We all know life can change in an instant.
For instance, imagine a scenario in which you’ve just learned you’re going to receive a windfall of cash from a lottery, unexpected inheritance, lump sum retirement payout or divorce settlement.
Your initial reaction may be excitement, but this can quickly turn to anxiety and feeling overwhelmed. Knowing this windfall could change your life, the first step is to take a deep breath and pause. Do not make any quick, irrational decisions.
Do not buy a new car or a home, tell your family and friends about the windfall, or quit your job until you understand the ramifications of this new wealth. To be prepared to navigate through this phase of your life, you need to understand how this wealth will affect your financial goals and objectives, now and in the future.
Has the windfall, in fact, made you wealthy?
Your first step — before you take receipt of the money — should be to make an appointment with a fee-only, certified financial planner who specializes in financial planning for high-net-worth families. A CFP is certified by the CFP Board in financial planning.
More specifically, this is an adviser who is trained to look at all elements of a person’s financial life, and then develop a plan to help that individual meet their responsibilities and achieve financial goals. These professionals typically provide a combination of advisory services such as tax planning, estate planning, philanthropic planning and college funding planning.
Your adviser can help you implement a financial plan, discussing goals and objectives as well as risk tolerance when it comes to investing. They will have tools available to run financial projections, determining a safe amount to withdraw monthly or annually from your newfound wealth.
This planning could be as simple as reviewing existing estate planning documents, insurance policies, portfolio allocation and tax ramifications, and making changes where appropriate, or it could require more complex strategies. If one adviser doesn’t have the full skill set to advise on all aspects of your planning, it can be prudent to have a team of specialists working on your behalf.
If you do not already have a team in place, a professional will be able to help you select advisers specifically for your needs. That’s because a CFP typically partners with other advisers, such as certified public accountants, estate planning attorneys, insurance brokers and coaches to collaborate on financial strategies.
The team works together to identify and implement strategies that are specific to clients’ objectives. Any planning should be reviewed by you and your adviser(s) at least annually and updated as appropriate.
Your CPA will play an important role on this team, helping to analyze and understand the tax consequences of the windfall.
An estate planning attorney may also be helpful. Estate attorneys provide guidance and can help prepare a trust, a will, a power of attorney and healthcare advance directives. The combination of these documents and possibly more can help protect privacy, preserve the estate for the benefit of heirs and maintain control of the estate while the client is living—and after they are deceased.
You may also consider meeting with insurance agents to review property, casualty and life policies. You will want to confirm the insurance policies manage the risks that come with the increased net worth.
If family dynamics are problematic and complex, you may want to consider adding a coach who specializes in family wealth to the team of professionals. The coach may not provide financial or legal advice but can help to facilitate complicated family meetings.
Topics to address with your team of professionals include:
—What are the income tax ramifications of this windfall?
—Will my assets provide income for my lifetime?
—How should the money be invested to outpace inflation?
—Is it mandated by the Internal Revenue Service that I withdraw money annually from these funds?
—When do I involve my family?
—How do I tell my friends and family members that they will not be getting gifts or loans?
—Should I set funds aside to fund my children’s or grandchildren’s college expenses?
—What is the best way to support my favorite charities?
—Are my estate planning documents appropriate for my new wealth?
—How do I protect my assets?
—How do I leave a legacy for my children?
—Will my estate owe estate tax upon my death?
—Should I strategically gift some of these funds to family members while I am alive?
—How do I manage my inherited property? What are the consequences if I commingle the funds in a joint account?
—Do I have enough liability insurance?
—Do I need life insurance?
Once you receive your windfall, are you actually wealthy? The answer is: It depends. You may be in receipt of a considerable sum of money, but if that money is not managed well, it could run out long before expected, leaving you broke in the retirement phase of life.
Manage this new wealth with frugality and thoughtfulness. As my mother reminds our family members, “One bad decision can ruin the rest of your life.”
Your actions and mindset on day one will impact the future of your finances. Implement and follow a financial plan, so your new wealth lasts your lifetime.
Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com.
