Powerball winner? Zip it, lawyer up, enjoy ride
Imagine you're holding a lottery ticket worth $800 million.
You read the numbers carefully, checking each digit. You realize it's true. You want to share the moment with a friend and pick up your phone.
That would be your first mistake, says attorney Doug DeNardo. It could be your first step on a path to misery.
“The best thing you can do when you win is don't tell anybody,” said DeNardo, an estate attorney with the Downtown law firm Rothman Gordon, who has helped a dozen lottery winners claim and invest their financial windfalls.
Making that first call will be just one of a myriad of decisions awaiting the winner of the record Powerball jackpot this weekend. Maintaining anonymity — to the extent possible — provides a lottery winner time to prepare for a life-altering event, DeNardo said.
Should the winner take the annuity that spreads payouts over decades or opt for the lump sum? How should the money be invested? Should some of the winnings pay off the mortgage, splurge on a family vacation or go into a charitable trust?
There's no rush to answer these questions. Winners in Pennsylvania have a year to claim their check. While names of winners are made public, waiting a week or even a month to claim a prize can lessen the frenzy and allow for time to prepare. That's why the first call is so important.
“I would contact my estate attorney, first and foremost,” said Chris Wiles, a financial adviser in Mt. Lebanon. “The first call, even before I called the state lottery office.”
An estate attorney can guide the process of claiming the money and, together with a financial adviser and accountant, write a plan for managing it.
With that much money, there will be plenty of advisers knocking at the door. But a lottery winner must be cautious about whom they choose, said Charlie Smith, chief investment officer at Fort Pitt Capital Group in Green Tree. Take the time to investigate and understand their fee structure, check four or five referrals, search regulatory filings for disciplinary actions. Then, interview the advisers personally.
“Don't be in a hurry,” Smith said. “If the process takes a couple of months, the state is still going to be there with your check at some point.”
There's another big decision: whether to take the cash all at once or spread it over decades as an annuity. Choosing the annuity would mean getting the full $800 million, but broken into annual payments over three decades. Taking the cash puts it in your pocket right away, but at a steep price — a winner would collect $496 million, which, after taxes, would be closer to $372 million.
Most jackpot winners take the cash, said Gary Miller, a spokesman for the Pennsylvania Lottery.
Wiles and other financial advisers say that's a good decision.
“What if the state goes bankrupt?” Wiles said. “Who's to say what happens in 30 years? I'd rather have the money in my own hot little hands rather than letting the government figure out how to invest it for me.”
Savvy investors could earn back what they would have been paid in the annuity and provide security for their descendants long after they are gone.
The rule of portfolio diversification still applies, but the money need not be put into risky investments that pay higher yields, Wiles said. Municipal bonds, treasuries, some stocks, he said. Maybe even a second or third home.
“Real estate here or there where you think it makes sense and you'd love to visit. You might like to have a ranch,” he said. “I wouldn't put that much into equities because you don't need to make a lot of money. You need to preserve what you have.”
Paying off credit card balances or other high-interest debts should be a priority, advisers said.
Some lottery winners set aside a portion of the money for a charitable foundation. Beyond the tax advantages, this can help winners deflect the scores of distant relatives and organizations who will ask for money, Wiles said.
“If someone says, ‘Can you give me some money?' Tell them, ‘Well, you can apply to my charitable foundation, and we'll figure it out,' ” he said.
A foundation could be an employment opportunity for family, as children could be hired and paid a salary to be on the foundation's board, he said.
Of course, there's always the opportunity to splurge on yourself, financial advisers say. But set limits and don't feel rushed to do it right away. Take a few months, figure out how you want to spend it. Otherwise, it could lead to a lifetime of regret.
“Receiving an amount of money this size, we all know this is a life-changing event,” said Bernard Carter, investment strategist for Downtown wealth management firm Hapanowicz & Associates. “You need to take your time and think about how your life is going to change and think about what you need to do to remain happy and healthy and productive.”
Chris Fleisher is a Tribune-Review staff writer. Reach him at 412-320-7854 or email@example.com.