Navigating Sudden Wealth
With this week’s news that a lottery ticket worth a share of the $494 million Mega Millions Jackpot was purchased in Fort Myers, Florida, another lucky individual became the recipient of life-changing wealth.
Whether sudden wealth comes from an inheritance, the sale of a business, an IPO, or the lottery, there are several key steps you should take when dealing with an unexpected windfall.
Because I’m feeling punchy and we just re-sealed our bathtub and shower, those facing sudden wealth should remember CAULK and take a step back before charging forward into new and different spending patterns.
C - Consider the impact of your sudden wealth
More than likely, your life is about to significantly change. Opportunities that seemed far out of reach may now be realistic possibilities. While these changes open new doors, they can also create unforeseen consequences.
Whether you quit your job, move to a new city, buy a luxury car, or decide to give your wealth away to a foundation, your decisions now will have ripple effects down the road.
Before making any decisions, revisit your core values and consider the personal and community impact you want to create with your newfound wealth. Just because you have greater financial means, it does not make you a fundamentally different person.
Ask yourself:
Where did you value investing your time, energy, and resources in your previous life?
How can you amplify that enjoyment with increased resources?
What about your life pre-windfall do you think you will miss?
Remember that the grass is always greener on the other side. While wealth creates opportunity and freedom, it doesn’t guarantee a worry-free existence. Build a plan for the future that incorporates the freedom your new wealth provides but doesn’t erase the values, passions, and relationships that you have spent your life building.
A- Assemble professionals to help you manage an unexpected windfall
Remember when I said wealth doesn’t create a worry-free existence? Sudden wealth often necessitates quickly assembling a team of professionals who are qualified to help you navigate the intricacies of managing a windfall.
Depending on your situation, your team may include a financial advisor, CPA, and attorney, among other professionals. This can often be a difficult and confusing step to navigate, especially for those who don’t have a network of wealthy friends or family to ask for referrals.
Many people in your situation are taken advantage of by unscrupulous professionals looking to advance their own self-interest. As you interview professionals, ask the following questions:
What is your experience dealing with people in my specific situation?
Do you have experience helping clients with the tax/legal codes in my state?
How are you compensated? How does that compensation change depending on how much help I need?
What control, if any, will you have over my wealth?
Can you provide references from current clients?
What other types of professionals should I be working with?
Are you a CFP®, fee-only advisor, and/or fiduciary? (Financial advisors only)
When you find a professional you like, ask them for references of other advisors who can round out your team.
U - Understand the tax consequences of a sudden money event
Dreams of purchases made and adventures taken with newfound wealth are often crushed by the harsh realities of taxes.
Consider a lottery winner in Oregon: a $100 million payout could be reduced by almost 50%, down to $53 million. That is still a lot of money, but ~$47 million off the top is a steep tax bill.
Those selling assets may be subject to lower capital gains rates, but taxes will still present a likely burden and planning opportunity. Estate taxes and mandatory taxes on distributions from IRA accounts can also take a hit on an expected inheritance.
Regardless of how your wealth arrives, don’t make any plans or promises until you have discussed and confirmed with a qualified CPA how much you should actually end up with after paying your taxes. Always remember - even if money is in your bank account, it isn’t fully yours until Uncle Sam has gotten paid!
L - Leave decisions around an unexpected windfall until later
Sudden money events are not necessarily happy occasions. Give yourself time to process complicated emotions before making any major life changes.
In the case of an inheritance, you may be mourning the person who passed and wondering how you are going to navigate this new challenge without them. For those selling a business, the transition may be bittersweet as you look forward to new adventures. And any recipient of an unexpected windfall is likely to be overwhelmed with the amount of complexity and the number of decisions that now rest on their shoulders.
While it may feel like everything needs to get done yesterday, give yourself time and space to breathe and sit with your feelings. Don’t rush into any decisions. Remember that it’s almost always easier to hold off on a decision than it is to try and reverse a choice once it has been made.
A good rule of thumb is to wait for at least a year after any unexpected windfall before making life-altering changes. This gives you time to process your feelings, consider the impact questions above, and decide what next steps make the most sense for your new reality. This year doesn’t have to be a quiet period, it can be spent gathering information and pursuing different options in service of an eventual decision.
One caveat for those managing grief and an inheritance at the same time: you may not be ready to do anything with your wealth after a year, or two, or more. Grief is not linear and when it is tied up with money issues it can get complicated and emotionally confusing. Give yourself grace to manage the best way you know how and don’t beat yourself up if you don’t have the energy to get on top of everything within a set amount of time.
K - Keep news of your sudden money under wraps
It is generally wise not to spread news of your sudden windfall far and wide. There are always bad actors looking to benefit from those who are unfamiliar with managing large amounts of wealth.
Depending on the nature of your interpersonal relationships, even trusting friends and family with details may lead to additional strife down the road.
Before sharing your news, get your professional team in place behind you and work with those advisors to put up guardrails and answer the following questions:
How will I respond if my immediate family asks me for money?
How will I respond if my extended family asks me for money?
How will I respond if my friends ask for money?
How will I respond to requests from non-profits, community organizations, et cetera?
What physical and electronic security measures do I have in place to avoid falling victim to theft or scams?
If you are the recipient of an unexpected windfall, remember CAULK and take time to get your affairs in order before making any decisions. Money doesn’t equate to happiness and complicated feelings about newfound wealth are to be expected. Have patience with yourself while you navigate these new waters and make sure you have a network of professionals and trusted loved ones around you to help support and inform your decision making.
Navigating a sudden money event can be a cause for joy and gratitude, but also a source of fear, frustration, and tension. For help building a plan to manage a sudden money event in a way that aligns with your goals and vision for your financial future, Contact Katherine or schedule a call to build a strategy that works for you and your family.
About Sunnybranch Wealth
Sunnybranch Wealth is a boutique, fiduciary, fee-only financial advisory firm that works with progressive individuals and families who want to build their wealth while creating positive social impact.
Sunnybranch specializes in working with millennials and busy families who need help but don’t have time or energy to devote to their finances. We serve as your trusted resource and partner, alleviating the stress of managing your wealth and letting you focus on living your life.
Our founder, Katherine Fox, is a CERTIFIED FINANCIAL PLANNER™, Chartered Advisor in Philanthropy®, and 21/64 Certified Advisor with deep expertise and experience in helping clients build wealth while navigating life’s financial challenges. Her work combines comprehensive financial planning, ESG and impact investing, and charitable guidance to serve clients who want to grow their wealth sustainably while giving back in a meaningful way.