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Getting rich quick can be liberating; it can also be frustrating. Sudden wealth can help address retirement saving or college funding anxieties and provide the opportunity to live and work on your terms. On the other hand, you’ll pay more taxes, attract more attention, and perhaps even contend with jealousy or envy. You may also deal with grief or stress, as a lump sum can be linked to death, divorce, or a pension payout decision.Windfalls don’t always lead to happy endings. Take the example of a Florida couple who were down to their last $25 in 1990 when they hit a lottery jackpot of roughly $13 million. Their feel-good story ended badly. By 2006, they were bankrupt and facing tax fraud charges. Another individual won $18 million in the Illinois Lottery and eight years later filed for Chapter 7 bankruptcy. She had $700 to her name and owed $2.5 million to creditors. Windfalls don’t necessarily breed “old money” either – without long-range vision, one generation’s wealth may not transfer to the next. The Williams Group, a California-based wealth coaching firm, recently spent years studying the estate transfers of more than 2,000 high net worth households. It found that 70% of the time, the wealth built by one generation failed to successfully migrate to the next.1,2
“For the love of money is a root of all kinds of evil. Some people, in their eagerness to get rich, have wandered away from the faith and caused themselves a lot of pain.” (1 Timothy 6:10).
What are the wise steps to take when you receive a windfall? What might you do to keep that money in your life and family for years to come?
Keep quiet, if possible. Don’t step into the spotlight. Who really needs to know about your newfound wealth besides you and your immediate family? The Internal Revenue Service, the financial professionals who you consult or hire, and your attorney.
What if you can’t? When wealth is publicized, expect friends and strangers to come knocking at your door. Be fair, firm, and friendly – and avoid handling the requests yourself. One generous handout may risk opening the floodgate to others. Let your financial team review appeals for loans, business proposals, and pipe dreams.
Yes, your team. If big money comes your way, you need skilled professionals in your corner – a tax professional, an attorney, and a wealth manager. Ideally, your tax professional is a Certified Public Accountant and tax advisor, your lawyer is an estate planning attorney, and your wealth manager pays attention to tax efficiency.
Think in stages. When a big lump sum enhances your financial standing, consider the immediate future, the near future, and the far future. Many celebrate their good fortune when they receive sudden wealth and live in the moment, only to wonder years later where that moment went.
“Whoever loves money never has enough; whoever loves wealth is never satisfied with their income. This too is meaningless.” (Ecclesiastes 5:10).
In the immediate future, an infusion of wealth may give you some tax dilemmas; it may also require you to reconsider existing beneficiary designations on IRAs, retirement plans, investment accounts and insurance policies. A will, a trust, and an existing estate plan may need to be revisited. Resist the temptation to try and grow the newly acquired wealth quickly through aggressive investing.
What about the next few years? Think about what greater financial freedom means to you. How do you want to spend your time? Should you continue in your present career? Should you stick with your business, or sell or transfer ownership? What kinds of near-term possibilities could open for you? What are the concrete financial steps that can help defer or reduce taxes? How can risk be sensibly managed as some or all the assets are invested?
Looking ahead, tax efficiency can potentially make an enormous difference for a lump sum. You may end up with considerably more or less money decades from now due to asset location and other tax factors.
“A good man leaves an inheritance to his children's children.” (Proverbs 13:22).
Consider doing nothing financially momentous for a while. Sudden, impulsive moves with sudden wealth can backfire.
Welcome the positive financial changes, but don’t change yourself. Remaining true to your morals, ethics, and beliefs will help you stay grounded. Turning to professionals who know how to capably guide that wealth is just as vital.
“A faithful man will abound with blessings.” (Proverbs 28:20).
Submitted by Patrick Wallschlaeger, CEO, Midwest Professional Planners, Ltd., a Registered Investment Advisor. You can write to him at 2610 Stewart Ave. Suite 100 Wausau, WI 54401, or call him at 1-800-236-6775.
Investment Advisory Services offered through Midwest Professional Planners, Ltd. (“MPPL”), 2610 Stewart Ave., Ste. 100, Wausau, WI 54401, 1-800-236-6775, an SEC-registered investment advisor. Securities products involving commission or transaction based fees are offered through APW Capital, Inc., 100 Enterprise Drive, Ste. 504, Rockaway, NJ 07866, 1-800-637-3211. Member FINRA/SIPC/MSRB. MPPL is independent of APW Capital, Inc. Registration with the SEC or State Regulatory Authority does not imply a certain level of skill or expertise.
Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable or equal any historical performance level(s).
Citations.
1 - bankrate.com/finance/personal-finance/lottery-winners-who-went-broke-1.aspx#slide=1 [5/23/18]
2 - money.cnn.com/2018/09/10/investing/multi-generation-wealth/index.html [9/10/18]
