Daniel Satz, CFP®, MPAS® CRPC®, AWMA®
Recently Come into a Lot of Money?
Receiving a large sum of money can be just as stressful as losing lots of money.
Give yourself at least a year to get your plan in place before spending or donating your newfound wealth. There is an emotional transition, too.
Make sure your financial advisor coordinates with your accountant, attorney, and other advisors.
If you decide to help family members financially, make it very clear whether the money is a gift or a loan.
Suddenly coming into a windfall can be just as stressful as losing a lot of money. In fact, it can be even more stressful because there's a sudden influx of wealth and the responsibility that comes with it. If you find yourself in this situation, the key is to take your time and make sure you have a solid plan in place before making any major financial decisions.
There are a variety of reasons someone might come into a windfall, such as selling a business for a large gain, receiving an inheritance from a parent or grandparent, or receiving a life insurance payout after the loss of a spouse. In any case, the sudden influx of wealth can be overwhelming, especially when it's coupled with the emotional stress of life changes.
When faced with a windfall, it's common for people to want to make big purchases, like a fancy new car or a bigger house. But it's important to remember that this newfound wealth needs to last you a lifetime, so it's crucial to make smart decisions about how you're going to use it. This is where a financial advisor can be incredibly helpful.
Preparing For Your Windfall If you don’t have a financial advisor already, it’s very important to find one who can guide you through the process of becoming responsibly wealthy. You also want a trusted expert who can work closely with your accountant and estate attorney to help you make the best possible decisions. Find a fee-only financial advisor who always has your best interests in mind and who does not receive commissions or other compensation for the products or services they recommend to you.
First and foremost, your advisor can help you work through decisions like these:
Is any of the newfound money taxable?
Do we have to set aside money to pay taxes or quarterly estimates?
Depending on how the money is received, what’s the best way to structure it?
A fee-only financial planner can help you create a list of goals and a realistic financial plan for getting you there. Give yourself at least a year to do the planning before you start spending (or giving away) your newfound wealth. It can be hard to adjust to a life of abundant wealth and suddenly not having to work. A huge range of emotions will come into play.
Three of my clients lost their husbands within two months of each other due to cancer or heart issues. They were each in their 40s and early 50s. There’s a lot of guilt involved and anxiety with making sure the children are okay. Should I be taking the kids on extravagant vacations or buying them lots of things to make them feel better? If you’ve inherited a large sum of money and you want to take the kids to Disney World or make home renovations that are long overdue – and doing so has no impact on your financial plan – then that’s fine if it satisfies an emotional or tangible need.
But buying a huge house that requires lots of upkeep, staffing, and taxes, is a decision that should be discussed with your advisor and carefully planned.
If you inherit money in the form of stock or other assets from a loved one, it can be hard emotionally to let yourself sell that asset or reduce the size of your position, even when it would seem financially prudent to do so. That’s another reason why an independent financial advisor can be very helpful.
When you inherit money or other assets, part of the reason you’ve received that windfall is that the giver wants you to benefit from it. One of your jobs as the inheritor is to make sure that the inheritance stays safe. When you have all of your money concentrated in just a few stocks, that’s not the wisest thing to do. You have to put the safety of your inheritance over your emotional attachment to the assets themselves.
Whatever you decide, don’t procrastinate. Just sitting on a large pile of cash because you're fearful of losing it in a down stock market is not a strategy. You and your advisor should come up with an investment plan and financial plan as soon as possible. It’s not just about putting the money to work; it’s about making sure your estate is updated and that your assets are properly titled. If you’re recently widowed and have minor children, is it clear who will have guardianship of the kids if something should happen to you, and how the inheritance will flow to them?
Don’t Publicize Your Newfound Wealth
Another reason to have your will and estate plan updated is that people tend to come out of the woodwork when they hear you’ve come into a large financial windfall. Some don’t have the best of intentions, so it’s best not to publicize your newfound wealth. Otherwise, uncles, cousins, and second cousins you barely know will be approaching you about giving them money for a “really great business opportunity” or to help with some overdue loans. They may try to make you feel guilty if you’re hesitant to help them. If you are going to help family members financially, it’s very important to stipulate whether the money you give them is a gift or a loan. If it’s a loan, make sure the repayment terms are clearly spelled out, and if it is a gift, make sure a precedent is set for their future expectations.
If you or someone close to you has concerns about an inheritance or other financial windfall they’re about to receive, please don’t hesitate to reach out. We’re very experienced in this area and happy to help.
DAN SATZ MS, CFP® is a Wealth Manager at Novi Wealth