Finance Guy wrote:
However, I would also shop around to see whether I could buy a better annuity in the market place that replicates even higher payments for the $454.71 million investment.
You can't. The fair value has already been determined by a select group of bond brokers. Note the first link has sample state income tax implications.
The first business day after a lotto winner is determined the State lottery Commission bids for a portfolio of US Treasury STRIPS from a select crowd of 8-10 bond brokers to fund the annuity. The age-old question of "which is better, annuity or lump cash" is moot -- it's an equal offering (outside of tax considerations). Lottery annuities, unless they are so-called lifetime annuities, are payable to your estate in the event of your untimely demise.
https://www.usamega.com/powerball-jackpot.aspIf you win Lotto Texas and you've chosen annual pay, the Texas Comptroller purchases US Treasury securities (zero's coupon bonds / strips) with your winnings. You are "suppose" to receive all monies earned from those investments. And ... each of your 19 OR 24 investments do have CUSIP numbers which you'll read about in a minute.
Example of the bid process
http://www.masslottery.com/lib/downloads/procurement/RFR_LOT_1003_Annuity_Prequalification.pdfNEW YORK
http://entertainment.howstuffworks.com/lottery2.htmIn order to guarantee that the funds for all of these payments are available, the New York Lottery buys special U.S. Treasury Bonds called STRIPS (Separate Trading of Registered Interest and Principal of Securities). These are also known as zero-coupon bonds (see Financial Pipeline: Zero Coupon or "Strip" Bonds for more details about bonds).
A zero-coupon bond pays a certain amount of money when it matures. For instance, in March 2001, you could buy a zero-coupon bond that would be worth $1,000 in 10 years for about $610. The longer the amount time before the bond matures, the less it will cost you today. A bond maturing in 25 years for $1,000 would only cost about $260 today. If you did the math, you'd find out that if you invested the $260 at about 5.7-percent interest, in 25 years it would be worth $1,000.
When a winner claims his prize, the New York Lottery asks seven different bond brokers to quote a package of bonds that will pay each of the 25 future yearly payments. They buy the bonds from the broker at the best price for the complete package. An investment bank holds the bonds, and each year when one matures, the funds are automatically placed in the New York Lottery's cash account. The funds are transferred to the prize-payment account, and a check is written for the winner.
Typically, the whole package of 25 bonds ends up costing the New York Lottery a little less than half of the jackpot amount.
However, most winners don't opt for annual payments. About 80 percent of winners choose the lump sum option, which is usually about half of the jackpot amount. Since the New York Lottery has to pay a lump sum to buy bonds anyway, it is just as happy to give that same amount of money to the winner instead. It still goes through the process of getting quotations for the bonds, but instead of buying the bonds it pays the winner the amount the bonds would have cost.
Most people take the lump sum because they figure that they can invest the money and do a little bit better than the approximate 5-percent interest that the bonds would earn.
Most U.S. lotteries take out 28 percent from the winnings to pay federal taxes. But, if your winnings were in the millions of dollars, you would be paying closer to 39.6 percent (the highest tax bracket) in federal taxes when tax time comes. Add state and local taxes, and you might end up with only half of your winnings when you are done paying taxes.
If you had opted for the lump sum prize in our $10 million lottery, the prize would be about $5 million. After federal and state taxes, you'd be left with about $2.5 million.