"I have an unusual question for you. If I win a large prize in the lottery, should/could I establish a nonprofit corporation to receive the prize? I asked a financial advisor about this, and he said that I could do this and also have the identity of the manager (me) hidden from the public.
"There are two reasons I have for wanting to do this. The first is to keep my identity secret, so that no one will know that I won the money. The second is to spread the winnings out over several years, thus possibly lowering the tax rate. According to him, the money will not be taxed when it is paid to the organization by the lottery commission, but only when it is dispersed by the organization.
"I am not so much worried about paying the taxes, but keeping my identity secret is very important. I have read and seen too many instances where families have been torn apart because there is no 'fair' way to share the money. Someone will always feel they did not get as much as they should have. Do you have any thoughts on this?"
First of all, this is a WONDERFUL problem to have. Congratulations!
Let's start with the basics: Lottery winnings are "income," and you must pay federal and state income taxes on them.
At the federal level, if you win more than $5,000 in the lottery, 25 percent must be withheld from your winnings for federal income tax purposes. You will receive a Form W-2G from the lottery commission showing the amount of lottery winnings paid to you during the year and the amount of federal and state income tax withheld.
You report your lottery winnings as income in the year, or years, you actually or "constructively" receive those winnings. If you're required to take the winnings in annual installments, you only report each year's installment as income for that year. Most states require you to choose between "lump sum" and installment payments when you buy your ticket; others will allow you to make the choice after you've won. But the choice usually must be made within a specified time period.
I think your financial advisor is recommending you set up a "private foundation" to claim the winnings. For a concise summary of the IRS rules on private foundations, see "The Life Cycle of a Private Foundation," at www.irs.gov/charities/foundations/article/0,,id=127912,00.html.
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