Even when the influx of a large amount of money is a happy event, it can provoke many uncomfortable feelings. There can be even more emotions at play when it is an inheritance, a sale of family property, or even a business exit.
And then there’s the cash itself – what do you do with it? Should it change your financial plan? Should you gift it to others? Charities? Splurge wildly? Pretend it didn’t happen?
There’s 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 the key thing. It’s better to have the money sit untouched and unmanaged than make bad or irrevocable decisions.
Some practical considerations:
- Are there any immediate deadlines that need to be met?
- Do assets need to be retitled?
- Do you need to update your estate plan to protect children?
An attorney and a financial advisor can help you take care of any short-term needs to safeguard the new assets and if necessary, 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 what you want will change. Don’t lock yourself into anything.
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:
If your company just IPO’d, you’ll need a plan to sell the stock that considers timelines, vesting, exercising, holding periods, etc. It can get complicated, and the amount due will depend on how long you hold the stock when you sell and what the share price is.
A deferred sales trust may help you minimize taxes if you’ve sold your business. You’ll have to set up the structure and identify when and how you will gain access to the funds over time.
Inheritances can be real property, stock, cash, art, or other valuables. If you’ve inherited a stock portfolio or a 401(k) or IRA, you’ll need to be aware of timelines for withdrawing the money, and you’ll have to think about the cost basis of the stock you’ve inherited. If you can use the step-up in basis, you may eliminate a large portion of taxes.
It May be Time to Reassess Liability and Risk
You have more assets, so you also have more risk. Do you have a dog, coach a sports team with kids, or have a swimming pool and like to invite the neighbors over? 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 Goal?
Is the money just a nice 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 make a difference and 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. If you want to do a little of everything? You can see how it gets complicated quickly. No matter how solid your current financial plan is, your tax picture will change at minimum. Spending the time to identify what you want to do and then building a financial and investment plan around it is a good idea – and it can take some time to come into focus.
Creating a plan that incorporates flexibility and matches your risk profile is a good first step.
While some of these may seem like they are for larger firms, qualifying may be easier than you think. Since they reduce your tax liability without impacting your taxable income, they are worth exploring.
The Bottom Line
The thing about life-changing money is that you want it to change your life for the better. That requires a plan. And a successful plan means thinking through what you want, selecting from among options, and then carefully implementing it.
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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
This content not reviewed by FINRA
