The Lottery Winnings Exception To Federal Gift Taxes


An interesting circumstance often shows up with lottery winners. After they have won, it seems that a very high percent of them had arrangements in place before they bought their lottery tickets to share their winnings with family members. Due to this arrangement, when the proceeds are paid, they are paid into an entity owned by multiple family members. This allows those family members to share directly in the lottery winnings.

This is all fine if there was in fact a bona fide and binding arrangement to share the proceeds. However, if there was not, this arrangement should result in a gift as to the value of the lottery proceeds that are effectively transferred to the family members. Given the high multi-state Powerball and other payouts that occur these days, these transfers can be significant.

Some have wondered whether many of these pre-existing arrangements really exist, or are only a product of post-lottery planning. Seeing the number of these arrangements, one gets the feeling that many believe there is a "lottery winnings" exception to federal gift taxes that gives a free pass to the sharing of the winnings among family members.

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