rules, survivors may request to cash out some or the entire remaining installment payments to pay any estate taxes due at the death of the winner and they can do this without penalty or additional cost.

When you take the lump sum, the first thing to realize is that about 45 to 50 percent of the lump sum prize will be lost up front to pay income taxes. You'll need tax advice as to how much tax you'll owe and when tax payments must be made.

Next, you'll need to create an investment plan for the remaining lump sum proceeds, which means you'll need to hire an investment adviser. Finally, you'll be tempted to make large purchases and invest with large amounts of money, and those investments will most likely be complicated, illiquid and risky. All of this is risky business and most lottery winners do not fare well when taking the lump sum.

If instead you elect to receive installments, here's what happens:

According to the Multi-State Lottery, when the winner chooses to receive installments, the lottery commission will invest the entire cash lump sum amount, unreduced by income taxes. They request competitive bids from major financial institutions for a portfolio of bonds backed by the U.S government and U.S. government agencies. The bonds are purchased with maturity dates that coincide with the annual cash payments each year. The bonds are held in a trust account, which is secure from creditors, where a major bank or financial institution is the custodian. In each year that an amount of bonds come due, the cash is paid over to the revenue or finance division of the state of the prizewinner, and the payment is sent to the individual.

In short, taking the installments is a low risk financial strategy, the return is reasonable and the payments are protected from creditors -- or from being stolen by a crooked adviser. The benefit of receiving installments is that if you blow the money paid to you from one year, you'll hopefully learn your lesson and will manage the remaining installments more carefully. You could do a lot worse.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.