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Mega Millions Winners: The Best Way To Get Your Millions

Daily Ticker

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2-4-23-38-46 and Mega ball 23.

The winning numbers from Friday's record $656 million lottery jackpot made three very lucky ticket holders multi-millionaires overnight (and the envy of everyone else who played). Each winner will get more than $213 million before taxes. As of Monday the winners have not yet come forward but the winning tickets were sold in Kansas, Maryland and Illinois.

Before the numbers were chosen Friday night, millions of Americans were daydreaming about what they would do with the money: quit their jobs, travel the world, buy a brand new car and a new home (or 2 or 3), etc. But there's one question lotto winners need to answer before that enormous paycheck arrives in the mail: cash payment or annuity?

The Daily Ticker's Aaron Task posed that age-old question to tax expert Doug Dachille, who helps manage $8 billion as the CEO and CIO of First Principles Capital Management. Dachille says without hesitation: "lump sum it."

Here's Dachille's analysis: in a low-interest rate environment, the value of deferring tax (which, according to Dachille, is the only benefit of the annuity option) "really isn't worth it." If a winner chooses to receive the lotto money in 26 annual installments, he or she could potentially defer taxes into a higher tax regime, Dachille says.

"Ben Bernanke has basically be a windfall for people who want to take the lump sum because zero interest rates mean the stated amount is the actual amount you get," he says. The Federal Reserve has kept the benchmark Federal Funds rate near zero for years and has pledged to keep it low until 2014.

It may be too late for this round of lotto winners, but Dachille says future jackpot winners should consider opening an irrevocable trust to avoid "foolishly spending all of the prize money." The trust also acts as a tax shelter, allowing winners to avoid paying hefty federal and state estate taxes. The current federal estate tax rate is 35 percent and state estate tax rates range from seven percent to 19 percent. Dachille points out that the estate tax could revert back to its pre-2001 maximum rate of 55 percent if Congress does not act by the end of this year.

"Set up the trust and gift the ticket immediately to the trust," he says. The trust can be funded with just $1, so "you can simply document the gift of the ticket to the trust." But federal and state estate taxes can only be avoided if the trust was opened prior to winning the lottery, Dachille notes.