Insights + Resources

When a Windfall Comes Your Way

Dec 1, 2021

Getting rich quick can be liberating, but it can also be frustrating. A sudden wealth windfall can help you address retirement saving or college funding anxieties, and it may also allow you to live and work on your terms. On the other hand, you’ll pay more taxes, attract more attention, and maybe even contend with jealousy or envy. You may also deal with grief or stress, as a lump sum may be linked to a death, a divorce, or a pension payout decision.

Windfalls don’t always lead to happy endings. Take the example of Alex and Rhoda Toth, a Florida couple down to their last $25 who hit a lottery jackpot of roughly $13 million in the 1990s. Their feel-good story ended badly: by 2006, they were bankrupt and facing tax fraud charges. Or Janite Lee, who won $18 million in the Illinois Lottery. Just eight years later, she filed for Chapter 7 bankruptcy; she had $700 to her name and owed $2.5 million to creditors.¹

Windfalls don’t necessarily breed “old money” either. Without a long-range vision, one generation’s wealth may not transfer to the next. As Fast Company notes, the wealth built by one generation fails to migrate to the next 70% of the time, and two generations later, it is gone 90% of the time.²

What are some wise steps to take when you receive a windfall? What might you do to keep that money in your life and your family for years to come?

Keep quiet, if you can. If you aren’t in the spotlight, don’t step into it. Who really needs to know about your newfound wealth besides you and your immediate family? The Internal Revenue Service, the financial professionals you consult or hire, and your attorney. The list needn’t be much longer.

What if you don’t have the opportunity to keep quiet? Winning a lottery prize, selling your company, signing a multiyear deal – when your wealth is publicized, expect friends and strangers to come knocking at your door. Be fair, firm, and friendly – and avoid handling the requests on your own. 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, you need to think about the immediate future, the near future, and the decades ahead. Many people celebrate their good fortune when they receive a sudden windfall and live in the moment, only to wonder years later where that moment went.

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, and investment accounts and insurance policies. A will, a trust, or an existing estate plan may need revisiting. Resist the temptation to try and grow the newly acquired wealth quickly through aggressive investing.

Now, how about the next few years? Think about what financial independence (or 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 this open for you? What are the concrete financial steps that could help you defer or reduce taxes in the next few years? How can risk be sensibly managed as some or all the assets are invested?

Looking further ahead, tax efficiency can potentially make an enormous difference for that lump sum windfall. You may end up with considerably more money (or considerably less) decades from now due to asset location and other tax factors.

Think about doing nothing for a while. Nothing financially momentous, that is. There’s nothing wrong with that. 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 a suite of professionals including a trusted financial advisor, tax consultant, and estate lawyer who know how to capably guide that wealth is just as vital.

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Tags: Certified Financial Planner Charlotte NC, charlotte NC, financial advisor charlotte nc, Financial Planning, Investment Planning, Personal Finance, Retirement Tax Savings, Wealth Building