Here's What Happens If You Die After Winning The Lottery

People sometimes worry that if they get everything they've ever wanted, something bad will happen. Take a 73-year-old cattle rancher from Brazil who won around $30 million in a lottery jackpot in November 2020, but sadly passed away just a few weeks later during a routine dental visit. Doctors thought that the huge shock of winning might have been too much for his heart. It's a strange twist of fate we do not wish for, still we need to examine the unexpected consequences of death after sudden wealth.

Lottery winners are offered an option to receive their winnings as a lump sum or as an annuity. If they take the lump sum — all the lottery winnings at once — and die after, that will be a question of inheritance amongst the family of the deceased. Now, if they do take the annuity option — steady payment of their winnings over several years — what happens if a winner dies before they are done receiving all of their annuity payments? To set the stage, now if you win the lottery (use the 70 percent rule to increase your chance of winning), winners can choose someone to receive any remaining prize money if they pass away before the full amount is paid out. The details of how this works depend on the rules of the lottery and the laws of the state.

When someone who's won a lottery annuity passes away before they've received all their payments, what happens next usually depends on the situation. If the winner had chosen someone to receive the remaining money, that person gets the payments. If not, the money goes to the winner's estate. For example, in Texas Administrative Code §401.310, the rules say that the person handling the deceased winner's estate can ask the lottery commission to give them any money left, all at once, instead of in scheduled payments.

In California, the representatives of an estate must work with the Lottery's Prize Payments Annuity Desk to keep the payments flowing to the right people, whether that's the designated beneficiaries or the estate itself. For big games like Mega Millions and Powerball, the rest of the money will go to either a named beneficiary or the estate. This is usually outlined in the annuity contract that comes with the lottery prize.

Like any legal process, there are specific steps and rules, which can cause delays and sometimes disputes among family members, especially if the deceased didn't leave a will or clear instructions about their winnings. It might also bring extra costs, including attorney fees and court charges. To avoid these issues, it's wise for winners to prepare a will early or establish a trust. This helps ensure that beneficiaries receive their payments without delays.

When a beneficiary inherits an annuity, taxes still apply. Let's assume that a beneficiary receives $100,000 in annuity and the federal tax for the total money received is at 22%, with an additional 5% tax levy from state level. This means the beneficiary has to pay a total of $27,000 in tax, leaving them with a balance of $73,000.

Not all beneficiaries go through the hurdles of paying taxes for every installment they receive. Some states, such as Florida and Texas, do not tax lottery winnings at all, meaning that any beneficiary residing within these states get to keep more of their money. Whereas, other states, like California, apply a progressive tax system, which may result in larger deductions. Estate taxes are exempt from this rule, but if the estate of the deceased is large, then estate taxes may also come into play, further affecting the amount passed down.

Because taxes can impact the actual amount received, beneficiaries are advised to work with financial professionals. A well-planned tax strategy can help minimize liabilities and ensure compliance with all tax regulations. Proper planning allows beneficiaries to manage their annuity payments effectively and secure a more stable financial future.