Michael Boone: Financial planning for lottery winners
Michael Boone has over 15 years experience in investments and securities. He is a Certified Financial Planner and a Chartered Financial Analyst. He does public speaking on financial matters, and has written for or been featured in many publications.
CNN: Good afternoon Michael Boone and welcome to CNN.com Newsroom.
BOONE: Hello! This is going to be fun -- a new format for me.
CNN: What's the very first piece of advice you would offer to any Powerball winner?
BOONE: I think the first thing would be "congratulations!" From a financial standpoint, I'd try to separate the emotional excitement of winning the prize from the actual decision-making phase of deciding what to do with the money.
CHAT PARTICIPANT: I'm sure you advise investment of the Powerball winnings, but how much would you leave for fun money?
BOONE: It really depends on the size of the award. It's going to be a percentage we'll work from, and it will depend on the person's financial situation. It's important to remember that this is exciting and fun, but my role as an advisor is not to make this into a drudgery where you feel like a kid put on an allowance. But it's important to not make major mistakes by being caught up in the excitement of the winning. So, let's say for instance that someone won $40 million. Nearly half that money may disappear in taxes to the federal and state governments. So, we're really talking about slightly over half of that money available.
Now, I would recommend taking a fairly significant amount, which may be $10,000 for some people, and a $100,000 to others, and dedicate that to just having a fantastic time doing something you've always dreamed of doing. In any case, $100,000 is a small percentage of the roughly $20-25 million that is left after taxes. One of the valuable tools that we use in early planning after coming into a large sum of money is to help people spend enough to get that sense of remorse that comes with maybe spending a little too much money. We find that's really useful to get to that stage early, where people say, "Okay, I've really gone through more money than I could possibly imagine in a short period of time, so I need to start being responsible with the rest of the money."
CHAT PARTICIPANT: What are the regulations on depositing such large amounts into financial instruments: banks, stock funds, etc.?
BOONE: Typically a large transaction like this will be handled by wire order. It will be worked out between the actual issuer of the check, in this case a consortium of states. So I'm not sure who issues the check, but it's worked out between the issuer and the bank on the other side that agrees to accept the money. I use the term bank, but it could also be an investment brokerage firm as well. A transaction of this size is something a bank has to be willing to accept, and the state has to be willing to wire it to that organization.
CHAT PARTICIPANT: How does a winner handle all the requests from charities for money that come once their identity is known?
BOONE: That's a great question. I mentioned that in my earlier piece on CNN. It's really important that you don't lose your personal values when you come into a large winning. One way to do that is to decide what charities you want to benefit and to plan this out as part of your overall plan of what to do with the money. Planning what charity you'd like to benefit is as important as selecting which house you want to buy, or which vacation you want to take with the money. So, where you donate the money needs to reflect whatever your personal values are.
Now, an interesting side fact is that not all charities are easily equipped to handle, say, a million dollar donation. The United Way, for instance, or a large national charity, knows exactly what to do with a million dollars. But your local church, synagogue or homeless shelter may have never seen a check that size. One thing that we do is work with the charities to help them maximize the value of the gift. This can be through giving the money over a period of time, through a pledge, or it can mean setting up a matching program to encourage gifts from other people.
CHAT PARTICIPANT: If you won would you go public or be anonymous?
BOONE: Well, it sure takes a lot of the pressure off to remain anonymous. Personally, if I won, I would remain anonymous, but that comes from the experience of living through people whose lives have been impacted in a negative way by the award, by the prize.
CHAT PARTICIPANT: Is it possible to remain anonymous?
BOONE: I don't know the answer to that question. Many drawings and lotteries do not allow you to remain anonymous, because it is a great marketing exposure for them to be able to share the story of the winner. For instance, the gentleman who won one of the Powerball winners, who is unemployed and in need of money, will definitely spur people to believe they can win. An anonymous person in Iowa is not much of a motivator to buy a ticket.
CHAT PARTICIPANT: Which is usually the best way to go for people -- a one lump sum payment or the multiple payment over a few years time?
BOONE: That's a great question. In general, the best option is the lump sum. Imagine that you are Powerball, and you are guaranteeing a stream of income for a period of years. They have to invest that money, and set it aside to guarantee that stream of income they offer to you. In order to guarantee that money, they invest in government securities, or similarly safe investments. We calculate for our clients the exact rate of return required to beat that rate, offered by the lottery. In the case of Powerball, it is approximately 4.75 percent annually. We believe that even a conservative investor can beat that return over the long run. Thus, it is best to take the lump sum. In addition, you have the issue of control of the funds, so that you could choose to invest them or donate them immediately, rather than wait for a time period that may be longer than your life span.
CHAT PARTICIPANT: Mr. Boone, in your opinion what would be a wise investment for today?
BOONE: Initially, we start with Treasury securities, meaning U.S. bonds, bills and notes, which are government guaranteed investments. Because an amount the size of a Powerball winning is well above the federal insurance limit for banks, we try to invest the money immediately in U.S. government guaranteed investments. From there, the horizon opens dramatically. For a very affluent investor, typical investments are going to include stocks, tax-free bonds, real estate, both commercial and residential, and it even may include tangible investments like paintings, coins, rare cars, and manuscripts. We believe strongly in diversification to reduce investment risk.
CHAT PARTICIPANT: Michael what do the states do with their share of winnings?
BOONE: That depends upon the state. Different states have earmarked different areas for their proceeds from the lotteries. Some states have said areas such as education funding, or even transportation. Other states, it may just go to the general fund.
CHAT PARTICIPANT: Should winners quit regular jobs?
BOONE: That's always one of the first questions people ask. My professional advice is, whatever you want to do. My experience shows me that you probably should quit your job in a pretty short period of time. Human nature is such that when you lack the necessary motivation to be going to work, it becomes a lot more drudgery than when you know you have to go there. I guess the way to look at it is if the boss makes you a little mad now, if you're a little irritated at conditions today, $20 million in your bank account won't make it any easier. Most people have a lot of other things they'd rather be doing with their time, if money wasn't an issue.
CHAT PARTICIPANT: Should a winner put some money into trust for their children and grandchildren to avoid estate taxes if they die?
BOONE: Estate taxes are a huge issue, when you have well over a million dollars in assets. Estate taxes can take up to 60 percent of a deceased person's estate. Let's just run the numbers on this, to show the impact this can have. If you start with a $40 million lump sum, and then take away 40 percent in taxes to the federal government, and $3 million to the state government, you're left with $21 million. If you were to die of a heart attack at the shock of being a winner, you'd have to pay nearly $13 million in estate taxes. This leaves $8 million for your heirs. Trusts can be a very useful tool in minimizing estate taxes. A trust must be irrevocable in order to have estate tax advantage. We would recommend using trusts to benefit your family over many generations.
CNN: Do you have any final thoughts for us today?
BOONE: Winning a lottery or receiving an inheritance can be an exciting and life-changing event. Many of the dreams, hopes, aspirations for yourself and your family can be realized. But it is also easy to lose track of who you are, what your values are, and the things that are truly most important to you. What we try to do is to help people have all of the good things, the benefits of winning and receiving the money, without losing themselves and their values in the process.
CNN: Thank you for joining us today, Michael Boone.
BOONE: You're welcome!
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