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Wall Street Steward Blog

The Lottery Portfolio

How many times have you heard someone say “if I won the powerball lottery, I would do <insert here>?”

Well, here is your chance. What would you like to do with the money? More importantly, what would your advisor tell you to do with the money? If any of you care what I would personally do, keep reading.

First, some housekeeping. We need to derive a number to use for this illustration. Lets assume a total jackpot of $250 million. The annuity of $10 million per year for 25 years, or the present value of such annuity, which would be around $100 million lump sum (using rate of 3.73%).

You like how I backward calculated that lottery to come out at $100 mill? Hey, I figured I would keep the math easy to illustrate percentages. What would you do with your $100 million? Better be careful…there are some serious potholes that one can step in if they are not prudent.

So, we’re using $100 million, after tax. Whatever the potential tax burden would be, I would set aside using laddered CDs until the time came to write Uncle Sam his check. 

Ok, so $100 million it is.  

Now that we have the number to use, we have to discuss product. Due to compliance rules, I will not discuss specific products, but instead I will use asset classes. I am not intentionally being vague, but instead trying to stay on my regulator’s good side. Rest assured that each asset class would be well diversified across all sectors, styles, sizes, etc.

*STEP 1: Fully fund three 529 accounts for my children. This takes care of their college expenses, gets a chunk of money out of my estate, and provides a nice write off on my South Carolina tax return. The 529 account that I use has a maximum initial contribution of $130,000 per child ($13k per year each for my wife and I, and we can put in 5 years worth of money in year one).

529 for Ava: *$130,000* (.13%) invested 100% in stocks
529 for Cole: $130,000 (.13%) invested 100% in stocks
529 for Lila: $130,000* (.13%) invested 100% in stocks

.39% allocated to college funds

$99,610,000 left

STEP 2: I would begin searching for some real estate for my wife and I. We would like to own homes in Manhattan (either Upper East Side or Tribeca), Italy (Amalfi coast), London, and San Francisco. I will save the details, but we would use only the most knowledgeable brokers at each location, and the result would be this:

Manhattan property: *$5,000,000* (5%)
Italian property: *$3,500,000* (3.5%)
London property: *$4,000,000* (4%)
San Francisco property: *$2,000,000* (2%)

14.5% allocated to real estate

$82,110,000 left

STEP 3: Pay off all debt. Obviously, I am not going to disclose how much debt we have, but just to keep the numbers round, I will say $110,000.

$82 million left

STEP 4: We would set up a foundation (revocable trust) account designed to assist our favorite charities. The interest and earnings off of the account would be contributed to the charities each year, with the lump sum to be passed on upon the second death. We would contribute $10 million. This would be managed by myself, as the trustee, and I would allocate the money into 40% stocks, 60% bonds.

Charitable Trust: *$10,000,000* (10%)

$72 million left

STEP 5: I would give back a tithe of 10% of the amount received. However, rather than write a $10 million check, I would again setup a trust account that would disperse the funds upon our discretion. The goal of this money would be to further God’s kingdom – not necessarily to help any single church. I would manage this trust personally using a conservative allocation of 40% stocks, 60% bonds.

God’s Kingdom Trust: $10,000,000 (10%)

$62 million left

STEP 6: Begin maximizing the annual gifting provision. There are about 15 friends/family members that I would like to gift money to. The IRS allows an annual gift of $26,000 (13k for each of us) per year to each of these people. You know who you are. We would give for 5 years.

Per person: $26,000/year for 5 years = $130,000
$130,000 times 15 people = $1,950,000

$60,050,000 left

STEP 7: Setup a trust for each child. There would be stipulations that would have to be met, and the bulk of the money would not be available until each child was 35 years old. We would place $2,500,000 in each account. The money would be allocated using a balanced approach. 75% stocks, 25% bonds. Each trust would be revocable, and I would be the trustee, of course.

Ava Trust: $2,500,000 (2.5%)
Cole Trust: $2,500,000 (2.5%)
Lila Trust: $2,500,000 (2.5%)

STEP 8: Begin an investment account that is dedicated to nothing but tax-free municipal bonds. Maturity length would not be a concern here, and maximum income would be the goal. I would ladder the maturities from 5 years to 35 years. I believe that this would generate an annual income of around 4% tax-free. $400,000 per year tax-free. This is part of what Laura and I would live on year to year.

Municipal Bond Portfolio: *$10,000,000* (10%)

$42,550,000 left

STEP 9: Place $10,000,000 in blue-chip, dividend paying stocks. A 3% annual yield would be the goal with this account. This would provide another $300,000 in annual income for Laura and I to live on.

Blue Chip Stocks: *$10,000,000* (10%)

$32,550,000 left

STEP 10: Place $10,000,000 into a diversified bond portfolio that would include corporate bonds, high yield bonds, international bonds, government bonds, etc. Capital preservation would be the intent here, and all interest would be reinvested. 

Bond Portfolio: *$10,000,000* (10%)

$22,550,000 left

STEP 11: Allocate $1 million to a trading account purely for speculation. This account would be tremendously risky, and I would manage it myself. 

Speculation Account: *$1,000,000*

$21,550,000 left

STEP 12: Allocate $10,000,000 into an alternative investments account, which would include absolute return strategies, private equity, long/short, hedging, etc.

Alternative Investments: $10,000,000 (10%)

$11,550,000 left

STEP 13: I would allocate $10,000,000 into extremely safe money market types, CD alternatives, etc. These types of investments are liquid on a daily basis and yield around 2.5% per year. This would be our liquid money account. Our rainy day fund, if you will.

Liquid Money Account: *$10,000,000* (10%)

$1,550,000 left

STEP 14: Last, but certainly not least, my wife and I would enjoy spending this last million-5. I know that I would buy myself a Lamborghini, because I am a tool, and I am quite sure that the Mrs. would enjoy a budgetless shopping trip. Here is a recap of what my overall portfolio would look like:

529 for Ava: *$130,000* (100% stocks)
529 for Cole: *$130,000* (100% stocks)
529 for Lila: *$130,000* (100% stocks)
Real Estate: *$14,500,000*
Charitable Trust: *$10,000,000* (40% stocks, 60% bonds)
God’s Kingdom Trust: *$10,000,000* (40% stocks, 60% bonds)
Ava Trust: *$2,500,000* (75% stocks, 25% bonds)
Cole Trust: *$2,500,000* (75% stocks, 25% bonds)
Lila Trust: *$2,500,000* (75% stocks, 25% bonds)
Muni Bond Portfolio: *$10,000,000* (100% bonds, generates $400k/year income)
Diversified Bond Portfolio: *$10,000,000* (100% bonds, all interest reinvested)
Blue Chip Stocks Portfolio: *$10,000,000* (100% stocks, generates $300k/year income)
Speculation Account: $1,000,000* (100% stocks)
Alternative Investments: $10,000,000* (100% alternative investments)
Liquid Cash Account: $10,000,000* (daily liquidity)

Overall asset allocation: 
$25,015,000 in stocks (26.8%)
$33,875,000 in bonds (36.3%)
$10,000,000 in alternative investments (10.7%)
$10,000,000 in cash (10.7%)
$14,500,000 in real estate (15.5%)

Money spent: 
Spend $1,550,000 on cars, shopping, etc.
Gift $1,950,000 to friends and family
Pay off debt of $110,000 

Estimated annual income:
$700,000 per year

After everything was in place, we would ask the same attorney we used to setup each of our trusts to design an advanced estate plan that would maximize the amount of money we pass to heirs, while minimizing any estate tax burden. 

There’s my plan. Shoot me an e-mail with yours and I will include them in a future blog.

This scenario is for illustrative purposes only and doesn’t represent actual events. Asset allocation does not guarantee profits or protect against loss.