20-ye ar lottery winnings - Page 2

#70 01-25-2006, 11:05 PM

"Seth Breidbart" <sethb[at]panix.com> wrote:
- quote -

> David Woods <davidwoods[at]verizon.net> wrote:
> > "Seth Breidbart" <sethb[at]panix.com> wrote:

> > > Suppose there were 1 year remaining, with a $10 million
> > > payment. The estate has enough cash to pay its taxes.
> > > Since tax was paid on the $9.5 million value of the
> > > remaining payment, isn't $9.5 million inherited and
> > > therefore non-taxable when received?
> > > > > Or does the estate have to stay open until all payments are
> > > received, paying tax on IRD as the lottery money comes in?

> > The estate needs to remain open and there is no basis
> > adjustment at death. All lottery payments would be IRD.

> That seems like double taxation, unless the 0 basis means
> there's no inheritance tax on the present value of the
> lottery annuity.

Paying both estate tax and income tax is not double
taxation. It's no different than paying income tax and then
personal property tax on an automobile you might win.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#69 01-25-2006, 10:46 PM

"Gil Faver" <Rowdy'sboss[at]ND.com> wrote:

- quote -

> why focus on farms? I know of much real estate that comes
> onto the market due to the need to pay estate taxes.

If it's just investment property, well, go sell it to pay
the taxes if you have to.

But if it's the family business, the family livelihood, it
should not have to be sold just because the parents die.
Traditionally farms fall into this category more than other
businesses.

Stu

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#68 01-25-2006, 10:46 PM

Two very good tax-and-estate lawyers in two different states
have been definite that the present value of a future stream
of income due to the deceased is an immediately taxable
asset on death (federal estate tax).

This was in the context of substantial royalty payments. I
see no reason why future payments of lottery winnings would
be treated differently, but I'm not a lawyer. Any lottery
winner should consult a good lawyer. Non-lawyer's guesses
(including mine) on this issue are not reliable.

David

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#67 01-25-2006, 10:46 PM

Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:
- quote -

> sethb[at]panix.com (Seth Breidbart) wrote:
> > David Woods <davidwoods[at]verizon.net> wrote:

> > > The estate needs to remain open and there is no basis
> > > adjustment at death. All lottery payments would be IRD.

> > That seems like double taxation, unless the 0 basis means
> > there's no inheritance tax on the present value of the
> > lottery annuity.

> Apparently it is double taxation - estate tax is assessed
> on the present value of the future income stream, and
> income tax is assessed on income received that has not yet
> been taxed.

But the present value of the future income stream _has_ been
taxed, so taxes should be due only on the excess over that,
right?

Seth

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#66 01-25-2006, 10:46 PM

Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:
- quote -

> sethb[at]panix.com (Seth Breidbart) wrote:
> > Gary Goodman <XgaryXg7X[at]yahoo.com> wrote:

> > > It's usually best to take the lump sum. The lottery
> > > commissions pay the first payment, but then buy an annuity
> > > from an insurance company or the like. The annuity usually
> > > looks for a very conservative return on investment so that
> > > the insurance company (or whomever) is certain to make the
> > > payments and a profit.

> > Except there's double taxation that way (the lump sum is hit
> > with taxes, then the interest you earn on it is hit again).
> > For instance, if the insurance company pays 4% and you can
> > lock in 5%, but you're in the 40% tax bracket (not unlikely
> > for a lottery winner), you're better off collecting the
> > annuity.

> I don't see how that constitutes double taxation. If you take
> a lump sum and you die, your estate pays estate tax on what
> you have left. If you take payments and die, you are taxed on
> the present actuarial value of the income stream. So the tax
> on both should be about the same.
> And then in both cases you pay income tax on each additional
> dollar received, either annual payment on the one hand or

Is that, additional to the amount already taxed as part of
the estate? That isn't what previous posters wrote.

That is, if there's $20 million remaining to be paid over
time, and the present value (taxable) is $15 million, will
tax later be due on all $20 million as it's received, or
only on $5 million of it?

Seth

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#65 01-25-2006, 12:06 AM

- quote -

> I remember two cases from my Chicago IRS days in the 1970's.
> Both involved prominent families in which husband and wife
> died close together, and both predated major changes that
> were made in the law to give more payment options.
> I also remember from my IRS National Office days when Congress
> was harping about Accounts Receivable Dollar Inventory and I
> got reports on megacases. There was an estate involving a
> closely-held company with liability well over $100 million
> that had been making payments at 4% interest since Hector
> was a pup. No sale had to be made, and the family retained
> control.
> As for Becky and Billy, those poor farm kids who would just
> love to save the family farm, but have to sell to pay estate
> tax, opponents are still looking for them. Perhaps if they
> looked in the big city, where Becky and Billy fled some years
> ago to get off the farm, they could find them, wanting their
> cash but not wanting to pay estate tax.
> Those who inherit farms and want to work them have no trouble
> getting extensions to pay.

"How is this any different than an estate that owns real
estate or a business that is forced to sell in order to pay
the IRS?"

why focus on farms? I know of much real estate that comes
onto the market due to the need to pay estate taxes.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#64 01-24-2006, 06:31 AM

- quote -

> > There are plenty of estates that have had to sell.
> > Not all, but plenty.

> That's the claim I've seen, but when asked to provide
> specific information (names and dates) it somehow is never
> available.

I remember two cases from my Chicago IRS days in the 1970's.
Both involved prominent families in which husband and wife
died close together, and both predated major changes that
were made in the law to give more payment options.

I also remember from my IRS National Office days when Congress
was harping about Accounts Receivable Dollar Inventory and I
got reports on megacases. There was an estate involving a
closely-held company with liability well over $100 million
that had been making payments at 4% interest since Hector
was a pup. No sale had to be made, and the family retained
control.

As for Becky and Billy, those poor farm kids who would just
love to save the family farm, but have to sell to pay estate
tax, opponents are still looking for them. Perhaps if they
looked in the big city, where Becky and Billy fled some years
ago to get off the farm, they could find them, wanting their
cash but not wanting to pay estate tax.

Those who inherit farms and want to work them have no trouble
getting extensions to pay.

--
Phil Marti
Clarksburg, MD

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#63 01-24-2006, 06:27 AM

sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

> David Woods <davidwoods[at]verizon.net> wrote:

> > The estate needs to remain open and there is no basis
> > adjustment at death. All lottery payments would be IRD.

> That seems like double taxation, unless the 0 basis means
> there's no inheritance tax on the present value of the
> lottery annuity.

Apparently it is double taxation - estate tax is assessed
on the present value of the future income stream, and
income tax is assessed on income received that has not yet
been taxed.

The same thing happens with IRAs and other qualified plans
- there's estate tax on the value of what's in there, and
income tax when it comes out of the plan.

Stu

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#62 01-24-2006, 06:14 AM

sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

> Gary Goodman <XgaryXg7X[at]yahoo.com> wrote:

> > It's usually best to take the lump sum. The lottery
> > commissions pay the first payment, but then buy an annuity
> > from an insurance company or the like. The annuity usually
> > looks for a very conservative return on investment so that
> > the insurance company (or whomever) is certain to make the
> > payments and a profit.

> Except there's double taxation that way (the lump sum is hit
> with taxes, then the interest you earn on it is hit again).
> For instance, if the insurance company pays 4% and you can
> lock in 5%, but you're in the 40% tax bracket (not unlikely
> for a lottery winner), you're better off collecting the
> annuity.

I don't see how that constitutes double taxation. If you take
a lump sum and you die, your estate pays estate tax on what
you have left. If you take payments and die, you are taxed on
the present actuarial value of the income stream. So the tax
on both should be about the same.

And then in both cases you pay income tax on each additional
dollar received, either annual payment on the one hand or
interest on the other. In the case of interest payments that
may be lower than the annual lottery payments, so you might
come out ahead a little there. But not by a lot, I would guess.

Stu

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#61 01-24-2006, 05:01 AM

Gil Faver <Rowdy'sboss[at]ND.com> wrote:
- quote -

> "Phil Marti" <prm20871[at]verizon.net> wrote:

> > Opponents of the estate tax have been trying for years to
> > find one family farm that had to be sold even though the
> > heirs wanted to continue farming it.

> There are plenty of estates that have had to sell.
> Not all, but plenty.

That's the claim I've seen, but when asked to provide
specific information (names and dates) it somehow is never
available.

Seth

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#60 01-24-2006, 05:01 AM

David Woods <davidwoods[at]verizon.net> wrote:
- quote -

> "Seth Breidbart" <sethb[at]panix.com> wrote:

> > Suppose there were 1 year remaining, with a $10 million
> > payment. The estate has enough cash to pay its taxes.
> > Since tax was paid on the $9.5 million value of the
> > remaining payment, isn't $9.5 million inherited and
> > therefore non-taxable when received?
> > > Or does the estate have to stay open until all payments are
> > received, paying tax on IRD as the lottery money comes in?

> The estate needs to remain open and there is no basis
> adjustment at death. All lottery payments would be IRD.

That seems like double taxation, unless the 0 basis means
there's no inheritance tax on the present value of the
lottery annuity.

Seth

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#59 01-24-2006, 05:00 AM

Could George have avoided the estate problems by
establishing a family trust to receive the annual payments
and distribute them to (living) persons as decreed by the
trust terms and/or the trustees?

Moderator:
That is a very shrewd approach. Unfortunately it requires
planning and that is atypical of lottery winners.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#58 01-24-2006, 04:20 AM

David Woods <davidwoods[at]verizon.net> wrote:
- quote -

> "Seth Breidbart" <sethb[at]panix.com> wrote:

> > So the remaining lottery payments can have a negative value,
> > since the estate taxes are based on the time-discounted
> > total amounts received, and the full amounts are taxable
> > income when received? (I'm assuming that both estate taxes
> > and total state+federal income taxes can exceed 50%.)

> The full amounts are taxable to the estate exactly as they
> would have been to the decedent.

Does that mean the right to receive the future payments is
not considered a taxable asset for estate tax purposes? Or
is there some extent to which there is double tax?

Stu

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#57 01-24-2006, 03:59 AM

Gary Goodman <XgaryXg7X[at]yahoo.com> wrote:

- quote -

> In the stated question, it's ordinary income when the checks
> are received. My guess as to the treatment on an estate
> return depends on the rules of the lottery. Payments may
> stop upon death of the winner.

Not with the usual state lotteries.

- quote -

> It's usually best to take the lump sum. The lottery
> commissions pay the first payment, but then buy an annuity
> from an insurance company or the like. The annuity usually
> looks for a very conservative return on investment so that
> the insurance company (or whomever) is certain to make the
> payments and a profit.

Except there's double taxation that way (the lump sum is hit
with taxes, then the interest you earn on it is hit again).
For instance, if the insurance company pays 4% and you can
lock in 5%, but you're in the 40% tax bracket (not unlikely
for a lottery winner), you're better off collecting the
annuity.

Seth

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#56 01-23-2006, 07:51 AM

"Phil Marti" <prm20871[at]verizon.net> wrote:
- quote -

> "Gil Faver" <Rowdy'sboss[at]ND.com> wrote

> > So, the estate has a way to
> > get the money to pay the IRS. How is this any different
> > than an estate that owns real estate or a business that
> > is forced to sell in order to pay the IRS? It is not
> > different at all - it is they exact same gyp!

> It's also a myth that estates have to sell assets the heirs
> would rather hold onto in order to pay estate tax.
> Extensions of time to pay are common, and there are special
> Code provisions for farms and closely held businesses.
> Opponents of the estate tax have been trying for years to
> find one family farm that had to be sold even though the
> heirs wanted to continue farming it.

There are plenty of estates that have had to sell.
Not all, but plenty.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#55 01-23-2006, 07:32 AM

"Seth Breidbart" <sethb[at]panix.com> wrote:
- quote -

> Dick Adams <rdadams[at]smart.net> wrote:
> > NadCixelsyd wrote:

> > > Slighty modification: George leaves the annuity to his
> > > wife, Betty. Does Betty inherit the basis of $10m. Therefore
> > > most of the proceeds are return of capital and therefore not
> > > income? Would this be any different if George had left the
> > > lottery annuity to his son, Paul?

> > Not true. It's ordinary income no matter how you cut it.
> > Turning ordinary income into capital gains requires a minor
> > miracle.

> George's estate holds a contract for the right to receive $1
> million/year for 16 years. Its value is $10 million.
> Estate tax is paid on the $10 million (worry about how,
> later). Doesn't that give the contract a value of $10
> million, so when $16 million is received (over time), $6
> million is taxable, and $10 million is considered inherited?
> Suppose there were 1 year remaining, with a $10 million
> payment. The estate has enough cash to pay its taxes.
> Since tax was paid on the $9.5 million value of the
> remaining payment, isn't $9.5 million inherited and
> therefore non-taxable when received?
> Or does the estate have to stay open until all payments are
> received, paying tax on IRD as the lottery money comes in?

The estate needs to remain open and there is no basis
adjustment at death. All lottery payments would be IRD.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#54 01-23-2006, 07:32 AM

"Seth Breidbart" <sethb[at]panix.com> wrote:
- quote -

> David Woods, EA, ChFC, CLU <dwoods[at]woods-financial.com> wrote:
> > "NadCixelsyd" <nadcixelsyd[at]aol.com> wrote:

> > > Slighty modification: George leaves the annuity to his
> > > wife, Betty. Does Betty inherit the basis of $10m.

> > There is no basis in this annuity, death or no death.

> So the remaining lottery payments can have a negative value,
> since the estate taxes are based on the time-discounted
> total amounts received, and the full amounts are taxable
> income when received? (I'm assuming that both estate taxes
> and total state+federal income taxes can exceed 50%.)

The full amounts are taxable to the estate exactly as they
would have been to the decedent.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#53 01-22-2006, 11:35 AM

"Gil Faver" <Rowdy'sboss[at]ND.com> wrote

- quote -

> So, the estate has a way to
> get the money to pay the IRS. How is this any different
> than an estate that owns real estate or a business that is
> forced to sell in order to pay the IRS? It is not different
> at all - it is they exact same gyp!

It's also a myth that estates have to sell assets the heirs
would rather hold onto in order to pay estate tax.
Extensions of time to pay are common, and there are special
Code provisions for farms and closely held businesses.

Opponents of the estate tax have been trying for years to
find one family farm that had to be sold even though the
heirs wanted to continue farming it.

--
Phil Marti
Clarksburg, MD

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#52 01-20-2006, 10:54 PM

"Dick Adams" <rdadams[at]smart.net> wrote:

- quote -

> NadCixelsyd wrote:

> > George wins the lottery and it pays $1 million per year
for
> > 20 years. I assume $1m is income to George whenever he
> > receives a check. Four years into the 20 years, George
> > dies. He has no assets other than the remaining lottery
> > annuity. Because of the time-value of $$$, the
remaining
> > $16m annuity is valued at $10m at the time of his death.
> > How can the estate pay any estate tax if there's nothing
> > until the next annual payout?

> This is a very real problem. It has to have been addressed
> in the past, but I've not seen any case law on the subject.
> It would be interesting to find the written IRS policy on
> this issue.

there are places that will pay you the $10M to receive the
$16M annuity. Or, maybe they would pay you a bit less than
the $10M, but you get the idea. So, the estate has a way to
get the money to pay the IRS. How is this any different
than an estate that owns real estate or a business that is
forced to sell in order to pay the IRS? It is not different
at all - it is they exact same gyp!

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

#51 01-20-2006, 10:54 PM

A related question I've been considering, preparing for when
I win Mega Lotto, is how best to claim the winnings up
front.

If I went to collect the whole jackpot, I'd end up giving my
siblings money anyway, and then smaller pieces to related
relatives, and so on to whomever comes out of the closet.
Lots of gift tax consequences.

So why not go down to the lottery office and tell them I
paid for half the ticket, my siblings paid 40 cents, and
everyone else one or two cents? I wonder if they'd care it
was a lie.

Moderator: Take the cash and put me in for a nickel.

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >

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