A while back I talked about Lottery Tax Planning for a Billion Dollar Drawing. And what I said in the earlier article still stands… But the recent bumps in the Washington state estate tax rate made me think a quick update might be good.
For purposes of this blog post, I’m going to talk in terms of the recent, late December 2025 $1,500,000,000 Powerball. That drawing gave the winner an option. Receive $50,000,000 annually for three decades. Or, alternatively, take a roughly $700,000,000 lump sum.
And that choice—annuity vs lump sum—is the part I want to focus on…
The TLDR Summary: Take the Lump Sum
To cut to the chase, with large Powerball lottery winnings, the safe tax plan is probably to take the lump sum. This advice appears to be the opposite of what I saw reported in the media. Most experts appeared to think $50 million a year for thirty years makes more sense. And just superficially? That advice sounds right.
But seriously you really don’t want to burden heirs with the catastrophic estate tax risks of an annuity. And a quick illustration explains why.
Say you were confronted with the exhilarating choice of either $50 million a year for three decades versus a lump sum $700 million. And then (sorry) say you died the day after you won.
In this situation, your estate owes about $427,000,000 in estate taxes if you domicile in Washington state. (The state’s new 35% estate tax will amount to about $245 million. The federal 40% estate tax would account for the other $182 million.)
And the problem here? Your estate and heirs only “have” enough cash to pay the $427 million of estate taxes due a few months after your death if you took the $700 million lump sum.
Paying the Estate Taxes Off Over Time
In other words, in the tragically absurd scenario where you took the annuity and then died, your heirs will find themselves paying off the $427,000,000 estate tax liablity using the $50,000,000 annual annuity.
That sounds workable. But let me step you though the details so you see it’s a terrible outcome.
First of all, the federal and state income taxes on the $50 million might run about $18 million for a Washingtonian if the state’s new 10% millionaire’s tax has become law. So you don’t have $50 million each to grind down the debt. You have about $32 million after income taxes.
But because you owe the state and the federal government several hundred million dollars in taxes? Your estate accrues, one way or another, interest on the hundreds of millions of dollars of tax debt. Close to $24 million the first year, roughly $23 million in years two and three, and then ever smaller amounts as the “loan balance” shrinks.
Now, yes, your heirs will slowly be able to pay off the estate tax lability loan using the leftover money: $8 million of principal the first year, $9 million the second year, and increasingly large amounts each future year. But the paydown process will take decades. (I did a little Excel spreadsheet that amortizes the pay down and it takes the first 24 annual payments to extinguish the debt if the interest rate is 6%.)
And that’s the surprise here. Taxes not only reduce the net winnings (by more than 80%.) Taxes also delay when heirs receive their inheritances. And worse than that , some heir will find him or herself jungling estate finances over decades to pay off the $400,000,000-ish estate tax bill.
Thus my advice: If you ever do win a big state lottery? Yeah, absolutely take the lump sum.
Closing Comments and Caveats
Let me share three other comments, too, before I close.
First, comment: I was a little rough in my accounting. The federal tax rate for example isn’t exactly 40%. Rather, it’s 37% for the federal income tax and then 3.8% for the net investment income tax so a total of 40.8%. The federal estate tax is a flat 40% but only after any state estate tax is paid and only above $15 million (roughly). The new 35% Washington state tax applies only above $3 million and uses a $9 million phase in range where the rate starts at 10% and then rises to 35%. Finally, I assume that both federal income taxes and state income taxes calculations allow a deduction for the estate taxes paid. Federal rates do work that way. But we don’t know how a new Washington state millionaires tax might work.
Second comment: The fundamental, structural problem here is the estate needs to pay taxes on illiquid assets not easily converted to cash. And note this isn’t only a problem with something like a lottery annuity. Illiquid business and investment interests may create a similar timing problem for families.
Third comment: A change in domicile can fix or address a state estate tax problem as well as reduce a state income tax burden. Moving from Washington state to Nevada, for example, potentially zeros out your Washington state estate and income taxes. (If really did win a Powerball lottery and you current reside in Washington state? You probably want to seriously look at a domicile change.) You can’t however do something similar with federal estate and income taxes. Thus, moving from Washington state to, say, Luxemburg does not zero out your federal estate and income taxes.
Additional Resources
Washington State Estate Tax Calculator
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