Kentucky resident James Farthing is what polite society used to call a “career criminal” (although today’s politically correct term is “persistent felony offender”). He probably doesn’t have a LinkedIn page. But if he does, he can fill it with a very particular set of skills: strangling a girlfriend, selling cocaine to an undercover police informant, escaping from a prison work detail, bribing a corrections officer to deliver Xanax and Oxycodone into a state facility, possessing stolen firearms, and even getting his mother indicted in a marijuana smuggling plot. His “numbers” are just as impressive: a 16-page rap sheet, 25 different jails, and 30 years in custody.
Clearly, Farthing needs help. A hotshot criminal defense lawyer, obviously. A drug counselor and addiction specialists. An anger-management counselor. A good life coach might not hurt, either.
But now Farthing needs someone else – specifically, a good tax planner. In April, he bought a $2 Powerball ticket at Clark’s Pump N Shop and wound up splitting a $167 million jackpot with his mom. Now, just like Jed Clampett after shootin’ at some food, he finds himself with enough money to move to Beverly Hills and even get himself a cement pond.
Seriously, though, winning half of $167 million means owing a fortune in taxes. What sort of moves can a newly minted 1%er like Farthing make to keep more of his winnings?
The first thing Farthing learned, probably much to his disappointment, is that the advertised prize applies only if he takes it as a 30-year annuity. If he grabs the lump sum, he gets just enough to buy that annuity. In Farthing’s case, the lump-sum option would be around $43 million, with a $16 million tax bill. (Still not bad for a guy whose last job was 80 cents/hour as a prison janitor!)
Taking the annuity works out to about $2.8 million per year, with $1 million in annual tax. Over time, that puts $50 million more in keepsie money in his pocket, assuming rates stay constant. Of course, comparing those choices requires properly discounting the net present value of those cash flows, which probably isn’t part of Farthing’s skill set.
Let’s assume our one-man crime spree has poor impulse control and takes the lump sum. Are there still strategies he can use to keep more of this particular score away from Uncle Sam? Absolutely! He could pair a charitable lead trust with a pooled income fund to eliminate up to 50% of his adjusted gross income. This would let him give millions to his favorite charity while still enjoying a tax-advantaged income stream plus leave millions to whoever he chooses at death. And he’d still get to blow the other half on his favorite recreational chemicals! (As W.C. Fields famously said, “I spent half my money on booze, women, and gambling. The other half, I wasted.”)
We don’t know whether Farthing chose the lump sum or the annuity. We do know he left the Bluegrass State to celebrate his win at the TradeWinds Resort in St. Pete Beach. The day after he arrived, he punched a fellow guest in the face and assaulted the police officer who came to arrest him. Oops! After a few weeks in Florida jail, he was extradited back to Kentucky for failing to get his parole officer’s permission to leave in the first place. Double oops! At least he can afford a private lawyer now, instead of relying on an overworked and underpaid public defender.
Here’s the bottom line. There’s always an opportunity to pay less, no matter how you earn your millions. So call us before you call your travel agent and we’ll help you keep more!
