Washington Law Review


When a lottery winner dies after receiving only a few annuity payments from the state, the winner's estate must pay federal estate tax on the balance of the annuity. If the lottery prize is not legally transferable, the winner's estate cannot sell or pledge the right to future payments in order to generate funds to pay the estate tax. The estate tax value of an annuity is generally based on valuation tables that discount the future payments to present value. However, these valuation tables do not control when they produce an unrealistic and unreasonable result. The United States Courts of Appeals are split as to the proper method of valuing nontransferable lottery winnings. The Ninth and Second Circuits have held that the valuation tables produce an unreasonable and unrealistic valuation result for nontransferable lottery winnings because the tables do not consider lack of marketability. The Fifth Circuit departed from this precedent by holding that the valuation tables were controlling and no marketability discount was appropriate for nontransferable lottery winnings. Although stability and lack of transferability are two factors integral to the lottery winnings' value for estate tax purposes, none of the circuits have considered both of these factors. This Comment proposes a new approach to valuing nontransferable lottery prizes. First, courts should use the valuation tables to calculate the annuity's present value. Second, courts should modify the tables' value with a limited-percentage marketability discount calculated by weighing the stable payment structure of the lottery prize against the legal restrictions on its transfer. This approach gives proper weight to the two most fundamental characteristics of nontransferable lottery prizes.

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