Coming into a sudden inheritance or windfall requires special wealth planning. Did you know that a significant percent of people who receive large inheritances have little to show for it within a few years?
Because many people are unprepared for the emotional stress, heightened complexities of financial management and the changing dynamics of personal relationships that comes with sudden wealth. That is why having a wealth planner is so important.
Coming into an unexpected wealth can leave one feeling overwhelmed. The unsolicited advice, distrust and fear of people’s motives, as well as the multitudinous opportunities for investment can leave a person reeling. Throw in the loan requests and financial tips from friends or neighbors and it can be a real disaster.
[Related: How the SECURE Act affects Wealth Management]
The temptation to quit your job, jump into investments and buy a yacht can be nearly impossible to resist. However, we highly encourage you to wait. Take time to breathe and really think over your choices. Many people will spend an inheritance money more frivolously than they would money that they worked for. This is flawed thinking though and it will lead to financial ruin.
After you have taken time to relax and consider things, you can begin investigating potential lifestyle changes. What does that mean exactly? Well, if you are thinking of quitting your job and joining a nonprofit, start by volunteering. See if it’s what you really want to do before jumping in. Always dreamed of that brand new sports car? Rent one. Drive it around and see if it’s a practical decision for you.
During this process, we encourage people to consider this money as a long-term source of income, instead of an asset. For example, instead of thinking of it as $1,000,000 consider that it could be $40,000 of income per year for the rest of your life. This perspective can help you avoid pitfalls and maximize the impact of your funds.
Building a Team
In order to effectively manage your newfound wealth, you need a team of people helping you. A good mix of legal, tax, estate, risk management and financial advisors is crucial. The legal implications and financial tax of an inheritance or windfall are extremely complex. Having a team of financial advisors will ensure that your best interest is always in mind. Also, this will help maximize your money, ensuring that it will last as long as possible.
Furthermore, you need a team that understands and respects your desires and doesn’t push you to make rash decisions. This is a new situation for you, and you should take the time to think through each decision. In this phase, many people choose to speak to a therapist to deal with the emotional issues associated with a sudden inheritance.
Choosing the Right Financial Planner for You
Always choose an advisor that is fiduciary. This means they are legally required to put your interests first, despite their own compensations. You can check their client experience by asking questions, checking references and searching for any disciplinary information on the advisor’s regulatory body.
Tax Implications of Sudden Wealth
A CPA or tax specialist is a logical first choice for the team. You may have a large tax liability and will need to set money aside for that before moving forward with potential investments. Make sure that you fully investigate each financial planner’s background, expertise, and approach. Ensure that they possess the right skills and can provide the service you deserve.
Financial Management of Windfall Earnings
While you build your team, it’s important to learn more about financial management and investing. This will ensure more substantive conversations with your financial advisor and lead to more successful wealth management.
Normally, people take decades to build up their nest egg and have time to slowly build their financial literacy skills. However, people who receive an inheritance/windfall don’t have the luxury. For this reason, building a financial management acumen should be top priority to you and your team.
Planning for the Future
Once your team is in place, it’s time to begin planning for the future. First, get a clear understanding of your goals. Do you want to pay off debt? Make charitable donations? Set up a trust fund? Establish goals and set up a plan to achieve them.
You will need to think through some things with your advisor. This includes:
- How much will you spend monthly?
- Can you retire early and be financially independent?
- What will your asset allocation look like?
- How do you ensure that this wealth does not negatively impact your family and friends?
A good financial plan will address the five key elements of financial planning. These are:
- Expenses. This means setting up a budget and cash flow projections.
- Investing. This plan will show where assets are allocated and what risks you’re taking.
- Protection. This includes insurance coverage and estate planning.
- Debt Management. This plan addresses debt payoff and minimizing interest costs.
- Tax Planning. A proper tax plan can help you minimize tax costs over time.
Implementing Behaviors and Strategies for Success
After your team is in place and your goals are outlined, it’s time to implement your strategy. Typically, you will address time sensitive items first. Since you now have more to lose, it’s important to increase your insurance coverage. This is also the time for estate planning and tax minimization.
While many people lack the self-discipline to maintain sustainable spending habits when they receive a large influx of money, it is possible. We recommend that you prioritize initial spending on long-term, high value areas. This includes funding your retirement accounts and paying off debt. Then you can move forward with your investment plans.
Sudden Wealth Planning in Washington DC and Northern Virginia
If you have found yourself suddenly wealthy, and you wish to remain that way, it is imperative that you make wise choices. That begins with wealth planning. If you would like to speak to an advisor on the matter, contact Argent Bridge Advisors today!