From 1955 to 1960, there was a popular television show called The Millionaire. The premise was that a wealthy benefactor would send his assistant to various people and, for reasons known only to the benefactor, present them with a certified check for one million dollars. Each episode would then follow the recipients, showing how they dealt, whether successfully or unsuccessfully, with their unexpected wealth.
Most of us have fantasized about being part of such a scenario. In fact, the notion of “sudden wealth” appears repeatedly in popular culture, more recently in the popular show Who Wants to Be a Millionaire? and also the country-western song “If I had $1,000,000.” You may have even heard someone joke that if they received such a windfall, they would “pay off debt as far as it will go.” But if you ever really find yourself in this situation, at some point the reality begins to settle in and you begin to realize that properly handling a large inheritance or other windfall is a big responsibility. Unfortunately, many people who actually experience sudden wealth never come to grips with that responsibility; reports of lottery winners, for example, suggest that for many who win significant amounts in lotteries, the money actually brings about some pretty negative consequences. In other words, unless those who obtain a windfall prepare themselves to handle the wealth responsibly, they are likely to squander much of it.
The good news is that you can take some specific steps that can greatly increase your odds of being a good steward of your newfound wealth and help you make a plan for your future financial wellbeing and that of your family. You may even be able to put yourself in a position to be a benefactor of causes that are important to you.
Take your time, especially in the beginning.
We’ve all heard the proverb, “haste makes waste”; it is highly applicable to managing a windfall. Once you know from a reliable source that you are receiving a large sum, whether from an inheritance or some other source, you should take plenty of time to be certain you understand what form the wealth will take. For example, it makes a big difference whether you’re inheriting cash, listed securities, real estate, or assets in some other form. You also need to be sure of any terms are attached. Is the wealth governed by a trust, for example, which may specify when and how much of the assets you will receive? You will obviously also want to know the accurate fair market value of what you are receiving. And it is most important that you avoid making any quick decisions, especially regarding spending, paying off debt, or even investing. Keep in mind that the main benefit of having money is that it gives you choices; take plenty of time to think through as many options as you can before taking any action.
Build a team of advisors.
Suppose you found out tomorrow that you were going to become responsible for running a large business that you knew little about. You would probably want to know who would be advising you, right? In fact, surrounding yourself with knowledgeable advisors who could help you keep things running efficiently would be a very smart first step. And actually, handling a financial windfall has many similarities with running a business. You will need to decide how to extend the life of the assets, how to direct their use in the most advantageous ways, and how to obtain a good increase on your newfound wealth. This is why those who are becoming responsible for properly handling a windfall should obtain the services of the best and most trustworthy experts they can find, including a CPA, a qualified estate planning attorney, and a professional, fiduciary financial advisor or wealth manager. You need a team that can work together efficiently to help you make the right choices about taxation, investment management, estate planning considerations, and other vital financial matters. Having the right team in place, in fact, may be your best defense against making hasty decisions that aren’t in your long-term best interest.
Make a plan.
You need a plan, even if it eventually needs to be revised or redesigned. And this is where the professional team mentioned above can really help. Your financial plan should take into consideration your debt, your assets, and what you want to accomplish. Are you mainly concerned with funding education for children? Starting a new business? Preparing for a secure retirement? Some combination of all of the above? Your team can help you figure out where you are and the best way to deploy your newfound wealth to get where you want to go. You may need to pay down high-interest debt in the short term, or you may need to set up an education fund. You may need to make a purchase that will create immediate financial advantages, or you may even decide to support a worthy cause. But you can’t do any of that until you understand where you are and strategically decide on your desired direction.
Keep learning.
Now that you are the “CEO” of your new “enterprise,” you need to educate yourself in finance, investment, taxation, estate planning, and other important financial topics. You don’t have to become a lawyer, a CPA, or a finance expert, but you should do your best to become an informed consumer of the advice and guidance you receive from the professionals on your team. Make it a habit to keep updated on financial and economic news, changes in the tax code, and other current developments that could affect your financial strategy or your investments. Your professional advisors can help here, too, keeping you abreast of economic, financial, legal, and legislative developments that can affect your planning. Remember: the more you know, the more confident you’ll be. And confidence can reduce stress and lead to better decisions.
The Planning Center is dedicated to providing clients with the knowledge, tools, and guidance they need to manage and increase their wealth, whether “sudden” or acquired over time. In fact, our webinar, “Wealth Planning 101: How to Manage Inheritance and Sudden Money with Confidence,” provides information on the topics covered above and more. You can access this free webinar on our website, as linked above.
