Prepare for paying taxes on Powerball winnings by consulting with a financial advisor and setting aside a portion for taxes.

A little while ago, I spoke about the importance of Lottery Tax Planning in case of a Billion Dollar Drawing. And my previous advice still remains valid... However, recent changes in the state estate tax rate in Washington have prompted me to share a quick update on the matter. For the purpose of this blog post, I will be discussing the $1,500,000,000 Powerball drawing that took place in late December 2025. The lucky winner of this drawing was presented with two options: receive $50,000,000 annually for the next 30 years or take a lump sum of around $700,000,000. And this is where I want to focus my attention... In summary, my recommendation for those who win big in the Powerball lottery is to opt for the lump sum. This may seem contrary to what you may have read in the media, as most experts suggest taking the $50 million annual payments. And at first glance, this may seem like the smarter choice. However, you do not want to burden your loved ones with the potential estate tax risks associated with the annuity option. To illustrate this, let's say you were faced with the decision of receiving $50 million a year for 30 years or a lump sum of $700 million. Now, let's say you passed away the day after winning. In this unfortunate scenario, your estate would owe approximately $427,000,000 in estate taxes if you were a resident of Washington state. And the issue here is that your estate and heirs would only have enough cash to cover the $427 million tax bill if you had chosen the lump sum option. If you had opted for the annuity and passed away, your heirs would have to use the $50 million annual payments to pay off the estate taxes. On the surface, this may seem manageable. However, let me break down the details for you to show you why this is actually a terrible outcome. Firstly, federal and state income taxes on the $50 million could amount to around $18 million for a Washington resident, especially if the state's new 10% millionaire's tax has been implemented. So instead of having $50 million each year to pay off the debt, your estate would only have around $32 million after taxes. Moreover, because you owe the state and federal government hundreds of millions of dollars in taxes, interest will accrue on that debt. In the first year alone, the interest could be close to $24 million, followed by around $23 million in the second and third years, and smaller amounts in the following years as the loan balance decreases. Yes, your heirs would eventually be able to pay off the tax debt using the leftover money, starting with $8 million in the first year, then $9 million in the second year, and increasing amounts each year after that. However, this process could take decades, and that is the shocking reality here. Taxes not only reduce the net winnings, but they also delay when your heirs receive their inheritances. And on top of that, one of your heirs would have to manage the estate finances for years to pay off the $400,000,000+ tax bill. So my advice to anyone who wins a big state lottery is to take the lump sum without hesitation. Before I conclude, I would like to share three more comments. Firstly, my calculations may not be exact, as the federal tax rate is not exactly 40%. Instead, it is 37% for federal income tax and 3.8% for the net investment income tax, totaling to 40.8%. The federal estate tax is a flat 40%, but only after any state estate tax has been paid, and only on amounts above $15 million. The new 35% Washington state tax only applies to amounts above $3 million and has a phase-in range of $9 million, starting at 10% and gradually increasing to 35%. Additionally, I am assuming that both federal and state income tax calculations allow for a deduction for the estate taxes paid. This is true for federal rates, but we do not know how a potential Washington state millionaire's tax would work. Secondly, the underlying issue here is that the estate has to pay taxes on illiquid assets that cannot be easily converted to cash. This is not just a problem for lottery winnings, but also for illiquid business and investment interests that may pose a similar timing issue for families. Lastly, it is worth noting that changing your state of residence can help alleviate state estate and income tax burdens. For example, moving from Washington state to Nevada could eliminate your Washington state taxes altogether. However, this does not apply to federal estate and income taxes. So, moving to a different country, such as Luxembourg, will not eliminate your federal tax liabilities. For further resources and information, you can use the Washington State Estate Tax Calculator and read my article on Planning for the 35% Washington Estate Tax. Keep in mind that changing your Washington state residency can also help with state estate and income taxes.