If we say that we have not sat at our desk staring out the window at the birds passing by and daydreaming about winning the lottery—then would be lying to you and to ourselves. One common theme in these moments of innocent mind wandering is thinking about all the people that we could help and share our good fortune with in the event of a big win. These people could be friends but usually consist of our closest family. One thing that bursts our dream bubble, however, is knowing that giving our family significant sums of money from our winnings is rarely as easy as it should be. In this article, we will look at how to share lottery winnings with family members to spread the joy of winning.
Different Countries—Different Rules
One thing that we need to get out of the way right away is that the rules around giving away portions of your lottery winnings vary from country to country. Therefore, if you are in one country, what applies to you may not be true of somebody living across the ocean—or even south of the border.
So, to make it easier for you, we have broken up what rules and regulations apply to giving your family members some of your lottery winnings in the US, the UK, and in Canada. After explaining all of the rules that each of these countries has, we will give you some tips on how you can avoid losing money to the taxman when gifting money to your loved ones.
The United Kingdom
You probably already know that lottery winnings are not subject to tax in the UK. This is easily one of the best things about playing the lottery in the UK. However, usually, you do become liable for tax as soon as you deposit your winnings into your bank account and interest begins to grow. For this, and more noble reasons (of course), you may want to give some money away to your family members to ensure that they are also well taken care of and are not in want.
Thankfully, HM Revenue Customs has no problems with you doing this. Any lottery winnings that you gift to your family members will not be regarded as personal income and neither you nor them will need to pay any tax—unless you die within seven years of giving them the money. This may sound harsh, or even like we are joking, but we are not. If the worst happens and you die within seven years of giving your family money from your winnings, they will be liable for massive taxes. This is because all the money that you provide to them will suddenly become taxable as inheritance tax.
In the UK, inheritance tax can be up to 40% and can quickly give a large portion of your winnings directly to government coffers. It must be said, however, that 40% tax is only applied if the estate is valued at more than £325,000. So, the only way to ensure that you don’t leave your family with a massive tax bill is to ensure that you live longer than seven years from the time that you gift them the money.
The United States
Unfortunately, the US does not allow you to give money to your family on the condition that you stick around for a while. In the US, all lottery winnings that you give away as gifts are taxable unless they are under the gift tax threshold. This threshold is set (as of 2020) at $15,000 per recipient per year. This means that you will only be able to give each family member $15,000 if you do not want to be liable for tax. If you’re married, then this goes up to $30,000 between you and your spouse. Gifting any amounts over this threshold to your family members will result in some severe costs having to be paid over in tax. Below are the current tax rates on gifts in the US:
Value of Gift (In Excess of Threshold)
Tax Rate Used
$10,000 or less
18%
$10,001 to $20,000
20%
$20,001 to $40,000
22%
$40,001 to $60,000
24%
$60,001 to $80,000
26%
$80,001 to $100,000
28%
$100,001 to $150,000
30%
$150,001 to $250,000
32%
$250,001 to $500,000
34%
$500,001 to $750,000
37%
$750,001 to $1 million
39%
More than $1 million
40%
As you can see from the above, gifting large amounts to your family can end up costing a large amount of money. To fully understand this, let us assume that you have won $20 million on the US Powerball in California. Because you opted to take a cash lump sum, you only receive $12.2 million (or 61% of the advertised jackpot). Of this $12.2 million, you will need to pay a total of $2.928 million in federal taxes at a rate of 24% (state taxes do not apply in California). This will leave you with a balance of $9.272 million to deposit into a private bank that can handle big sums of money.
Of this money, you choose to give your mother, your father, and your sibling $1.2 million each—thinking that it will only cost you $3.6 million. However, because you only have a $15,000 gift tax exemption for each person, $1.185 million of your gift to each of your loved ones will be taxed. The worst is that the excess will be taxed at 40% because it is over $1 million.
This means that for each family member, you will need to pay $474,000 in gift tax. In total then, you will need to pay $3.6 million to your family members to make up their gifts and a further $1.422 million to the IRS for tax. Because of this, your generosity will end up costing $5.022—a massive sum more than what you originally expected.
Canada
Thankfully, Canada is entirely different from both the United Kingdom and the United States. Here, you will be able to give as much or as little away to your family members as you desire. This is because the sharing of lottery winnings is entirely exempt from any type of tax, and you will not incur any penalties or implications when filing your tax after giving away large gifts. As an added bonus, lottery winnings in Canada are never taxed. Sounds like a pretty great country!
How to Get Around Gift Taxes
While the UK and the US technically have very different ways of dealing with the tax surrounding money given as a gift, the two territories share a method in which to try and circumvent paying gift tax. Canada, of course, does not need any way to get around gift taxes, as they simply don’t exist.
The below method (which we are not saying that we encourage or support) is supposedly the best way to prevent paying heavy taxes when sharing your lottery winnings with your family members.
The method we are talking about takes place before you even claim your prize, and you will need to spend time thinking carefully about it before you come forward to claim your ticket. In theory, you and your family members will be exempt from paying any gift tax if they are registered as part of the group or company that claims the lottery winnings.
What this means is that when discovering that you have won a jackpot, you will need to think about how much you would like to give to each member of your family. You will then need to work out what percentage of your total win each family member represents. Using these percentages, you and your family members will need to come forward as one to claim your winnings—with each person claiming the percentage of the total that you decided upon.
Doing this means that the winnings that you would have given to each family member are claimed directly from the lottery operator by the family that you were going to gift the money to. This avoids all gift taxes and generally even means that you will get more money out of your lottery claim (because each person is taxed individually on their winnings—bringing the total amount taxable down, which results in lower tax amounts).
Does This Method of Avoiding Gift Taxes Actually Work?
Clearly, the person who first suggested the above method as a way to avoid paying gift taxes has given the theory a great deal of thought. However, there seem to be a few flaws in the plan—though, strangely, these flaws are only present in the US. Using the method mentioned above in the UK is an almost sure-fire way of avoiding gift taxes and will work almost all of the time.
In the US, this is not necessarily true because of the IRS. In instances where lottery winnings are claimed by a group—particularly a group that is made up of family members—the IRS generally suspects that the above method is being employed.
When this occurs, you as the lottery winners will need to produce proof that you have been operating as a lottery syndicate from a time that predates your big win. As part of this proof, you will need to provide an agreement that takes into account a minimum of all the following things:
How long you have been purchasing tickets together for and what proof of that is there
A clear agreement on how winnings will be shared amongst the group in the case of a win
Proof that all participants in the group were aware that tickets were being purchased on their behalf
Proof that each member contributed money to the purchasing of tickets
Proof that plans have been discussed on how, as a group, the money will be spent after winning—only occasionally requested by the IRS.
Failure to produce an agreement that provides this information will cause the IRS to investigate deeper into your lottery win. Sadly, as is the case with Tonda Lynn Dickerson, a woman who tried to pull off this method—the IRS realised what was happening and she became liable to pay the full amount of all outstanding gift taxes.
What About After Death?
If you want to gift your lottery winnings after you pass away, then things work a little bit differently. While in this case your estate won't be charged a gift tax, your beneficiary will be charged an inheritance tax that is often charged at both the federal and state level. The federal threshold at which taxes kick in varies every year, but at the time of this article it was set at $11.58 million—with the maximum rate a steep 40%.
Conclusion
Gifting large sums of money to family members after a big lottery win that will ensure that they will never be in want is a noble and generous thing to do. In Canada, this gesture goes unpunished and you can give away as much of your winnings as you like—as we believe it always should be. In the UK, this is also true—as long as you don’t plan on kicking the bucket any time soon.
However, in the US, gifting lottery winnings to family members is an expensive endeavour. While the above workaround method does sound promising, it does beg the question of whether or not the risk is worth the reward. In most cases, a more appropriate thing to do would be to simply pay off the debts of your loved ones and purchase the things they want for them. While this too may have some tax implications, it is bound to have a substantial amount less.
At the end of the day, the best thing that you could do when wanting to give your family some of your winnings is speak to your financial advisor (who we hope you have on speed dial after winning). They will ultimately be in the best position to offer you advice and show you what you should and should not do. They will also be able to tell you all about the methods of giving your family money without the IRS finding out that we can’t talk about here—we’re joking, of course. (Or are we?)
