Even when a large influx of money is a happy event, it can provoke many uncomfortable feelings. Emotions can be 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 correct 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.
Process Before You Act
Emotional flooding in the face of an inflow of money is just as real as a loss of money. Cash 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. Having the money sit untouched and unmanaged is better than making bad 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 your 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 basis, you may eliminate a large portion of taxes.
Consider 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. You'll need to revisit your risk management plan with an influx of wealth.
Define 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, your tax situation will likely grow more complicated. No matter how solid your current financial plan is, your tax picture will change at a minimum. Identifying what you want to do and then building a financial and investment plan around it is a good idea. It can take some time for your new objectives to come into focus.
Creating a plan that incorporates flexibility and matches your risk profile is an excellent first step.
The Takeaway
The thing about life-changing money is that you want it to improve your life. That requires a plan. And a successful strategy means thinking through what you want, selecting from among options, and then carefully implementing it.
Working with a trusted financial planner can reduce your stress and help you map out the best course of action for your situation. At Pursuit Planning and Investments, LLC, I help you think through your options. I help you make the best decisions for yourself, your family, and your money. Feel free to place a commitment-free 30-minute meeting on my calendar. We can discuss your goals and begin best optimizing your financial plan in that meeting.
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