Post by: Desertdog on January 14, 2007, 07:43:46 PM
Lottery Winner: Thieves "Got All My Money"
Winner Of Record-Breaking Powerball Jackpot Says Crooks Have Cleaned Out His Accounts
http://www.cbsnews.com/stories/2007/01/12/national/main2357053.shtml?source=RSSattr=U.S._2357053#ccmm
(CBS/AP) A man beset by problems since winning a record lottery jackpot says he can't pay a settlement to a casino worker because thieves cleaned out his bank accounts.
Powerball winner Jack Whittaker gave that explanation in a note last fall to a lawyer for Kitti French, who accused him of assaulting her at the Tri-State Racetrack and Gaming Center, a slots-only casino near Charleston, according to a motion French's lawyer filed this week demanding payment of the confidential settlement.
Although he was already a wealthy contractor, Whittaker became an instant celebrity on Christmas Day 2002 after winning a $314.9 million Powerball jackpot. He took his winnings in a lump sum of $113 million after taxes, and at a news conference in which he came across as a jolly saint, he promised to donate one-tenth to his church and contribute to other causes.
He soon created a charity to help people find jobs, buy food or get an education; he split $7 million among three churches; and he gave money to improve a Little League park and buy playground equipment and coloring books for children.
But his life has been marred by lawsuits and personal tragedies. He faced his granddaughter's death by drug overdose in 2005; he was sued for bouncing checks at Atlantic City, N.J., casinos; he was ordered to undergo rehab after being arrested on drunken driving charges; his vehicles and business have been burglarized; and he was sued by the father of an 18-year-old boy, a friend of his granddaughter's, who was found dead in Whittaker's house.
In the latest lawsuit, Whittaker told French's lawyer, John Barrett, that "a team of crooks" cashed checks in September at 12 City National Bank branches and "got all my money," according to the motion Barrett filed Wednesday in state court.
"I intend to pay but can't without any money," Whittaker wrote, according to the motion.
An official with City National Bank said Friday the bank is investigating "small discrepancies" in Whittaker's accounts.
Calls to Whittaker and his lawyers Friday were not immediately returned.
Post by: gunsmith on January 14, 2007, 08:13:26 PM
and seeking help.
I feel kind of sorry for him, losing a granddaughter has gotta be rough.
Post by: 280plus on January 15, 2007, 02:33:35 AM
Post by: BozemanMT on January 15, 2007, 04:16:12 AM
Guy was successful businessman too, you would think he could handle the money
apparantly not
Me, I'd blow it all, but I wouldn't whine about it.
Post by: HankB on January 15, 2007, 04:26:18 AM
It would be nice to go on an African "Big 5" safari and come back home with more money than when I left . . .
I don't see myself getting continuously drunk or getting doped up just so I could feel worse later . . .
Post by: The Rabbi on January 15, 2007, 08:51:17 AM
Post by: InfidelSerf on January 15, 2007, 09:14:06 AM
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This is why if I won the big one, I would take the yearly payments. That way I could go broke 26 times instead of once.
No if I won the big one I'd do like the guy in OR that won the largest one prior to this guys win. He took 6 months before even letting the officials know he won, in order to build a mastermind group of lawyers, accountants even a publicist.
I would take the one lump sum, because I would invest 95% of my winnings. Take half of the 5% left over and just "blow" it. The other hald of that 5% would be to eliminate debt and buy the essencials.
I wouldn't touch any of the other 95% until my returns hit certain goals. Like not spend one dime of it until it doubled.
Of course I would actually have to buy a ticket in order to win.
SWMBO and I buy a few when it's over 100Million.
Otherwise it's a complete waste of money.
Post by: MechAg94 on January 15, 2007, 09:46:01 AM
I would definitely have to talk to a lawyer about taxes and liability as well as a finance guy or two. I know a friend who was into finance stuff and often helped people set up annuities and such after getting settlements. I'd probably consult with him and get a referral.
Also, don't keep all your money in checking accounts. If this guy is not lying, that looks like what he did. I can't imagine spending that much money, but it is obviously possible.
Post by: MechAg94 on January 15, 2007, 09:48:51 AM
There was a guy in Texas that said he was building an underground garage at his house for his car collection. He only won 1.5 mil take home. I figure he spent almost half that on the garage.
It takes a pretty decent amount of money to be truly independently wealthy. Veloce851 has it right. You might need to put the money away and keep living your normal life for 5 or 10 years and let that money build into an early retirement nest egg. Tax free bonds are also another option.
Post by: Brad Johnson on January 15, 2007, 09:58:42 AM
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I would take the one lump sum, because I would invest 95% of my winnings. Take half of the 5% left over and just "blow" it. The other hald of that 5% would be to eliminate debt and buy the essencials.
I wouldn't touch any of the other 95% until my returns hit certain goals. Like not spend one dime of it until it doubled.
I wouldn't touch any of the other 95% until my returns hit certain goals. Like not spend one dime of it until it doubled.
No. Way. There's a reasons they offer you a lump-sum option, and it's not because it's good for you.
Not only do you only get a percentage of the actual winnings (usually around 60% of the stated jackpot), you also get hit with ALL the taxes up front and there isn't a darn thing you can do about it except wave and thank them for taking it.
If you go payments you can begin structuring your finances over time to minimize the tax losses. Invest half the annual payment and live on the rest. At the end of the 25 yr jackpot payout the revenue from the half you invested, even at a modest return, will be as much as the actual payments were. You end up with a greater net return and you kept the govt's grubby hands off a little more of it in the interim.
Brad
Post by: HankB on January 15, 2007, 10:09:40 AM
Not only do you only get a percentage of the actual winnings (usually around 60% of the stated jackpot), you also get hit with ALL the taxes up front and there isn't a darn thing you can do about it except wave and thank them for taking it.
No. If you live in Texas or any other state without a state income tax, you're better off to get the money into your own hands now . . . if you take, say, 20 years of payments, then, first, you'll be hit with state income taxes when & if they're imposed, and second, your payments each year will be in inflation-devalued currency. As for tax rates . . . lotto winnings are ordinary income, not subject to preferential tax treatment like (for example) capital gains. Your top marginal rate on, say, $15,000,000 a year won't be much different than your top marginal rate if you take all the money in a lump sum. And now, you have a chance to invest it, convert some to hard & portable assets, and perhaps stash some overseas (flight capital?) if you're so inclined.
Of course I would actually have to buy a ticket in order to win.
Hmmm . . . so THAT's my problem!Actually, I regard the lotto as a tax on people who don't understand statistics . . . but I admit that I may break down and spend $5 or so when the advertised jackpot approaches the odds against winning. (Needless to say, I don't buy tickets very often.)
Post by: Brad Johnson on January 15, 2007, 12:18:03 PM
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if you take, say, 20 years of payments, then, first, you'll be hit with state income taxes when & if they're imposed, and second, your payments each year will be in inflation-devalued currency.
True, but the devaluation would have to be 40% over the life of the payments for the devaluation savings to equal the lost income from taking the lump-sum payment. Plus, the restructuring of tax burdens that can be accomplished with payments will reduce the income tax (federal) from the maximum (top marginal) rate to whatever effective rate you and your accountant are able to make happen with the financial maneuvering you can do over time. If you see even a few percent reduction in the effective rate that can equate to several tens or even hundreds of thousands of dollars a year when you are dealing with a front-end number in the seven digit range.
Brad
Post by: MechAg94 on January 15, 2007, 03:11:27 PM
However, if you don't trust yourself, get the 25 annual payments. Better than blowing all the money, wrecking your life, and ending up broke.
Post by: Fly320s on January 15, 2007, 03:51:26 PM
I've always said, and stories like this seem to confirm, that lotteries are a tax on the stupid.
Yes, go gamble. Yes, have fun. Yes, realize that you are going to lose money.
Post by: Lee on January 15, 2007, 06:29:34 PM
Post by: Devonai on January 15, 2007, 08:02:20 PM
Post by: Monkeyleg on January 15, 2007, 10:26:49 PM
Post by: charby on January 16, 2007, 05:07:53 AM
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Post by: Brad Johnson on January 16, 2007, 05:54:31 AM
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A 25 million lottery win is for $1 million a year over 25 years, not for $25 million at present day value.
Correct. And by my math $25 million is more than the appx $15 million you get as a lump sum.
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However, if you don't trust yourself, get the 25 annual payments.
Has nothing to do with trust. It's a matter of sound financial planning.
Brad
Post by: InfidelSerf on January 16, 2007, 07:31:27 AM
I would rather have complete control over my winnings then rely on the state to handle it.
During that 20 years they are making interest gains on that money.
I would rather take one lump sum for the same reason I'd rather pay the IRS at the end of the year than get a refund.
I feel I know best how to handle and what to spend my money on.
Besides even after the excessive tax grab, (which as stated before isn't any more than if you made that annually)
It's still free money.
I would have the ability to invest it in various ways that over a 20year period could easily make up and exceed the "lost" revenue by taking a payout plan.
By having direct access to a larger sum of money your opportunities for investment in new or existing business ventures is increased.
Not to mention the wonders of compound interest on 1million versus 100K come into play.
The REAL challenge is to see if you can maintain your current lifestyle and actually use the money for the future.
Rather than taking on a billionaires "monthly lifestyle" immediately.
I'm sure we would all buy a new car and home. But just what car and how large of a home is the key.
I could have a home paid for (including all future projected property taxes) and have several cars paid in clear. With just 100K
It all depends on your attitude going into it.
The fact is that those with the dicipline to handle it that way simply don't, are hardly ever play the lotto.
Post by: Brad Johnson on January 16, 2007, 09:19:05 AM
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BJ while I agree that you might end up with more in the long run.
I would rather have complete control over my winnings then rely on the state to handle it.
During that 20 years they are making interest gains on that money.
I would rather take one lump sum for the same reason I'd rather pay the IRS at the end of the year than get a refund.
I feel I know best how to handle and what to spend my money on.
I would rather have complete control over my winnings then rely on the state to handle it.
During that 20 years they are making interest gains on that money.
I would rather take one lump sum for the same reason I'd rather pay the IRS at the end of the year than get a refund.
I feel I know best how to handle and what to spend my money on.
If you know best how to handle your money, why are you giving them so much of it up front.
See, that's the problem I have with a lump-sum payment. You not only sacrifice roughly third of the jackpot anyway, you also have ZERO control over the taxation. In other words you are giving the goverment the most money you possibly can.
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Besides even after the excessive tax grab, (which as stated before isn't any more than if you made that annually)
It's still free money.
I would have the ability to invest it in various ways that over a 20year period could easily make up and exceed the "lost" revenue by taking a payout plan.
It's still free money.
I would have the ability to invest it in various ways that over a 20year period could easily make up and exceed the "lost" revenue by taking a payout plan.
Okay, let's say you won a $100 million jackpot. You take the single payment option so you only really get about $60 million of that. The government will get a third, so you actually take home about $39.6 mil. Now you put that into investments which perform at ... oh ... say 10% (and I think that's being pretty generous). That's $3.96 mil a year gross revenue.
Take the same $100 mil in payments over 25 years. That's $4 mil a year gross revenue.
Now you also factor in that you begin structuring your finances to ward off at least some of the tax man's bite. Let's say you are lucky and figure out a way to decrease your marginal rate to 25%. At roughly a 4% savings over full marginal that's an additional $160,000 a year in retained revenue.
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By having direct access to a larger sum of money your opportunities for investment in new or existing business ventures is increased.
Not to mention the wonders of compound interest on 1million versus 100K come into play.
Not to mention the wonders of compound interest on 1million versus 100K come into play.
You do realize that money invested in a business venture will often not return anything for at least the first 3-5 years? In other words, no interest at all on a big chunk of your money. Also, with that money invested in a venture, you have no source of long-term regular revenue for the bank to use as a reason to load you more.
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The REAL challenge is to see if you can maintain your current lifestyle and actually use the money for the future.
Rather than taking on a billionaires "monthly lifestyle" immediately.
I'm sure we would all buy a new car and home. But just what car and how large of a home is the key.
I could have a home paid for (including all future projected property taxes) and have several cars paid in clear. With just 100K
It all depends on your attitude going into it.
The fact is that those with the dicipline to handle it that way simply don't, are hardly ever play the lotto.
Rather than taking on a billionaires "monthly lifestyle" immediately.
I'm sure we would all buy a new car and home. But just what car and how large of a home is the key.
I could have a home paid for (including all future projected property taxes) and have several cars paid in clear. With just 100K
It all depends on your attitude going into it.
The fact is that those with the dicipline to handle it that way simply don't, are hardly ever play the lotto.
The problem is that people who've never had money, or been tought to manage it, think that 100K is more than anyone could spend in a lifetime. It's like play money - it means nothing to them until it's gone. In the meantime they are buying up all the stuff they could ever want.
As you've pointed out it's the choice of lifestle that determines how well an amount of money will work for you. Most of the people who win these jackpots don't have the foggiest clue about money management other than ignoring the bills collection notices in the mail. Me? I've always been a budgeter and a long-term financial thinker. That's why they payment method is so appealing to me. Winning a big jackpot would be no different for me financially, except that the budget numbers would be just a tad larger.
Brad
Post by: Cosmoline on January 16, 2007, 11:01:43 AM
Post by: TaxPhd on January 16, 2007, 11:12:16 AM
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Take the same $100 mil in payments over 25 years. That's $4 mil a year gross revenue.
Now you also factor in that you begin structuring your finances to ward off at least some of the tax man's bite. Let's say you are lucky and figure out a way to decrease your marginal rate to 25%. At roughly a 4% savings over full marginal that's an additional $160,000 a year in retained revenue.
Brad
Now you also factor in that you begin structuring your finances to ward off at least some of the tax man's bite. Let's say you are lucky and figure out a way to decrease your marginal rate to 25%. At roughly a 4% savings over full marginal that's an additional $160,000 a year in retained revenue.
Brad
How are you going to get to a 25% marginal rate? The $4 million/year is ordinary income, and will put you at the top marginal rate (35% for 2006). You are going to have to have some huge losses to drive that down to a 25% rate level (taxablae income of about $124,000).
Now, I don't know much about this kind of thing, but I am sure hoping to learn. . . .
Scott
Post by: Brad Johnson on January 16, 2007, 11:23:27 AM
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How are you going to get to a 25% marginal rate? The $4 million/year is ordinary income, and will put you at the top marginal rate (35% for 2006). You are going to have to have some huge losses to drive that down to a 25% rate level (taxablae income of about $124,000).
You will be at the top marginal rate presuming you do nothing but wait around to receive each annual check. What I propose is an active strategy of careful long-term financial planning to minimize the tax impact on your net revenues. In other words, treat your personal finances like a business and not like a simple bank account.
Carefully structuring your finances on an annualized basis to include certain types of investments, ventures, and planned expenses will roll down your net tax burden accordingly. Each year, as your portfolio grows, so does your ability to use your assets more effectively (which isn't possible with a large single payment). Properly planned, it isn't unrealistic to expect to lessen your overall tax burden by 25-30%.
There is no patent way to go about it as each individual's situation will be unique. Suffice it to say that, whatever happens, it will take a lot of planning, forethought, and diligence.
Brad
Post by: richyoung on January 16, 2007, 12:37:36 PM
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Okay, let's say you won a $100 million jackpot. You take the single payment option so you only really get about $60 million of that. The government will get a third, so you actually take home about $39.6 mil. Now you put that into investments which perform at ... oh ... say 10% (and I think that's being pretty generous). That's $3.96 mil a year gross revenue.
...while leaving the 39.6 million in principle intact. At the end of 25 years, you still have the 39.6 mill, and you can still get the 3.96 mill...
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Take the same $100 mil in payments over 25 years. That's $4 mil a year gross revenue.
But with NO principle intact. NO revenue after the 25 years, either.....
Post by: Brad Johnson on January 16, 2007, 12:48:36 PM
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But with NO principle intact. NO revenue after the 25 years, either.....
That's where the planning comes in. Half the annual revenue is used for living, the other half is inventested. Even with extremely conservativ investments (or a really lousy rate of return) you should have enough at the end of the 25 yrs to provide, in perpetuity, the same annual income as your original "half" of the jackpot payment you were using as the "living" part.
Hey, I just like the part about being able to plan ahead and provide for me and mine. I never have been, and never will be, a "gimme what I can get now" kind of guy - I am a long-term planner. I also abhor the govt taking any more of my money than is absolutely necessary. The fact that you have zero options on the taxation of the single-payment option rankles me to no end. Plus, giving up more than a third of the jackpot just to get everything now seems, to me, a fairly self-defeating option. You are taking a huge hit now on the presumption that your investing skills and the market viability will allow you to make up the loss on the front-end. Me no likey that kind of speculation.
Brad
Post by: wingnutx on January 16, 2007, 12:51:35 PM
Post by: Brad Johnson on January 16, 2007, 12:56:24 PM
Doesn't $4m put you in the same tax bracket as $100m?
It will if you do nothing except cash the check. Given a couple of years to properly structure you finances you should be able to knock something off the percent tax burden. When you're talking about numbers this big, "something" can turn into real money pretty fast. Even a 1% reduction in the effective rate would be $40,000 a year, and surely a good accountant and tax attorney can find you more than that.
Brad
Post by: wingnutx on January 16, 2007, 01:03:57 PM
Post by: Brad Johnson on January 16, 2007, 01:08:49 PM
Brad
Post by: glockfan.45 on January 16, 2007, 02:08:38 PM
Post by: MechAg94 on January 16, 2007, 02:44:35 PM
Post by: MechAg94 on January 16, 2007, 03:01:25 PM
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Correct. And by my math $25 million is more than the appx $15 million you get as a lump sum.
Has nothing to do with trust. It's a matter of sound financial planning.
Brad
First, it has everything to do with trust. Some people have no concept of "financial planning". They need to either get the annual payments or get a financial institution to help them set up a permanent annuity. Otherwise, they will blow all their money just being stupid like the guy in the article. Of course, someone like that probably won't make a very good decisions anyway.Correct. And by my math $25 million is more than the appx $15 million you get as a lump sum.
Has nothing to do with trust. It's a matter of sound financial planning.
Brad
As for the first item above, if you look at the present day value of both sets of money, the present day value will end up being close to the same. If you take 25 annual payments and don't spend anything, you will end up with $25 million plus the interest/investment income on the money you get when you get it. If you take the lump sum and don't spend it, you will have that lump sum plus interest/investment income for the entire amount over the full 25 years. The main difference between the two is in the potential interest income. The company setting up the 25 year annuity for the state is assuming a ~5% annual growth and calculating the starting value of the annuity required to reach zero at 25 years. If you can invest your money and make more than that, the value at 25 years will be greater than if you chose the annuity. Looking purely at interest, it is always better to have more money in year 1 than to invest more each year afterward.
Now you are making assumptions that you can pay a lower tax rate on the income you receive from the lottery over 25 years. You may be right, I don't know. However, you are also losing potential interest income that you could be making over the full time period. 1) the economy could tank and leave you making 0% or losing money some years. 2) the wrong people could be in D.C. and the tax rates might go up and you might lose the tax loopholes you intend to use. There are risks either way. I think I would be more comfortable with lump sum myself.
Post by: MechAg94 on January 16, 2007, 03:06:16 PM
Post by: RocketMan on January 16, 2007, 04:43:07 PM
Post by: MechAg94 on January 16, 2007, 05:27:15 PM
Post by: wingnutx on January 16, 2007, 07:20:44 PM
Post by: MillCreek on January 16, 2007, 07:21:51 PM
Post by: MillCreek on January 16, 2007, 07:23:15 PM
Post by: wingnutx on January 16, 2007, 07:48:04 PM
Post by: Bogie on January 16, 2007, 10:20:08 PM
And I'll buy a real House On Wheels, with a trailer big enough to tow a Mini and a 4-wheeler ATV, and do a lot of travelling and shooting. Some land in South Dakota, some land in South Texas...
Maybe buy a strip club... Maybe in West Virginia... Income producing real estate is good...
Post by: Brad Johnson on January 17, 2007, 11:35:19 AM
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However, I guess it would take a tax genius to take $4 million a year and get you down out of the top tax bracket.
Nope, just a good accountant and tax attorney. It's not about getting you out of the higher bracket, it's about minimizing your effective tax rate.
When you begin dealing with money in these amounts you can quickly find a whole host of deductions and exemptions you can use to your advantage. It will not reduce your marginal rate, but with careful management and strategic spending you can reduce your effective rate while still maintaining and growing your portfolio.
While I'm on it, it seems there still exists some confusion between a tax deduction and an tax exemption.
>Deduction - A direct reduction of the actual tax paid. A $1 deduction takes your actual taxes and reduces them by $1.
>Exemption - A portion of your income not subject to taxation. A $1 exemption means that $1 of your income is not taxed, reducing your paid taxes by $1 times your marginal rate.
Say your marginal rate is 30% and you have $100 deduction. That means you actual paid taxes are reduced by $100. If you have the same rate and a $100 exemption, your actual paid taxes are reduced by the exemption times the rate ($100 x 30% = $30).
Through a combination of strategic deductions and exemptions it's not hard to significantly reduce your effective taxes even though your gross income may have you in the highest marginal rate. That's why the first thing to do, whatever payout method you choose, is to get good advisors lined up.
Brad
Post by: MechAg94 on January 17, 2007, 12:40:43 PM
Post by: Brad Johnson on January 17, 2007, 12:52:51 PM
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Even if you took a lump sum, there will be interest income to deal with in the same way.
Agreed. Any idea of how dividend income is handled? Is there a reinvestment period where the income tax is deferred or are you taxed on the gross dividend payout?
Brad
Post by: wingnutx on January 17, 2007, 01:28:41 PM
Maybe buy a strip club...
I'm buying a mall that has a strip club, gun store, 24/7 diner, vintage book/record store, tattoo studio, and whatever else I can think up.
Post by: MechAg94 on January 17, 2007, 04:44:59 PM
I am sure there are other ways to off set investment income. Personally, I would set myself up with a base 6 figure income to live on and have the rest set up for longer term growth or retirement. It would all depend on how much. That is the main reason I like the lump sum. I could get all the settled and set up at once so all I had to do is monitor things and make adjustments.
Post by: Bogie on January 17, 2007, 05:41:41 PM
Diversity is your friend. If one sector of manufacturing tanks, it won't take your entire savings. Spread it out among a variety of industries, a variety of companies within each industry, and also look at things like real estate, etc...
And don't forget pleasure. If you are not doing what you enjoy, that's a bad thing. If you want to go hang gliding, but you put it off to save for retirement, consider that you probably won't be able to hang glide when you're age 50+...
It's all a balance.
Post by: TaxPhd on January 17, 2007, 07:23:56 PM
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However, I guess it would take a tax genius to take $4 million a year and get you down out of the top tax bracket.
Nope, just a good accountant and tax attorney. It's not about getting you out of the higher bracket, it's about minimizing your effective tax rate.
When you begin dealing with money in these amounts you can quickly find a whole host of deductions and exemptions you can use to your advantage. It will not reduce your marginal rate, but with careful management and strategic spending you can reduce your effective rate while still maintaining and growing your portfolio.
Sort of. There is NOTHING than can be done about the $4 million in ordinary income (other than generating losses, and then you lose the benefit of the income). It WILL put you in the top marginal bracket. Yes, there may be things that can done with the rest of your finances, but for normal people, the rest of their finances are tiny compared to the $4 million. Even very creative planning will do little to make a significant impact on the effective rate.
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While I'm on it, it seems there still exists some confusion between a tax deduction and an tax exemption.
>Deduction - A direct reduction of the actual tax paid. A $1 deduction takes your actual taxes and reduces them by $1.
>Exemption - A portion of your income not subject to taxation. A $1 exemption means that $1 of your income is not taxed, reducing your paid taxes by $1 times your marginal rate.
Say your marginal rate is 30% and you have $100 deduction. That means you actual paid taxes are reduced by $100. If you have the same rate and a $100 exemption, your actual paid taxes are reduced by the exemption times the rate ($100 x 30% = $30).
>Deduction - A direct reduction of the actual tax paid. A $1 deduction takes your actual taxes and reduces them by $1.
>Exemption - A portion of your income not subject to taxation. A $1 exemption means that $1 of your income is not taxed, reducing your paid taxes by $1 times your marginal rate.
Say your marginal rate is 30% and you have $100 deduction. That means you actual paid taxes are reduced by $100. If you have the same rate and a $100 exemption, your actual paid taxes are reduced by the exemption times the rate ($100 x 30% = $30).
There is still some confusion. What you describe as a deduction is actually a tax credit - a dollar for dollar reduction in the tax paid. A deduction reduces the amount of income subject to tax. Think of it as an allowable expense. Tax exempt income is never subject to tax. An exemption, like a dependency exemption, works the same way as a deduction.
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Through a combination of strategic deductions and exemptions it's not hard to significantly reduce your effective taxes even though your gross income may have you in the highest marginal rate. That's why the first thing to do, whatever payout method you choose, is to get good advisors lined up.
Sorry, but good accountants and attorneys are just not going to be able to keep you from taking a huge hit on that annuity.
Brad, have you done a PV calculation on that annuity? I figure you must have in order to believe that the 25 years worth of payments are better. I'd be interested to what you came up with and what your assumptions were.
Scott
Post by: Bogie on January 17, 2007, 08:18:42 PM
Research, research, research, travel, travel, travel...
A good accountant can write off almost anything. Including what you pay the accountant.
Post by: Brad Johnson on January 18, 2007, 10:04:45 AM
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There is still some confusion. What you describe as a deduction is actually a tax credit - a dollar for dollar reduction in the tax paid. A deduction reduces the amount of income subject to tax. Think of it as an allowable expense. Tax exempt income is never subject to tax. An exemption, like a dependency exemption, works the same way as a deduction.
My bad (that's what I get for posting in a hurry!). Thanks for catching that and correcting it before it got someone in trouble.
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Brad, have you done a PV calculation on that annuity?
Haven't done a PV, but have done a FV calc on it. Here goes...
The calcs were done presuming the above figures - $100 mil jackpot.
Both figures use a 35% tax rate. For the 25 yr payout this means an actual take-home of $2.6 million pr year. For the single payout this means appx $39 million in a single lump sum (presuming the avg 60% jackpot payment amount for the single payment option).
It is presumed that the 25 yr payee will be investing half their annual payment and using the remainder for living expenses ($1.3 million). For sake of accurate comparison is it also presumed that the the single-sum payee will be using that same amount annually ($1.3 million) for living expenses, except that to have $1.3 million to spend after income tax they will have to withdraw $2.0 million.
*DISCLAIMER* It's been a while since I was doing FV calcs. They may well be incorrect. Someone who's up to speed on a financial calculator please verify these!!
@ 5% interest
25 yr = $62.05 million
Single payment = $36.61 million
@ 6% interest
25 yr = $71.32 million
Single payment = $57.65 million
@ 7% interest
25 yr = $82.22 million
Single payment = $85.17 million
@ 8% interest
25 yr = $95.03 million
Single payment = $120.88 million
@ 9% interest
25 yr = $110.11 million
Single payment = $166.90 million
@ 10% interest
25 yr = $127.85 million
Single payment = $225.86
Spot Analysis...
If you know you are going to be able to sustain a minimum of at least 8% interest for the next 25 yrs, the single payment method will net you a higher value in 25 yrs. This presumes you are diligent in your spending habits and never draw more than $2 mil per year out of the portfolio.
If you are a conservative investor and budget-minded who tends to go with lower-yield (but less risky) ventures, the payout method will net you a higher value in 25 yrs. This also presumes you are diligent and contribute at least 1/2 of the annual payment to the account.
I tend to be very conservative in my finances. That's why the payout method has such an appeal for me. There is also the fact that many more conservative investments, although lower-yield, are potentially tax-free (municipal bonds, t-bills, etc). That's a built-in ROI due to not losing 35% of the yield to income tax.
*Edited to add*
Now we get into all the ways you can use to step 'round the tax man if you opt for the 25 yr payout. There is a whole industry geared to giving those with the means a way to retain more of their dollars at the end of the year - set-asides, exclusions, deductions, deferments, exemptions, investments, etc. - none of which is an option for the person who takes the lump sum payout (on the jackpot winnings, not the interest income).
Presume that the payee of the 25-yr method finds a way for half their annual $1.3 mil investment ($650K) to fall into a category that exempts, defers, or otherwise removes the taxability for that portion of their income. At 35% income tax that's $227.5k recovered at the end of the year. Yes, you pay tax on the full $4 mil when it is paid but you get to recover a big chunk of it. Presume that you have enough willpower to reinvest that that $227.5k a year in the same account we were using above. The value of that extra investment would add to the above numbers as follows:
@ 5%
$10.86 million
(added to above 25 yr value = $72.61 million)
@ 6%
$12.48 million
(added to above 25 yr value = $83.8 million)
@ 7%
$14.39 million
(added to above 25 yr value = $96.61 million)
@ 8%
$16.63 million
(added to above 25 yr value = $111.66 million)
@ 9%
$19.27 million
(added to above 25 yr value = $129.38 million)
@ 10%
$22.37 million
(added to above 25 yr value = $150.22 million)
Spot Analyisis
Pretty much the same as above, except the percent return for a 25 yr net advantage has increase by appx 1.
I still prefer the payouts. I am a "structure" kind of guy, financially speaking. I still see more advantage to having a long-term payment plan that you can use to structure your finances around. Most of the tax deferment and exemption programs are structured around long-term revenue streams and not lump-sum windfalls (not surprising given that the programs were created by, and for, people with large, sustained revenue sources). I see there being many more opportunities for portfolio growth and management using the long-term payout vs the lump-sum payout.
Again, just my personal opinion.
(Side effects of this program may include fatigue, headache, dry mouth, nausea, hair loss, impotence, loose stools, irritable bowels, sensitivity to sunlight, sudden death, and long lines at the post office...)
Brad