Powerball lottery: 5 tips from a money expert for what to do (and what to avoid) if you win

Powerball’s jackpot has reached a staggering $200 million, but would you know what to do if you had the winning ticket to make sure that cash would last a lifetime?

Lottery winners aren't immune from the risk of blowing their new-found fortunes. Financial planner James Wrigley from First Financial has revealed the general advice he’d give his clients to maximise their wealth, and warned of the pitfalls that “catch out a lot of lotto winners”.

He gave his first breakdown before last week's $150m went unclaimed and today's jackpot hit a record $200m, but told Yahoo Finance the steps remain the same when he revealed exactly how much you need to win to be able to quit your job forever.

The first to buy a home in your own name. From there on, it’s a bit more complicated. Here are the ins and outs as an influx of Australians are expected to buy a ticket ahead of the 7.30pm draw, in which half of all adults are expected to have an entry.

Do you have a lottery story to tell? Contact belinda.grantgeary@yahooinc.com

1. Gift money to family - but not in the way you think

If you want to share your winnings with your loved ones, Wrigley advises against just handing over the cash as a gift. Instead, he said, put it in writing as a loan.

“Make sure you document that money as a loan. It will help you and them if something happens to them,” Wrigley said.

RELATED

• Powerball rolls over to yet another $100 million draw – so why are we seeing more big jackpots?

• Do Australians have to pay tax on lottery winnings?

• How lottery winner blew it all and became a garbage collector

He explains that the money can be “called back in” if they fall into financial trouble.

“You take that money back out, they can sort themselves out and then loan the money to them again later on," he said.

2. Boost your super for tax breaks

The financial planner said you would want to maximise your deductible super contributions, both concessional (before tax) and non-concessional (after tax) because you'd be taxed far less on the income made if it was in your superannuation account.

“This is all about tax. Your superannuation fund will pay a maximum rate of tax of 15 per cent on the earnings," Wrigley said. "The money that you receive from winning the Powerball is tax-free but any earnings you make on that is taxable income. Superannuation is going to be your lowest tax environment."

Now, you can’t access this money right now. But it is helping grow a nest egg that you can access, tax-free, after the age of 60, he said.

“Most people will make it to 60 to benefit from tax-free super,” Wrigley said, adding that "if you’re generous”, you can also help do this for your children, or other lucky loved ones.

It is tricky to get across, and you should definitely get your own financial advice, but you can read a bit more about how super contributions are treated by the Australian Taxation Office (ATO) here.

3. Give to charity for a $50m tax deduction

Sharing your new-found wealth is a generous move that can also have financial benefits. However, before handing out lump sums, Wrigley said you should create a private ancillary fund, which the ATO describes as a pool of money that is managed or held to make distributions to other entities.

This helps on the tax front, but will also help you to be able to give for longer, Wrigley said. You can allocate money to this fund and, on an annual basis, distribute earnings from the pool to the charities of your choosing.

“You can give to them in perpetuity," he said. "Rather than just giving away a lump sum of money, you can invest that lump sum of money and give the income to those charities over and over and over.

“This money that you put into the private ancillary fund is a tax deduction for you. So, if you put $50 million into here, you get a $50 million tax deduction that you can carry forward to offset against income that you earn from all of these other sources.”

4. Create a family trust to make your money ‘go on forever and ever’

The final step is to create and put the remaining money into a family trust.

“The income you earn from that trust is your spending money. You can spend the income from these investments year after year after year. And this will go on forever and ever,” he said.

A family trust is a type of discretionary fund that holds valuable family assets and distributes income to its beneficiaries, helping to reduce tax obligations. On top of providing asset protections, the trust does not pay tax, instead, beneficiaries pay tax on the amount they are given.

This means if you spread the total income across multiple people (like your partner or children), you can try to keep their taxable income below a certain threshold, paying less than if one person was being taxed at the highest rate of 47 cents per dollar. Families are known to do this with businesses and there are also capital gains tax exemption benefits.

You can also use a “spillover company” or “bucket company” if the income is too great to push out to your beneficiaries, Wrigley said.

“This company will pay a maximum rate of tax at 30 per cent,” he said.

5. What not to do if you win lotto: ‘Catches out a lot of people’

There’s one thing Wrigley said not to do and that’s to eat into your initial $150 million winnings. The most important thing to do is establish ways of spending your money that will bring you a passive return, and burning through that money when it hits your account won’t help.

“The thing that catches out a lot of lotto winners, elite sports people and all the rest, is that they go spending the capital," he said. "You do not want to go falling into the trap of spending the capital on cars and luxury goods … you want to push that money into a trust.”

How does Powerball work and can I improve my chances of winning?

If last week is anything to go by, there will be a last-minute rush of people buying tickets today before the draw closes at 7.30pm AEST.

The peak of sales for the $150m Powerball draw was at 6.15pm last Thursday, when 7445 tickets were sold in a single minute. Now that figure is a historic $200m.

Almost half of all Australian adults are expected to buy a ticket, The Lott told Yahoo Finance.

The chance of winning the division one prize in Powerball, based on one standard game, is one in 134,490,400. You’re more likely to be killed in an asteroid impact, struck by lightning, or bitten by a shark.

Powerball can be particularly difficult to win because there are two different draws, one that pulls seven balls from a set numbered from 1 to 35 and a second “Powerball draw” from a separate 20-ball set.

If gambling is a problem for you, go to Gambling Help Online or call 1800 858 858.

Follow Yahoo Finance on Facebook, LinkedIn, Instagram and Twitter, and subscribe to our free daily newsletter.