Sudden Wealth Planning

You’re suddenly rich. Now what?

What’s the plan when you have a windfall? Through luck, inheritance, talent, or legal decisions, some people receive “sudden wealth” – a lump sum of money that is at least several times their annual income. Sometimes people think that the money will solve all of their problems. But if they aren’t careful, it can create entirely new ones.

Sudden wealth often comes with emotional baggage attached to it. If you’re suddenly wealthy, you may experience degrees of fear, guilt, anxiety and even paranoia in the months following your good fortune. As Dennis Pearne, Ed.D., author of The Challenges of Wealth notes, sudden wealth “changes what you can do, what you no longer have to do, where you can live” and other aspects of your life that seem set in stone. “So much changes so fast that it can be terribly overwhelming, and some people go into money shock.”1

We’ve all heard stories about people who won the lottery and ended up broke. In fact, you may have seen stories on TV or in magazines or newspapers about people who lost sudden fortunes in a matter of years, or let wealth wreck their families. It seems incredible, but it happens.

So, how does it happen? And how can you avoid it?

Rule #1: get financial advice from a qualified source. You would think that anyone who receives a six-figure or seven-figure check would immediately talk to a financial advisor. But that is not always the case.

Some people put it on their “to-do list” … and then go out and do other things with the money. Some never bother to seek qualified financial advice at all. Instead, they listen to relatives or neighbors.

The problem is, sometimes these relatives or neighbors

  • Have never had great money and do not understand the responsibilities that come with it
  • Only see wealth in terms of material things and purchases
  • Would like to vicariously live out their fantasies as a byproduct of your good fortune
  • Urge you to take chances (risks) with your money
  • Assume that you are “set for life”
  • Want you to look at wealth from their mentality, or want you to associate with their shady lifestyle

While your relatives and neighbors may mean well, they are likely not financial advisors. In fact, some financial advisors aren’t well equipped to consult people with sudden wealth either.

Rule #2: find an investor coach familiar with the issues surrounding sudden wealth. Ideally, you want someone who has consulted people in a similar situation. This is because sudden wealth is truly a special circumstance. It’s not just a matter of putting more money in bank accounts or investment accounts. Sudden wealth can mean a whole lifestyle shift – a new address, a new reason to get up in the morning, or maybe new questions about what to do with your life. Your loved ones may not look at the money the same way you do, and there needs to be harmony.

If you come into sudden wealth, do yourself a favor and pause. Find a investor coach who has consulted people who have come into money. Ask him or her to help you put together a team – because you may need one. Many millionaires and quasi-millionaires have financial planners, CPAs, and estate planning attorneys working for them – working in a unified effort to help them manage their money, reduce their taxes, make charitable gifts and arrange inheritances for their heirs.

Any new millionaire, or near-millionaire, should strive to make new found wealth grow and last. To do that, you need an investment plan that makes sense in the long run and makes you feel comfortable. You also need to plan to defer or reduce taxes and risks to your wealth – and when you are a new millionaire, you’re looking at a level of taxation and potential risk most people will never experience.

So if you find yourself with sudden wealth, plan. Instead of acting on impulse, act with intent and purpose. Call or e-mail us and schedule a time to talk with us to learn about your options and to establish financial priorities.

Citations.   [8/1/08]