If I decide to take the annuity (currently at over 6 mil after taxes), how safe is my money from further taxation/fees/confiscation down the line? Can our government decide that they get the money instead of me if certain conditions are met, or is that moolah mine no matter what?
There’s no reason why the government cannot raise income taxes and tax you on it, yes. You would be at the mercy of increased tax rates down the road, especially since your income would be in the highest possible bracket no matter what.
But as for total confiscation of income, I don’t think that could happen (unless it came in the form of something like, “a 100% tax on all income above $100,000 a year,”) and if it got to that point, then by then you have a government so dystopic that you probably have even worse problems to worry about.
One thing you can be sure of is that the government will never, ever do anything that would amount to taxing investment. Lottery proceeds are invested in interest-bearing funds, and the payouts to winners taken from those funds in a manner similar to an annuity or security. I presume the payments received are subject to ordinary taxation like any income, which is why lottery winners are advised to reinvest in other interest-paying investments. But basically the lottery is pure capitalism, and no way the government is going after that. At worst, you might lose a civil lawsuit that garnishes some portion of your payments or you might end up paying half in a divorce.
I wouldn’t be so sure. There were rumblings during the last election that the idea of taxing wealth - i.e. assets, not income - was not a bad idea for those rich beyond a certain point.
The logic was something like this - the ultrawealthy do not have income. They own stocks, which appreciate. they borrow against those stocks, thus keeping them so they can continue to grow. Borrowed money is not income. Taxes on the asset growth is not due until they are sold. usually this time of reckoning is due on the death of the owner, but (from what I’m told) apparently the stocks can transfer to heirs at current market value with no capital gains as part of an estate, thus escaping taxes altogether…
Presumably the trigger point would be fairly high.It depends how much you win, I guess…
If you borrow against the stock, did that not have to ever be paid back? How does that work?
The heirs have to pay back the loans. But the cost basis of the inherited assets are bumped up to the value at the time of death. Hence no capital gains tax.
One thing a lot of explanations leave out is estate taxes. Those still need to be paid. Most people who do this are rich enough that at least at the Federal level they’ll have to pay something. (Of course loans subtract from the value of the estate.)
Another great strategy for avoiding taxes is doing a long-term appreciated asset. You “give” a charity an asset like a pile of stock. But they don’t actually get it for 20-30 years. During that time the asset appreciates in value. At the end of the term the charity gets the original stock value. The donor gets to deduct the original stock value and, even better, gets to keep the appreciated amount tax free. Members of the Walton family do this a lot.
Maybe I’m missing something, but even if they did tax wealth, that shouldn’t affect the annuity, as it’s not yours until each of those monthly payments is made.
So if you win a million bucks paid out in some kind of annuity, whatever that principal is would be someone else’s problem for taxation, and you’d only be on the hook for whatever you’re paid out.
And AFAIK, that annuity is more of a contract- that other party is on the hook to pay out a specified amount a month, regardless of what happens investment-wise or tax-wise.
If the lottery agency went bankrupt, you would be one in a long line of creditors, and probably receive a small percentage of your original “win.” I personally would always take the cash payout and oversee the investing myself.
As for estate taxes, the key is to put all the assets in an irrevocable trust. That way there is no probate, the monthly payout is just divided among the surviving recipients. So you may receive 20 shares of the monthly payout while your spouse and kids get 1 share each. Then when you pass, your shares are divided equally among the others. . .
The trouble is finding a trustworthy person/group to oversee the trust investment and payouts.
You take out more loans to pay back what you owe. yes, there’s an accumulating debt against your assets, but you essentially live income-tax free. Someone with a billion dollars of accumulated capital gains does not need a billion dollars in living expenses. So you borrow a few million a year for groceries and cocaine, and when you die, your stocks are worth two billion and you owe $200 million, so sell some. If you are in the Bezos/Musk stratosphere, your living expenses are nothing compared to your accumulated wealth. (Unless you buy a billion-dollar yacht that you rarely use.) This strategy was extremely useful in the days of low interest which we may be returning to.
See? All that accumulated capital gains evaporates, gone with the wind, all that’s left is the estate taxes. I wonder what taxes will be cut in the next 4 years?
Note that in 2024, the first $13,610,000 is tax exempt (heading to $13.99 million in 2025).
I believe they buy a commercial annuity with the winnings, but I can’t imagine any state letting their captive lottery commission go bankrupt unless they got out of the lottery business entirely.
The heirs don’t have to pay back the loan, debts don’t transfer in probate. The estate has to pay back the loan before the heirs can collect. I’d assume this would require liquidating some assets and paying the capital gains tax at that point would it not?
If you own your own home, you pay property taxes. Property taxes are determined by a perceived wealth of the property.
How do the British handle it, since property tax laws go way back there and in the modern era are popularly depicted as near-confiscatory.
Huge estate taxes of 40%
How Inheritance Tax works: thresholds, rules and allowances: Overview - GOV.UK.
Which is not the same thing. Yes, property tax is based on value of the property. People who currently pay income tax also pay property tax. Wealth tax is supposed to be somehow taxing investments and/or savings over a high threshold, as an alternate to income tax for those who don’t have “income”.
Are you asking about taxation on the lottery win? Because my understanding is that in the UK, like many countries, lottery winnings are not subject to income tax. Unlike the US, of course.
No, I was asking about the British approach to taxing wealth instead of income.
This is incorrect. The vehicles you are describing are donor advised funds (DAFs), and charitable remainder trusts (CRTs).
In a DAF, you donate an asset (usually a large unrealized pile of stock) and get a charitable deduction for the entire value, but are only required to pay out a small percentage of it every year. The initial gift is irrevocable, and the donor doesn’t get any income or interest from it - but they do get to continue to invest it at their own discretion.
CRTs allow a donor to contribute an asset (usually a large unrealized pile of stock), and get a charitable deduction for a percentage of it (around half). During the life of the donor, they receive income from that trust - usually a fixed percentage of it. Depending on how well the donor (or their advisor) invests that asset, they may get quite a bit out of this arrangement. This income is taxed. When the donor(s) die, the remainder of that trust goes to charity.
I think I’d like to get back to the question at hand, and not the general subject of taxing wealth in different countries. I think that is why I posted in this forum.