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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121461  
Subject: Re: hypothetical question - just for fun Date: 9/24/2004 2:44 PM
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I don't unnerstand<sic> dis<sic> at all!
A person wins the lottery and decides to take it in a lump sum. Depending on tax jurisdictions (state) the winner(s) might end up with about 55%, give or take.
How will setting up a 70/10/10/10 scheme minimize taxes if it was set up before ticket purchase or before redeeming it? It seems to me taxes will have been paid at redemption on a lump sum payout. Ditto for a single winner who wants to "gift" the the winnings.
Interesting question!
Best regards,
Duane

___________________________________________

Duane,

If you're the jackpot winner, it will be cheaper to have the others pick up the income, and the income tax directly. There'll be a little savings on the income tax rate, but you get to bypass the gift tax altogether.

As Ira alluded, such a profit split can be fraudulent, or it could be perfectly legitimate.

Either way, one reason that lottery winners sometimes take a couple of weeks to come forward and claim their prizes, is that they've been taking care of business, such as getting unlisted phone numbers (easier these days, with cellular). And their lawyers have been busy throwing together a joint venture agreement "to formalize the oral understanding that previously has existed among the parties", or words to that effect. And maybe a family foundation, charitable trust, or something like that, too.

Where these things result in a legitimate prize-winning arrangement is when a group of family members, neighbors, or co-workers throw their money together to buy a big block of tickets and agree to share the winnings. This happens more when there's a big jackpot in an adjoining state, and somebody has to drive across the state line to make the purchase.

Where you push the envelope is when somebody wins, and then wishes he had the family members in on a joint venture with him, and so they do the paperwork then.

As you noted, "taxes will have been paid at redemption" on a lump-sum, or installments, for that matter. But don't confuse the withholding with the tax liability. If you win a jackpot, they don't withhold enough. The law currently provides for a flat 25% to be withheld. But you'll easily be in the top bracket at 35%. And the way some lottery winners spent it, they can have a problem on the following April 15.

Bill







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