Pay off student loans and mortgages. Buy a second home. Travel around the world. Everyone dreams of what they’d do if a windfall of cash or investment assets came their way. Most of these windfalls can be anticipated. Inheritances. Deferred compensation. Exercised stock options.
At some point, you might be on the receiving end of such windfalls. And while few would say “no” to an opportunity to take possession of these assets, it is important to evaluate how this influx will affect your financial position and goals.
Evaluate your new financial position
Just how wealthy are you? You'll want to figure that out before you make any major life decisions. Your first impulse may be to go out and buy things, but that may not be in your best interest. You'll want your current wealth to last, so you'll need to consider your future needs, not just your current desires.
Answering these questions may help you evaluate your short- and long-term needs and goals:
- Do you have outstanding debt that you'd like to pay off?
- Do you need more current income?
- Do you plan to pay for your children's education?
- Do you need to bolster your retirement savings?
- Are you planning to buy a first or second home?
- Are you considering giving to loved ones or a favorite charity?
- If your windfall is in the form of stocks or bonds, what effect could they have on your investment portfolio?
A financial planner can help you begin to formulate a plan to address these questions. Meanwhile, you keep these funds in an accessible interest-bearing account such as a savings account, money market account, or short-term certificate of deposit until you’re ready to implement your plan.
Impact on insurance
It's sad to say but a higher net worth may make you more vulnerable to lawsuits. Although you may be able to pay for any damage (to yourself or others) that you cause, you may want to re-evaluate your current insurance policies and consider purchasing an umbrella liability policy. If you plan on buying expensive items such as jewelry or artwork, you may need more property/casualty insurance to cover these items in case of loss or theft. Finally, it may be the right time to re-examine your life insurance needs. More life insurance may be necessary to cover your heirs’ estate tax bill so your beneficiaries receive more of your estate after taxes.
Impact on estate planning
Now that your wealth has increased, it's time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.
Carefully consider whether the beneficiaries of your estate are capable of managing the inheritance on their own. For instance, if you have minor children, you should consider setting up a trust to protect their interests and control the age and conditions under which they will receive their funds.
It's probably also a good idea to consult a tax attorney or financial professional to look into the amount of federal estate tax and state death taxes that your estate may have to pay upon your death; if necessary, discuss ways to minimize them.
Also, don’t forget to update your will to make sure that it accurately reflects your wishes. If your newfound wealth is significant, you should meet with your attorney as soon as possible. You may want to make a new will and destroy the old one instead of simply making changes by adding a codicil.
Giving it all away — or maybe just some of it
Is gift giving part of your overall plan? You may want to give gifts of cash or property to your loved ones or to your favorite charities. It's a good idea to wait until you've come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:
- If you forgive a debt owed by a family member, you may owe gift tax on the transaction
- You can make individual gifts of up to $15,000 (2018 limit) each calendar year without incurring any gift tax liability ($30,000 for 2018 if you are married, and you and your spouse can split the gift)
- If you pay the school directly, you can give an unlimited amount to pay for someone's education without having to pay gift tax (you can do the same with medical bills)
- If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income.
Where do windfalls fit into your financial plan?
A windfall—expected or unexpected—can have life-changing consequences. When these events occur, a financial advisor can objectively help you sort through the various implications and develop a plan to help you spend, invest, protect and distribute both this windfall and your existing assets more effectively.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Chris Gullotti is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.