The lottery annuity after death

The annuity is the responsible choice. Every financial columnist says so, and the reasoning is sound: thirty payments arriving once a year for twenty-nine years is an income stream that survives one bad decision, one bad year, and one persuasive relative. The cash option hands you everything at once and dares you to keep it.

What the columns rarely mention is the other side of the arithmetic. A 29-year annuity is a bet that you live 29 years. If you do not, the remaining payments do not vanish and they do not simplify. They become an asset of your estate, with a value the IRS will insist on measuring, a schedule your beneficiaries cannot accelerate, and a transfer restriction that requires a circuit judge to lift.

The Florida Lottery states the rule plainly: “If a jackpot or top prize winner dies before receiving all annual installments, the balance of the prize will be paid to the winner's estate.” And: “Upon receipt of a court order, annual prize payments will continue to be paid to the winner's heirs.” That is two sentences describing an estate administration that may run for a quarter of a century.

So the estate has to be opened, a personal representative appointed, and — because the Lottery pays on a court order — kept open or reopened long enough to direct the remaining payments. Probate in Florida is normally measured in months. Here it is measured in decades, unless somebody plans around it.

What Florida law does with a dead winner's payments

Florida's lottery exists because the voters put it in the constitution — Art. X, §15 — and the legislature built it out in Chapter 24 beginning with chapter 87-65 in 1987. The prize-payment rules sit in §24.115, and they are shorter than people expect.

A prize may be paid to the estate of a deceased prize winner, to the extent it has not been assigned or encumbered. The right to a prize is not assignable — except a prize payable in instalments over time, which may be assigned only under an appropriate court order as provided in §24.1153. And before any prize of $600 or more is paid, the department checks it against past-due child support first, then debts owed to state agencies.

§24.1153 is the assignment statute, enacted in 1999. It permits a voluntary assignment of instalment payments in whole or in part, but only on a court order making specific findings.

• The right court. A court of competent jurisdiction in the judicial circuit where the assigning prize winner resides, or where the department's headquarters is located.
• The written assignment, with a purchase price properly discounted to present value at a rate no higher than the state's usury limit.
• A sworn affidavit from the assignor covering six specified points — including that the assignor received independent legal counsel and independent financial advice from advisers unconnected to the assignee.
• Ten days' written notice to the department's counsel before any hearing on the proposed assignment.
• No assignment of amounts subject to offset for child support or state-agency debt. Those come off the top regardless.

Two practical consequences follow, and they pull in opposite directions. The restriction is protective: it makes it genuinely hard for a winner in a bad month to sell twenty years of future income to a factoring company at a punishing discount. It is also the reason the remaining payments are difficult to value, difficult to divide among beneficiaries, and difficult to liquidate to pay a tax bill that lands nine months after death.

Taxed twice, on two different theories, in the same year

Remaining lottery payments are hit from two directions when a winner dies, and the two taxes are not the same tax.

Income tax. Each annual payment is ordinary income when received. Because the winner earned the right before death but had not received the money, the payments are income in respect of a decedent under IRC §691 — they keep their character and are taxed to whoever receives them, the estate or the beneficiary, in the year of receipt. There is no step-up in basis to wash it away. Where federal estate tax was paid on the same asset, §691(c) allows an income tax deduction for the estate tax attributable to that item, which is the only relief in the structure and is routinely missed.

Estate tax. The present value of the remaining payments is included in the gross estate. And that valuation has produced one of the more entertaining unresolved fights in federal tax law: is a non-assignable lottery annuity worth what the actuarial tables say it is worth?

The IRS position is that IRC §7520 and its annuity tables govern, full stop. Two circuits disagreed. In Estate of Shackleford v. United States, 262 F.3d 1028 (9th Cir. 2001), and Estate of Gribauskas v. Commissioner, 342 F.3d 85 (2d Cir. 2003), the courts held that the tables can produce an unrealistic result for a prize the winner is legally forbidden to sell, and that a marketability discount may be appropriate. Gribauskas is worth reading for the facts alone: a Connecticut winner, a divorce splitting the annual payments, an intestate death on June 4, 1994, and 18 instalments still to come.

Two other circuits went the other way. Cook v. Commissioner, 349 F.3d 850 (5th Cir. 2003), held the tables apply regardless, reasoning that a restriction on selling does not alter the recipient's entitlement to be paid. Negron v. United States, 553 F.3d 1013 (6th Cir. 2009), reversed a district court that had followed the Second and Ninth Circuits and held the IRS tables properly value lottery annuities for estate tax purposes.

The reported appellate decisions come from the Second, Fifth, Sixth, and Ninth Circuits. The Supreme Court has not resolved the split. A Florida estate valuing a large remaining annuity is therefore doing so in an area where the answer depends partly on geography and partly on appetite.

The problem is liquidity, and it always was

Set the valuation fight aside. The structural difficulty is simpler and it arrives first: estate tax is due nine months after death, and the annuity pays once a year. An estate can be simultaneously worth a great deal and unable to write a cheque.

That is the situation the Internal Revenue Code's instalment provisions were written for in the context of closely held businesses, and it is why sophisticated planning around a large annuity usually starts with something that produces cash on death rather than something clever about the annuity itself. Life insurance held outside the estate is the ordinary answer.

The second difficulty is division. Thirty annual payments do not split neatly among four beneficiaries with different tax rates, different needs, and different views about waiting. A revocable trust named as the claimant, or a properly drafted assignment of the payment right into a trust, lets one trustee receive the payments and allocate them, rather than requiring the probate court to supervise a payment stream until the 2050s.

And there is the timing trap at the very start. Florida Lottery jackpot winners who want the single cash payment must claim within the first 60 days after the draw date — for Florida Lotto and Jackpot Triple Play, and equally for Mega Millions, Powerball, and Cash4Life. Miss that window and the annuity is not a choice you made. It is a default you inherited.