The Powerball prize won't instantly make its winner a billionaire, after taxes. What the $1.5 billion jackpot can provide a single champion is a shot at using the same tool that Alphabet Inc. co-founder Sergey Brin,
hedge fund manager Bill Ackman and Microsoft Corp. co-founder Bill Gates rely on to manage their fortunes.
Family offices, as they're known, handle the daily and financial affairs of multi-millionaires and their relatives. They're intended to help the wealthy hold onto their fortunes over decades, preserving it for philanthropy or for the futures of children, grandchildren and even great-grandchildren. They can also do almost anything else a rich person needs done, from hiring staff to managing a wine cellar.
Families usually need at least $500 million to set up a full-service family office that oversees investments, said Elizabeth Nesvold, managing partner at Silver Lane Advisors. Those with more than $100 million may also afford their own office if they outsource some services.
With the Powerball drawing this week in New York, a single winner who opts to take the lump sum would see about $930 million in cash, according to yesterday's estimate. Federal, state and local government taxes could cut that almost in half, but may still leave half a billion dollars to play with. That would catapult a winner into the world of those with family offices, a level many star athletes and celebrities never reach.
“This is so far above what other people have won,” said Steven Danish, professor emeritus at Virginia Commonwealth University, who has conducted research on how past lottery winners fared. “It's hard to get a handle on just how much money it is.”
WISE MANAGEMENT
Lottery winners are notorious for wasting their fortunes on spending sprees and bad investments. A family office could help a Powerball winner hold onto their jackpot or even grow it. The average family office saw a 6.1% return on their investments in 2014, according to a September report by
UBS Group AG and London-based research firm Campden Wealth.
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With those returns, and by carefully spending just 1% of their fortune per year, or about $5 million initially, a Powerball winner could be a billionaire in about 30 years, according to a Bloomberg Billionaires Index analysis of taxes, returns and spending.
“That level of wealth can not only satisfy your needs for the rest of your life but also your children's and charitable causes,” said Robert Elliott, vice chairman at Market Street Trust Co., a multi-family office that started with the wealth of the family who founded glassmaker Corning Inc. “If you manage it well.”
If a winner had more typical investor returns of about 4% and spent 10 times the amount a prudent winner would, they'd squander all but about $40 million over the next three decades.
UNDIVIDED LOYALTY
Wealthy people often opt for a family office because of its singular focus, said Barbara Hauser, an independent family adviser. “You have undivided loyalty, lack of conflict of interests that other service providers could have, you've got your own dedicated staff and it's private,” she said.
Starting a family office isn't cheap. Median pay for CEOs at family offices is in the mid-six-figures, according to a 2015 study by
Fidelity Investments. Many family offices pay $20,000 to $100,000 for the technology and software needed to track spending, taxes, investments and properties, and report back to family members, according to Richard C. Wilson, chief executive officer at the Miami Family Office, which serves a family that has more than $500 million in real estate assets.
It's best to start out with only a leader of the office and an administrator, said Ms. Hauser. Make sure to use a recruiter who's previously placed executives in family offices, she said.
If run properly, offices can handle all sorts of tasks. They hire and fire staff, including nannies, security guards, chefs and even yacht captains. They put together annual family meetings and archive personal photos, videos and history. They also keep the family secrets, by arranging the household's information technology and cyber security.
TAX PLANNING
A family office can help make sure a one-time windfall lasts for generations. Tax planning is crucial for this, with the U.S. estate tax applying to individuals with more than $5.45 million or couples with more than $10.9 million. The wealthy must also file a gift tax return if they give more than $14,000 to any individual this year.
For a Powerball winner, the key is to moderate spending while wisely investing the money, said Mr. Elliott.
“Consumption will destroy wealth,” Mr. Elliott said. He would advise a Powerball winner to “take a long time thinking about your investment decisions. Sitting and waiting a bit won't hurt you.”
