Three separate lottery winners in the third highest Mega Millions have some tough decisions ahead of the them.

In addition to deflecting requests for money from every person they have ever known (and many they have never even met), will have some “good” problems to deal with like – taxes, investment options, insurance protection and ensuring their after-tax funds outlive them. Unfortunately there are more financial horror stories about lottery winners than happy endings – mainly attributable to the fact winners seldom have any experience handling even moderate sums of money.

Before claiming their prizes, I recommend that they have some in-depth conversations with a qualified attorney, CPA and investment advisor (best if all are in the same room – and are not a relative).

The most pressing issues are:

1) Can I retain my anonymity?

2) Am I a solo winner, or are there other family members and/ or friends/ co-workers that are entitled to a portion of the winnings (and the related taxes)?

3) Should I take a lump-sum or installments?

The first issue will be dictated by each winner’s state of residence. In some cases, the winner can claim the prize through a trust or another legal entity and might be able to stay under the radar – for at least a short period of time.

The second issue needs to be fully vetted before claiming the prize. There are numerous, and significant income, gift and estate tax advantages of splitting the winnings amongst various family members, if you have established a verbal agreement prior to winning the game. For example, if a wife bought a $10 ticket and prior to the drawing announced she was sharing any winnings with her husband and 3 children, there is a good case that she made a gift of a a portion of the ticket ($2 to each family member), and the taxability would now be split 5 ways (ignoring joint filing with her husband). Since we have a graduated tax system, the savings can be dramatic – especially if they take installment payments – thereby gaining rate benefits each year for the first couple of hundred thousand dollars of winnings. Splitting the proceeds up front also saves massive amounts of gift tax and estate taxes which would get triggered if a winner moves funds to family members or friends after they claim the prize.

The final and somewhat complex decision is whether to take a lump-sum or installments. As previously mentioned, installments allow multiple years of lower taxes on the first $200,000 of winnings/ income, before hitting the maximum tax rates which can be as high as 43.4% for federal alone after $200,000 of taxable income. Installments also allow multi-year tax planning, which is not possible if a lump-sum is claimed. The installment approach can allow winners to still access future payments through deferred-taxable private loans or specialty companies that will purchase deferred installments at a discount.

With amounts as large as the current prize ($149M pre-tax each for the three winners), I highly recommend installments for the reasons above and as further discussed in my prior blog post on TaxConnections:  Lottery Winners Tax Strategies – Lump Sum vs. Installments

It is being reported that the Minnesota winner is claiming a lump-sum prize which will only leave him with about $54M (about 1/3 of the gross under the installment method) – not a good % by my calcs……

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