Huge traps for big winners

Auckland shoppers queue for their share of the 2.9 million Big Wednesday tickets sold this week. Photo / Dean Purcell

Auckland shoppers queue for their share of the 2.9 million Big Wednesday tickets sold this week. Photo / Dean Purcell

Saturday Jun 20, 2009

By James Ihaka

While winning $30 million is almost certain to put a smile on anyone’s face it is still not a guarantee of long-term happiness. As this week’s Big Wednesday draw reaches a record $30 million in cash and $1.7 million in prizes, financial advisers say the winner is “fair game” without fiscal guidance.

Spicers Wealth Management senior financial adviser Jeff Matthews said instant and vast wealth could “literally blow a person’s mind”. He has seen it happen among his clients who include a $2 million lotto-winning couple who struggled with their newfound fortune and nearly blew the lot.

The husband went on a spending binge, buying flash cars which devalued quickly and were eventually worth a fraction of what he had paid. He also had a go at property development but failed.

“This man would just spend and could not stop,” said Mr Matthews. The marriage came under strain as his wife had more conservative spending habits. Within a few years the couple were both back at work but were saved from complete disaster by two mortgage-free properties.

People need to build a satisfactory support mechanism perhaps a trusted adviser, a good accountant or a good lawyer or someone you can rely on, without it you’re fair game,” said Mr Matthews. Roger Sutherland, director of Grant Thornton Wealth Management, said winners needed to keep their emotions in check and stay quiet.

A couple of his former clients made the mistake of “telling the whole world” about their lotto win. “Soon friends and family and even total strangers were asking for handouts because they had made a song and dance about what happened.” Within three years the couple were back to exactly the same assets and lifestyle they had before winning.

“They got the flash cars and would decide to change and get another one and every time they did something like that they lost money,” he said. “They really just had no idea of how to handle that quantum of money.” Mr Matthews said conservatively depositing all the winnings into the bank would be a big and safe earner.

At five per cent, $30 million would clear $1.5 million before tax of $570,000 for a total of $930,000 a year. “That’s about $77,500 a month, or $17,885 a week to come and go on,” said Mr Matthews.

Liz Koh, director of Moneymax, said winners were often traumatised and suggested doing nothing but banking the money for at least six months while trying to work out what kind of life the person wanted to live. “It sends some people into a complete fluster and it can take them a while to work out what is really important to them.” She recommended to “have a little bit in everything”.

“Cash and fixed interest are your conservative investments while property and shares are more aggressive.” In terms of obscure middling investments she said people could get into forestry, classic cars or art.

“But those are not what you would consider to be part of your core portfolio and you would definitely need some kind of expertise in those areas.” Mr Sutherland doubted a $30 million winner would invest in high-risk schemes, nor would he advise them to.

“People generally take risk because they want a greater return or they can see an opportunity,” he said. Those willing to accept the risk could own commercial buildings. “It has some risk but gives you the opportunity to get some capital gains if you buy well.”

Mr Sutherland said small allocations to a competent hedge fund manager would also be a “pretty smart move”. He suggested people find a focus in life after the win and something they’re passionate, but knowledgeable about, as employment.

THERE’S A PRICE TO PAY IN SHARING YOUR LOTTERY WINDFALL New Zealand Lotteries spokeswoman Karen Jones says most Lotto winners are “very generous” and usually share some of their fortune with family members or friends. But there is a price for this generosity: gifts of more than $27,000 over a 12-month period to friends and family are subject to a sliding tax scale.

Ernst & Young tax partner Aaron Quintal said the duty applied to any gifts including houses, motorbikes, cars, shares and not just cash. “If you buy someone a car, that is subject to gift duty. It even goesas far as if you lend someone money and they don’t pay you backthen that’s a gift too,” he said.

“As far as Lotto winners are concerned, well they certainly couldn’t give it away without having to worry about gift duty.” For gifts over $72,000 in value the taxable rate is 25 per cent – paid by the donor. Mr Quintal said there were tests to determine whether gifts to family members were “excessive”.

“If you buy your kids a car it’s not subject to gift duty but if you buy them a holiday house on the Gold Coast or the neighbours a car it probably is going to be excessive.” Gifts or donations to charity were not subject to gift duty.