Winning the lottery can be a dream come true. But it also involves making some smart financial decisions. If you make a mistake, you can miss making the most of your golden opportunity. In particular, those who choose to take their lottery winnings in regular periodic annuity payments rather than as a lump sum can have difficulty if it turns out they need their money sooner than expected.

One chance to choose wisely
Most lotteries give you two choices. You can take a one-time lump-sum payment that in some cases will be less than the reported amount of the jackpot. You can instead choose to take a series of annual payments that in the long run will add up to the total jackpot amount. The exact structure of the lump-sum or annuity options depends on the lottery.

For instance, the Powerball lottery gives you the choice of either taking the full cash amount of the jackpot as a lump sum or taking 30 annual payments. If you choose the annuity, the lottery takes the cash amount and invests it, paying you not only each installment but also the interest earned on the remaining balance. By contrast, the Mega Millions lottery pays out an annuity that is calculated to rise by 5% each year, starting out relatively small but growing substantially over the 30-year payout period.

Selling a lottery annuity
You'll find numerous companies willing to buy periodic payments like a lottery annuity in exchange for cash up front. Before you assume you can use such a service, you need to look at the specific rules of the lottery that you've won.

Most lottery rules only cover transfers due to death, allowing a person's heirs to inherit any remaining annuity payments under a lottery prize. Some lotteries will give an estate a lump sum, while others will simply continue the annuity payments under the original terms of the prize.

In addition, state law often covers lottery annuity payments under the broader category of structured settlements. Selling rights to structured settlements requires a court order in many jurisdictions, with the idea being that a sale must be in your best financial interest.

Overall, it's complicated enough to transfer a lottery annuity payment that your best strategy is to think carefully about the future if you choose the annuity option. Once you do so, you should generally stick to it and accept that you won't have access to all of your money up front.

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