What to Do After Winning Big

The 18th season of Survivor kicks off in less than a week (Stock Quote: CBS), and one contestant will be crowned the show’s $1 million dollar winner.

The Survivor champion will have company in the TV winner’s circle. Already this month, NBC's (Stock Quote: GE)  Deal or No Deal and Fox's (STOCK QUOTE: NWS)  Are You Smarter Than a 5th Grader have doled out the million dollar prize. But before these sudden millionaires jump into real estate or indulge in flashy cars, they should take note of pesky tax rules and deadlines.

For a lesson on the perils of unplanned pitfalls, look no further than Ruben Studdard, the 2003 American Idol champion, who owes nearly $200,000 in unpaid income taxes according to the Associated Press. The federal government and the state of Alabama, where the former idol resides, placed liens on all of Studdard's property for unpaid income taxes in 2003 and 2005, according to court documents.

Studdard is not the only celebrity to find himself felled by a financial frenzy after hitting the mother lode on the small screen. Richard Hatch, the first winner of Survivor in 2000, failed to report his winnings on his taxes, saddling him with 51 months of jail time.

The first thing anyone banking $1 million on a game show needs to understand is that that they did not just get $1 million.  Susan Bradley, co-author of Sudden Money: Managing a Financial Windfall, which is set for re-release in 2009, says recipients of large sums fall into debt partly because they may make financial commitments before knowing the net value of their winnings.

Consider Taxes
Bradley recommends setting aside at least 30% of the money for taxes. Tax returns usually come within nine months, she adds, and depending on the situation, the way taxes are handled will differ. "If you're not used to paying taxes on your own, it's easy to over commit," she says.  If it is a lottery prize, contact the company hosting the draw and find out the details. Requirements for claiming the prize money will vary by state.

Decision-Free Zone
Large sums are often obtained when "life and money are in motion," says Bradley. It may be claimed after a spouse passes away or, in the case of Studdard or Hatch, through a competition or employment advance. Regardless, the recipient should allow time before making any commitments or investments. Bradley recommends that large sum recipients enter a decision-free zone, in which they do not spend or invest their new wealth.

"Let the money sit, even if it is for months," she says. "You don't have to jump into a new market with any of the money." And don't do it alone.  Hire a financial advisor. "Usually, when it's a big sum (like a lottery prize), it's an opportunity to recalibrate your life, reboot it," she says. Many people consider resigning from their current position or buying property, and consulting an advisor will help a recipient determine the reality of their plans.

Make a Plan
After considering taxes and understanding how much money is actually in place, form goals and see if the money gained can act as a bridge to them. Bradley creates one page protocols with her clients to further understanding. "We look at it as a 'purpose allocation,'" she explains. In general, "some of the money should go towards producing income, some would get blocked off to grow, and some would go to giving and sharing." It could be allocated for education or spent on managing an estate for a certain amount of time.

For someone planning to retire after landing a windfall, "It's important to invest in something safe, something that has inflation protection." She suggests bonds, CDs, and interest paying investments where the principal is guaranteed by a reliable entity. "The returns won't be big on these," she adds, which is why designating some money for riskier investments should be considered.

Knowing these steps before falling into money is a key to successful planning because though it may be enticing, "the classic windfall experience is literally like getting the wind knocked out of you," Bradley says. "It's a very strong hormonal experience." Bradley, who sees the stress people go through, says few understand the peril. "The American myth is that all money is good, and more of it is better."