Winning a large lottery is a dream come true, but you are faced with immediate estate tax exposure if you were to win over $5.25 million.
A recent Powerball lump sum payout totaled almost $371 million. (The annuity option would pay over $590 million) . The ticket was sold in Florida, where there is no state income tax to pay. But 25% would be deducted from the lump sum for federal income taxes, leaving $278 million.
You might think that paying almost $100 million in taxes would be enough, but in fact the federal government sits poised to take a great deal more than that if you don’t take the appropriate action.
The top rate of the estate tax is 40% right now. If you apply that to a couple hundred million dollars you are certainly talking about a great deal of money.
And then there is the gift tax to consider as well. Let’s say that you want to give $25 million to each of your two children right away. Once that $5.25 million exclusion has been used up along with the $14,000 annual per person gift tax exclusion everything else is potentially taxable at a rate of 40%.
The lottery situation puts things into perspective. Few people can imagine earning this much money during their working years, but just about everyone has dreamed about winning a big jackpot.
Many people who are exposed to the estate tax say that the death levy is not fair because they have already paid plenty of taxes during their lives. Perhaps they have a point, but the estate tax is a fact of life, and anyone who is exposed must take steps to position their assets with tax efficiency in mind.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.