Windfall Wealth Advice

A sudden change in wealth can be a good thing.  We all fantasize about winning the lottery, inheriting wealth from a long-lost relative, settling a lawsuit, or striking it rich with a start-up company.  However, as we know from tragic stories in the news, many people struggle handling sudden wealth.  Inherited wealth often comes with guilt, anxiety, and stress; furthermore, many beneficiaries lack the skill to manage financial assets resulting in substantial losses within a short period of time.  A study of lottery winners in Florida in 2010 found that 5% filed for bankruptcy within 5 years of winning – twice the rate of regular residents.  I had the opportunity to speak with a lottery winner in the United Kingdom, and they have a much more robust counseling regime for the winners.  “A win does not change people’s values around money, it exaggerates them,” said Andy Carter of Camelot (lottery operator in the UK).  To assist big-money winners, they schedule meetings with financial firms and banks to explain the risk and reward and independent advice as well as providing the winners with legal and tax counseling.  No matter how you may come by your assets, here are a few things to keep in mind to avoid major mistakes.

1. Avoid making immediate decisions. Although it is tempting to go out and buy a Ferrari or a boat or start shopping for a larger new home with a pool, these are purchases that you may soon regret.  Bigger homes (and other luxury items) come with extra costs – taxes, maintenance, utilities, and upkeep – which must be budgeted for.  The same advice applies to quitting your job. It is better to let the dust settle and take time to review your options before proceeding with impulse buying or other commitments.

2. Enjoy small pleasures. Rather than blowing the budget on a new car, celebrate your wealth in measured ways such as taking a family vacation or buying some small gifts.  Keeping the spending to a controlled amount will allow you to enjoy your wealth without regret.

3. Assemble a team of professionals. At a minimum, you will probably need an attorney, a CPA, and CERTIFIED FINANCIAL PLANNER™ to guide you through the process.  These should be professionals whom you trust to have your best interests at heart.  Ask for referrals, interview potential advisors, and check their credentials to make sure that they are honest, competent, and experienced.  Use your team to educate you on managing your new wealth.

4. Count the money. Depending on the source of your newfound wealth, there may be taxes to pay.  What is the net amount available to you?  Is the amount payable as a lump sum or an annuity or can you choose?  Perhaps you have inherited assets in a trust. You will need to understand the terms of the trust to see how and when you can access the money or what restrictions apply.  Bottom line: know how much you have net of taxes and restrictions before you make any plans.

5. Develop a life plan. The good news about a windfall is that it may allow you to accomplish some of your lifelong goals.  Paying off debts, gifts to charity, early retirement, college funding, taking vacations, buying a vacation home…the list goes on and on.  While achieving every goal may not be possible, you can prioritize them with a life plan.

6. Beware of friends and family. It is sad but true that money may be the root of all evil.  Your relatives may feel entitled to share in your newfound wealth or they may pull away from you resenting your good fortune.  Avoid starting down the path of helping all those who may ask you for a handout and try to maintain the relationships that you had before.

7. Keep it private. Although it may be difficult, avoid telling others about your good fortune and spreading the news on social media.  Try to keep the floodgates closed to charities, businesses, salespeople, and criminals who will see your wealth as their opportunity. In some cases, you may be able to shield your finances from the public eye by putting the proceeds inside of a trust.

8. Consider the emotional impact. Money can change your life, and not always in good ways.  Depending on the source, people with sudden wealth may be dealing with shock, guilty, anxiety, or all the above.  Money changes the way you feel about yourself, your identity.  A good therapist may be helpful in helping you resolve some of these issues which have come to be known as “sudden wealth syndrome”.