What Happens to Lottery Winnings When You Die?

As lottery enthusiasts, we all hope to win the jackpot and enjoy our winnings for many years to come. But sometimes lottery winners pass away before they spend all their cash, or they make investments that can earn significant interest far beyond their own lifespans.

Here’s what happens to lottery winnings when you die—and how you can gain control over your money now and in the future.

The Difference Between Lump Sum and Annuity Payouts

Winners of major lottery jackpots usually have the option to collect the money as a lump sum or as yearly (annuity) payments. Choosing a lump sum versus annuity payments has an immediate effect on how much money the winner receives and what happens to the money after they die. 

While some countries do not tax lottery winnings, the US collects a significant amount of taxes on large prizes. Winners of massive Powerball or Mega Millions jackpots don’t simply get a check for the full prize amount if they choose the lump sum option. Instead, the IRS immediately collects 24% in federal taxes on the prize before the lottery agency pays the winner. State taxes are also applied to the money when the winner files a tax return for the year. Unless a terrible accident takes the winner’s life right after hitting the jackpot, opting for the lump sum means that the winner will be able to deal with the immediate tax ramifications during his or her lifetime.

On the other hand, winners who collect their money as annuity payments do receive the face value of the prize. The cash is distributed over a long time, usually 20 to 30 years, and it’s contractually guaranteed to be paid. Taking the annuity option ensures a steady income source for many years—but it also increases the likelihood that a winner will die before all the payments are made. This may create more complications for the lottery winner’s family after he or she dies.    

Is It Possible to Transfer a Lump Sum to a Beneficiary?

When you win the lottery, the money you collect as a lump sum becomes part of your “estate” —your net worth in the eyes of the law. Once it is part of your estate, the money can be inherited along with other assets by your family or chosen beneficiary in the event that you pass away.

Selecting one or more beneficiaries is particularly important for big lottery winners to control their winnings in the long term. Hiring an estate planning lawyer and a financial professional to create a lottery fund for your winnings and writing up a clear will is the best way to ensure that your money will be distributed according to your wishes after you die. 

Is It Possible to Transfer Annuity Payments to a Beneficiary?

It is often possible to transfer annuity payments to a chosen beneficiary. However, most states only allow lottery winners to choose a single beneficiary, and lottery commissions also have their own rules.

For example, if the winner of a Mega Millions jackpot prize passes away before all the annuity payments have been collected, the remaining payments are automatically transferred to the winner’s chosen single beneficiary. The remaining payments will be made to the beneficiary under the original payment schedule. Meanwhile, the Powerball lottery’s website claims that annuity prizes will be handled by the winner’s estate, and that the payments can be passed on to heirs or anyone else “just like any other asset.”

If you have multiple heirs and your chosen lottery only allows for one beneficiary, you can choose to have the payments made to your estate rather than to a single individual. That way, the winnings can be distributed according to your will rather than according to your state’s standard inheritance law. Overall, it’s a good idea to check your favorite lotto agency’s regulations to make sure you know your beneficiary options.

Taxes on Lottery Winnings After You Die

Nothing is certain except death and taxes—and this is particularly true for lottery winnings. If you are lucky enough to win the lottery but also unlucky enough to die before you had a chance to really enjoy it—like Donald Savastano and Urooj Khan—your estate and its beneficiaries will be responsible for paying taxes on remaining annuity payments or investment earnings.

Depending on how large your estate is, your beneficiaries may also have to pay both federal and state inheritance taxes. The exact threshold varies each year, but the US federal government currently taxes inheritances above $11.58 million. For those with the largest estates, the federal government can tax heirs up to 40%. Each state also has its own tax laws for inheritances.

Debt and Lottery Winnings After Death

Overspending and debt can be a real problem for lottery winners and their families. Some winners may assume they can wait to pay off previous debts, such as student loans. Others may overestimate their spending power and sign their name to multiple mortgages, car payments, and credit cards.

However, once the jackpot money runs out, these bills will remain—and the winner will still be on the hook to pay them. Any debts accrued in a winner’s lifetime will have to be paid by their estate after they die. Creditors can seize property, money, and other assets, leaving beneficiaries with nothing. Once that money is exhausted, creditors may go after family members to try and collect the debt—even though most states do not expect surviving family members to pay up from their own pockets.

Conclusion

If you win a major lotto jackpot, your winnings can be made reasonably secure for the future—as long you avoid getting deep into debt. With proper estate planning and working with the right banks, you can ensure your prize is spent wisely and that it will be passed on according to your wishes. Most importantly, make sure to set up budgeting and legal support during your lifetime. Creating a lottery fund and sheltering your winnings from excessive taxes will preserve your fortune for the long haul.