A recent client came into what I would consider a life changing event and windfall. In one perspective, he and his wife and family will continue their lives with only the memories and photos of a loved one lost. It will take a long time to recover and accept their new life, but time is a great healer.
On the other hand, at the age of 47, he and his family will also be burdened with how to handle this unexpected windfall which will certainly change the family’s lives and lifestyle forever; one that involves a significant bequest.
A large influx of money can be an extremely happy event — for example, winning the lottery or receiving an extra bonus, major gift, or lawsuit proceeds.
There can be even more emotions at play when it is the result of an inheritance, a sale of family property, or even a business exit.
So what do you do with this cash or gift? Spend it? Give it to charity? Give it to others? Should it change your financial plan? Do you pretend it didn’t happen?
There is no right answer to what to do with the money, but some sensible steps can put you in a better position to make good decisions that are right for you now and in the future.
Don’t Do Anything Until You’ve Had Time to Process
Emotional flooding in the face of an inflow of money is just as real as in the face of a loss. Money is tangible, and it makes whatever event that led to the sudden windfall very real — and very final. Taking time out to understand and process your emotions is key. It’s better to have the money sit untouched and unmanaged during this time than make bad or irrevocable decisions.
Some practical considerations:
Develop your financial team from trusted family/friends, attorneys, CPAs, and financial planners.
A great financial planner will serve as a coach to help navigate the nuances.
Are there any immediate needs requiring efficiency which should be addressed?
Make a priority list of needs to review with your team.
Discuss how your actions or purchases might change your future lives.
Understanding the how and why of your purchase would also help you determine what or how to protect your family.
Do you need to update your estate plan?
An attorney and a financial advisor can help you take care of any short-term needs to safeguard the new assets and include them in your estate plan.
It’s important not to make any investment plans or spend large amounts right away. Your new reality will change you, and you should wait 6 months to a year before making life alternative changes. Don’t lock yourself into anything you can't undo.
Make Proactive Tax Plans
Unless the money results from a personal injury lawsuit, taxes will most likely be involved. There are strategies to minimize taxes, and there are other considerations to think through. You need to know how much is yours and how much will go to the taxman.
The source of the windfall will often dictate the tax strategy deployed. For example:
Inheritances of tax deferred accounts can be tricky under current tax rules regarding required minimum distributions (RMD).
If you’ve inherited a 401(k) or IRA, you’ll need to be aware of timelines and options for withdrawing the money.
Inheritances of real property, taxable accounts, stocks or cash, art, and other valuables
You’ll have to think about the cost basis of the stock you’ve inherited.
Oftentimes, you can use the step-up in basis and may eliminate a large portion of taxes.
If your company just IPO’d, or you received a large grant from ISO's, NSO’s or RSU’s, you’ll need a plan to sell the stock that considers timelines, vesting, exercising, holding periods, etc. It can get complicated, and your financial team, especially your CPA will guide you along.
A deferred sales trust may help you minimize taxes if you’ve sold your business or real estate. You’ll have to set up the structure and identify when and how you will gain access to the funds over time.
It May be Time to Reassess Liability and Risk
With more assets, you also have more risk. Do you have a dog? Do you coach a sports team with kids or enjoy inviting the neighbors over to to your swimming pool? Having a lot of money changes the calculus. Do you need an umbrella policy? Do you need to change your homeowner’s policy or add a rider to insure specific assets?
What is Your New Investment or Life Objective(s)?
Maybe people think about leaving their current employer or income source. But in that circumstance, what would you do to fill that space or time?
Is the money just comforting to have, or does it constitute your retirement plan? Will you give up work early and live off the proceeds?
Will you start a business or get serious about a passion project?
Do you want to use the funds to support causes or charities that are important to you?
Each of those goals would require a very different investment plan. They would also require ongoing tax planning. Maybe you want to do a little bit of everything. It can get complicated quickly. So no matter how solid your current financial plan is, at the very minimum, your tax picture will change.
Spending time to identify what you and your family want to do is the best advice anyone can offer. Being patient while simultaneously building a financial team is the best approach to making smart decisions for the future. Developing your thoughts, goals, and objectives around a financial and investment plan is a great step – which can take some time to come into focus.
Creating a plan that incorporates flexibility and matches your risk profile is a good first step. And then consider how you’ll explain or not explain your new lifestyle to your friends and family. There’s a lot to think about and having the guidance and support of a financial advisor can help make the big decisions a little easier.
The Bottom Line
The number one thing about life-changing money is that you want it to change your life for the better. And that requires patiences and a plan. Creating a successful plan means thinking through what you want, selecting from among options, and then carefully implementing it.
If you’re interested in discussing your options further, reach out to K Wealth Advisors for guidance on how to navigate this unique time. We can help you schedule a GoodFit meeting, and discuss your goals and priorities today. #KWA