Winning the lottery brings with it a rush of excitement, followed by countless questions. Many lottery winners wonder whether they should establish a trust for their winnings. The revocable trust and the blind trust are two options commonly used by lottery winners. Each has its own advantages and disadvantages.
One option for claiming your winnings is to establish a revocable trust before turning in your ticket. You choose a trustee to manage property transferred into the trust, and she is obligated to act according to the terms of the trust. You, as the grantor of the trust, retain the right to change the terms of the trust throughout your lifetime.
After you transfer the ticket to the trustee and allow her to claim the winnings, the money is paid directly to the trust, potentially avoiding significant gift tax issues. You can use your trust as an estate-planning tool, naming beneficiaries who will inherit the funds outside of probate when you die. Your estate-planning attorney can also include special language in the trust to reduce your estate tax liability.
While a revocable trust allows you a great deal of flexibility and control over your winnings, it does not keep your identity as a winner a secret.
Lottery winners seeking anonymity sometimes opt to establish a blind trust. Under a blind trust, you designate a trustee and beneficiaries. You can name yourself as a beneficiary, but you transfer your lottery ticket to the trustee. The trustee, often a lawyer or financial advisor, has complete discretion over how the winnings are managed. In many of the states that allow this arrangement, you and other beneficiaries can remain anonymous. Although you give up the right to direct the trustee's management of a blind trust, you retain the right to revoke the trust.
Each state has its own laws and procedures governing lottery winnings. Most states allow winners to establish trusts to claim their lottery winnings. A few states, including Pennsylvania, prohibit blind trusts from claiming lottery winnings, but they permit other trusts to do so.
Consult an attorney before you claim your lottery winnings. Not only can she advise you on how best to make your claim, but she can also help you anticipate the estate-planning concerns, gift tax issues and other legal surprises that can accompany a big win.