This article is written as a resource to support those experiencing a sudden influx of wealth. Large windfalls are often accompanied by a range of emotions that can create poor outcomes. Managing these emotional factors are often the most important determinants of your outcome.
Take a Breath
Receiving a sudden windfall can be overwhelming. Many people who come into large sums of money end up losing it relatively quickly. Whether your windfall comes from an inheritance, lottery winnings, or a personal loss, it's critical to pause and consider your long-term goals before making any significant financial decisions. A good idea might be to set aside one year's living expenses and place the rest of the funds into low-risk investments for one year. This provides space for emotions to cool, helps avoid impulsive behavior, and allows you time to put together a team of professional advisors.
Slow to Speak
It’s important to keep your circle small, especially in the early innings. Sudden influxes of wealth tend to turn up long-lost friends and family members who may see an opportunity for financial gain. Lending or gifting money to family and friends with severe financial trouble can often exacerbate the behavioral patterns that landed them there in the first place. Having a trusted team of professionals to act as a sounding board for you is extremely important.
Create a Written Plan
Be clear with your advisor on your priorities so you can develop a customized plan. Your plan should list your goals and describe when and how you expect to achieve them. Take time to reflect on what’s important to you and what you would like to achieve over a 1-year, 5-year, and 10-year period. In addition to your financial objectives, the ideal plan is one that preserves both your relationships and your emotional well-being.
Assemble Your Team
A sizable windfall comes with a lot of moving parts. How will the funds be taxed once received, if at all? Does the windfall exceed the estate tax lifetime exemption amount? If not, will it exceed it in the future? What are the tax consequences of sharing your wealth with others? You need a team of professionals to help equip you for what’s ahead.
Below are the professionals we believe you will need and how they can help:
CERTIFIED FINANCIAL PLANNER™ Professional
The CFP® designation is widely considered the gold star of financial planning. This individual will help you to develop your long-term goal, invest your assets for the future, and provide overall direction for you and your family. It is important to that your advisor is a fiduciary.
Certified Public Accountant (CPA)
Your taxes just got a lot more complicated. Tax planning will be a critical part of your financial plan. Not only do you need to find a CPA to properly file taxes for you, but you will need a CPA to do proactive planning and help minimize lifetime tax.
Once you’ve worked with your financial planner to develop your goals, an Estate Attorney will help you to solidify your estate plan. This process can range from simple to more complicated depending may be a simple process or more complicated depending on the size of the windfall and the dynamics of your family.
Additional Questions for Self-Reflection
What impact will the windfall have on my children and family, and how can I prepare them?
What are my 1-year, 5-year, and 10-year goals?
What level of risk am I comfortable with taking to grow the funds and generate income?
Are there any high interest debts that should paid off immediately?
What is the first thing you are going to do when the money is received?
Are there any charitable aspirations that should be considered?
Should I consider trusts or other structures to protect the money?
What kind of legacy do I want to leave?