Planning should be first step after big Lotto win

Associated Press and herald staff

Buying lottery tickets shouldn’t be part of your long-term investment strategy, but if – just if – you should hit the big one, there are ways to capitalize on the win.

Winners like Karen Ontko of Monroe, who took home a check for $4.32 million after her $12 million Lotto win last week, can find there’s a downside of becoming instant multimillionaires – unsolicited business proposals, appeals from charities they’ve never heard of and second cousins seeking reunions after years of silence.

One winning couple, Erwin and Patricia Wales of Buxton, Me., who will collect $41.4 million before taxes from their recent Powerball Lottery win, already has hired lawyer Terrence Garmey to run interference.

“We were trying to slow the whole process down and really allow this family to absorb the changes, some of which are going to be wonderful, some of which aren’t so wonderful,” Garmey told reporters.

In addition to getting the Wales’ home phone number changed, Garmey has gathered a team of financial advisers, accountants and lawyers to help them plan how best to use their winnings. They’ve talked about buying a new pickup truck and helping their children and grandchildren.

A lot of Americans apparently would like to be in their shoes, given that lottery ticket sales are up to some $38 billion a year.

Lottery winners – as well as people who come into a big inheritance or collect a significant damage settlement or cash out corporate stock options – do face difficult choices over how to spend and save their new wealth, financial planners say.

When it comes to lotteries, the first question is how to collect the money.

Phil Behnen, an accountant and financial planner at A.G. Edwards &Sons in St. Louis, said about 80 percent of winners take a lump-sum distribution, while the rest take an annual payout.

“The installment plan can make sense for people who would find a bulging bank account to be too tempting,” Behnen said. But he generally recommends the lump-sum payment because “they can get that money working for them right away with high-yield investments.”

Ontko, 46, opted for the lump sum, which was why she received only about one-third of the amount she would have been paid in installments. She said establishing college accounts for young family members was a top priority.

Taxes have to be considered early, too.

“There are major tax implications,” Behnen said. “There are taxes due on payout, there are estimated tax payments every year after that and there are estate tax implications.”

He said the advantage of hiring a team of experts to help is that lottery winners often have unrealistic expectations about how far their money will go.

“People think they’re going to buy a new home, and two new cars and a house for mom. Then there’s a cousin in need, and some nephews who’d like money for college. And they want to quit their jobs and join the country club and travel,” Behnen said. “But it takes work to get the numbers to add up, especially if they want an income stream for the rest of their lives.”

Susan Bradley, who runs the Sudden Money Institute in Palm Beach Gardens, Fla., says lottery winners often make hasty decisions they later regret.

“Winners are generally in a high state of confusion,” she said. “They’re looking at more money than they’ve ever seen in their lives, and it can be overwhelming. They’ll schedule a meeting with their planners for next week, then arrive at that meeting and announce that they’ve quit their jobs and bought a $2 million house.”

Bradley recommends winners establish a “decision-free zone” to give them the space to decide what to spend, what to save and what to give away.

The next step is to write what she terms a “bliss list.” The idea, she said, is to outline your dreams – how you want to live, how you want to help others live, how you want to leave your mark on the world.

She said most lottery winners were “most prone to overspending and overcommitting for a home or a vacation home … and undercommitted to investing to make the money last for themselves, their heirs, their charitable causes.”

In the end, it comes down to making choices because winners “realize they can do anything on the bliss list that they want, but not everything.”