What happens to a lottery annuity if the winner dies?

The basic rule

Powerball and Mega Millions annuities are 30 payments over 29 years. They are not life annuities, so the payments are not tied to how long you live. Powerball's own rules say that if a jackpot winner dies before all installments are paid, the remaining balance goes to the winner's estate, and with a court order, payments can continue to heirs. The practical details, including whether the estate receives a lump sum or continues to receive instalments, depend on the game, the state and the court, so read the rules on the lottery's site for your game.

What this means for your family

• The remaining payments are part of your estate, so they pass under your will or, if there is none, under your state's rules.
• A will, and where appropriate a trust, determine who gets what and when.
• Without planning, probate can be slow, public and expensive.

Tax after death

Remaining annuity payments are a type of income in respect of a decedent, and the people who receive them may owe income tax on them. The right to the remaining payments is also part of your estate for estate tax purposes. Federal estate tax applies only to very large estates above a high exemption, which has changed several times in recent years, and some states have their own estate or inheritance tax. A large jackpot can push an estate over those thresholds. Ask an estate lawyer to model it.

Can you sell or restructure an annuity?

Some winners sell future payments to a financial company for a lump sum, at a discount. State laws often require court approval for such transactions, and the discount can be steep. A common alternative is to take the lump sum from the start. This is a decision to make with independent advisers, because companies that buy lottery payments make their money from the gap.

Questions to ask before choosing the annuity

1. 1Does my game's rules pay the remainder as a lump sum or as ongoing payments to the estate?
2. 2Who should my beneficiaries be, and have I named them?
3. 3What are the estate and income tax consequences for my family?
4. 4How does the annuity compare with the lump sum in take-home, using our lump sum vs annuity calculator?
5. 5Would a trust help to protect and direct the money?

A simple planning example

Suppose a winner takes a $100 million annuity and dies after ten years. About $21 million has been paid (eleven payments), so roughly $79 million remains in the later, larger payments. The annuity does not stop. The estate receives the balance under the lottery's rules, and the heirs may owe income tax on what they receive, with the value counting toward the estate for estate tax. A will, a trust and named beneficiaries decide who gets it and how smoothly. Without them, probate can delay things for months. This is why estate planning belongs in the decision between lump sum and annuity.

Questions your estate lawyer should answer

• Who is the named beneficiary of the annuity, and does it match my will?
• Will payments continue or be paid as a lump sum to the estate?
• What income and estate tax would my heirs face?
• Would a trust reduce probate delays or protect heirs?
• What happens if I become incapacitated before I die?

Do not forget the paperwork

Update beneficiary designations when your life changes: marriage, divorce, children, death of a named beneficiary. Keep documents where your executor can find them. Review the plan every few years. For a large prize, these routine steps have large consequences.