Can Lottery Annuities Be Passed On to Heirs?

A common concern for lottery winners who select an annuity payout is the fate of their winnings if they pass away before all payments are made. In most circumstances, the remaining lottery annuity payments can be passed on to the winner’s heirs. This ensures that the full value of the prize is distributed, even if the original winner is not there to receive it.

The Inheritance Mechanism for Lottery Annuities

Upon the death of a lottery winner, the right to receive the remaining annuity payments becomes an asset of their estate. An estate is the legal term for the total of a person’s assets minus their liabilities at the time of death. These assets, including the future lottery payments, are then managed and distributed to the proper inheritors according to the deceased’s wishes or legal defaults.

The distribution of the annuity from the estate follows one of two legal pathways. If the lottery winner had a valid will, a document outlining their wishes for their property, the annuity payments will be distributed to the beneficiaries named within it. The person named in the will to manage this process, called an executor, is responsible for ensuring the annuity is transferred correctly.

If the winner dies without a will, the distribution is governed by state intestacy laws. These laws establish a hierarchy of relatives who are entitled to inherit the property. In this scenario, a court appoints an administrator to manage the estate, who will follow the legal framework to identify the rightful heirs and distribute the annuity payments.

Tax Consequences for Heirs and the Estate

Estate Tax

When a lottery winner with an annuity dies, the present value of the remaining payments is included in their gross estate for tax purposes. This means the total worth of the future income stream is calculated at the time of death and treated as a single asset. This value contributes to the overall size of the estate, which could be subject to federal estate tax.

The federal estate tax affects a very small percentage of the population due to a high exemption amount. For 2025, the federal estate tax exemption is $13.99 million per individual. This means an estate’s value must exceed this threshold before any estate tax is due. Consequently, only the largest lottery prizes, when combined with other assets, would potentially trigger this tax liability.

Income Tax

Heirs who inherit a lottery annuity are responsible for paying income tax on the payments they receive. These payments are classified by the IRS as “Income in Respect of a Decedent” (IRD). IRD is a tax concept for income the deceased person was entitled to but had not yet received before their death. The tax liability for this income passes to the beneficiary.

The heir will pay federal and, if applicable, state income tax on each annuity payment in the year it is received. The tax treatment is the same as it was for the original winner; the payments are considered ordinary income. The amount of tax owed will depend on the heir’s total income and corresponding tax bracket for that year.

The Process for Claiming Remaining Payments

Required Documentation

To claim the remaining annuity payments, the executor or administrator of the estate must gather several documents. These are needed to formally establish the death and grant the representative authority to act. Key documents include:

• A certified copy of the winner’s death certificate to formally establish the death.
• Official court documents that grant authority to act on behalf of the estate, such as Letters Testamentary or Letters of Administration.
• The original lottery annuity contract or agreement, which outlines the payout terms.
• The representative’s own identification and the Social Security or Taxpayer Identification Numbers for the estate and beneficiaries.

Procedural Steps

The first step is to formally notify the state lottery commission that issued the prize of the winner’s death. This notification should be done in writing by the estate’s executor or administrator. The commission will then provide instructions and forms that need to be completed to transfer the payments.

The executor must submit the required documentation to the lottery commission. The commission will review these documents to verify the death and confirm the legal authority of the person acting for the estate. This verification can take several weeks or months to complete. Once approved, the commission will update its records and begin directing future annuity payments to the designated heir or the estate.