None of this is tax advice, since I am not a tax planner or a financial planner.
If you are talking a prize in the tens of millions, you have to stop thinking in terms of your personal tax situation and more in terms of your family’s overall tax situation, assuming you have family that you want to help or share with financially, and that everyone is reasonably responsible about finances.
Of course the suggestion below won’t be attractive if you want to keep the whole pot to yourself.
And I doubt you will be able to do much to reduce the income taxes on the initial prize.
But the real tax savings will be had by getting a portion of the winnings into your descendants hands right away, rather than waiting until they inherit it down the road.
(Of course, who knows what inheritance tax laws will look like ten years down the road? You can only plan based on current law.)
Here is a very generalized, simplified example:
Assume you are a widow/widower, you have three adult children, and you win $40 million. Also assume you can grow the prize about 5% per year after taxes and spending (not likely, I know, but work with me), and you die in 14 years. Also assume that the estate tax exclusion is $5 million, and the estate tax is 40%. (close enough to the current situation.)
If you keep the prize all to yourself, it will roughly double in the 14 years before you die ($80 million). After excluding $5 million, your estate will owe 40% of $75 million, or $30 million in inheritance taxes. That leaves $50 million for your children to split, resulting in each getting $16.67 million after you die. Pretty sweet for them.
Compare this with a situation where you split the initial prize equally with your children right at the start (i.e., they received the prize as part of the initial payout, not as a gift from you which would trigger gift tax.)
(I am not going to try to determine what is the best form from a tax standpoint for them to get their share, whether it is outright, or through a trust, or as shares in a partnership. I am just pointing out a general principle here.)
Then you would have only $10 million at the start, and roughly $20 million when you die. That means your estate would only owe $6 million in estate taxes. Your kids would receive $14 million, or $4.67 million each. Plus the initial $10 million each that they would have received at the start would now theoretically be worth $20 million each.
So basically, you have avoided $24 million in future estate taxes from the standpoint of the whole family, which means each surviving branch of the family will have an extra $8 million each when you die in 14 years.
This largely ignores factors such as spending of the prize by a larger group of people, but again, one of the assumptions is that everyone is someone you want to help/share with financially and that they are responsible about money, so the use of the $10 million during the 14 years before you die is of significant value to them. Whether the actual savings is $24 million or a smaller figure, the point is you will likely reduce future taxes on your estate by letting children be co-prizewinners.