How to Handle a Windfall

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®
Many of us, at some point in our lives, will end up with a lump sum of cash, the likes of which we’ve never dealt with before. It may come from an inheritance, a business or patent sale, or even a lawsuit. Even if you are a high earner and have built up a sizeable nest egg through hard work and determination over the years, getting one lump sum is emotionally very different. However, if you handle it effectively, it can dramatically improve your life.
Unfortunately, many Americans are unsure how to handle a sudden windfall. Many make impulse purchases, invest haphazardly and spread the wealth around to family and friends before completely taking stock of the situation and figuring out long-term steps to take.

Protect Your Principal

You possess an extraordinary opportunity to transform your life and create a lasting legacy for future generations. You certainly don’t want to squander this chance.

Seek Professional Guidance

Before you even take possession of a windfall, it’s vital to sit down with a fiduciary – and I cannot stress this enough – a fiduciary financial advisor. A fiduciary advisor can help you determine if you should get an attorney involved and recommend a trustworthy CPA. I stress fiduciary because it is a fiduciary’s legal obligation to look after you, the client, and not in their own best interests. Should they act against your interests, they could face serious legal repercussions.
An advisor can recommend the first steps to take to help ensure your funds are secure and accessible only by you, such as in a safe, low-interest-bearing account, like a money market fund in your name only. The investing part comes soon, but before you get great advice on what to do with it, parking it somewhere liquid that earns some interest might be best to begin strategizing your financial goals. Also, given the size of your windfall, it may be wise to keep the news to yourself.  
Your financial advisor will then help you map out your goals and objectives with your funds and create a long-term financial plan grounded in sound financial reasoning, and then help you stick to your plan and ignore the distractions. Your advisor can also help you determine an appropriate emergency fund based on your expenses and lifestyle to minimize the chances of needing to pull from your long-term investments.

Craft a Tax Strategy

Your financial advisor will warn you of any taxable events you may trigger upon taking possession of your windfall, such as removing funds from an inherited IRA (another perk of talking with an advisor before receiving your funds). Ideally, a tax strategy would have been implemented well in advance, such as through an estate plan for an inheritance, a tax plan when selling a business, or an options strategy for Employee Stock Options. But even if a tax strategy hasn’t been established beforehand, it’s not too late to optimize.
The investments you make will likely create their own tax obligations too. Crafting a savvy tax strategy is essential for keeping your taxes low and maximizing your financial growth, not just for that year but over your lifetime. Each and every extra dollar you hand over to the IRS is a dollar that could have been earning compound gains for you in the long run – the difference a tax plan can make is enormous.
A basic tax strategy would include holding investments longer for lower long-term capital gains rates, using tax-advantaged accounts (like IRAs or 401(k)s), and employing tactics like tax-loss harvesting. Be sure to consult with a tax professional to avoid missteps resulting in an unexpectedly hefty tax bill.

Craft an Estate Plan

After receiving a significant windfall, establishing an estate plan becomes essential. With the guidance of your financial team, you will be able to create a long-lasting legacy for your heirs in the most tax-efficient manner possible through trusts and charitable strategies.
Even if you feel young and healthy, it’s never too early to start an estate plan. Unfortunately, unexpected life events don’t always discriminate based on health or age. Plus, implementing a plan will only help your overall portfolio via its tax advantages and creditor protection.

Review your Insurance Needs

A sudden influx of wealth not only changes your lifestyle but also your risk profile, making it high time to review and update your insurance policies to ensure they align with your new financial status. You may need to increase coverage in areas like home and auto insurance or even consider new types of coverage, such as umbrella insurance for broad liability protection. Life insurance should also be evaluated, as the death benefit can help balance any estate tax liabilities your beneficiaries may face if your estate’s value exceeds the estate tax threshold.

Grow Your Principal

Now that your funds are safe, it’s time to safely yet effectively grow your windfall.

Extinguish High-Interest Debt

Get out of debt—specifically, high-interest debt, such as credit card debt or a car loan. Your average credit card these days carries an interest rate of 24.24%. It’s highly doubtful you will find a safe investment that can beat the kind of return you would get by extinguishing that debt. If you begin investing before paying off that debt, it will be like fighting a flood with only a bucket – a feat nearly impossible to overcome.

Invest Wisely

If word gets out that you’ve suddenly come into wealth, you might be bombarded with ‘investment’ opportunities. A client of mine had come into a windfall and nearly put all of it into a startup – after some research, I discovered that only 1% of these kinds of startups ever make it – I quickly warned them against such an endeavor and they decided not to pursue, fortunately. An advisor can help you identify those red flags and steer clear of them.
Also, there will likely be the temptation to dump your fortune into what seems like a sure bet, such as a few major corporations like Apple and Meta. While these might seem like safe investments, you run the risk of concentrating too many funds into too few companies. Diversification is key.
A financial advisor can craft a diversified portfolio reflecting your financial goals and risk tolerance. They can take the guesswork out of it, handling rebalancing as necessary and adapting your portfolio to changing market conditions. Remember, diversification isn’t just about spreading your investments across different companies. It’s also about diversifying across asset classes like stocks, bonds, commodities, and geographies, encompassing both domestic and international markets.
Once most of your funds are appropriately allocated across a diverse range of investments, you might consider alternative investments to further grow your wealth. This could include starting a business, investing in a business, or purchasing real estate. But remember, be careful who you surround yourself with during this phase of wealth growth.

Extinguish Low-Interest Debt

From a mathematical perspective, it is often more beneficial to prioritize investing before focusing on paying down your mortgage. This is because mortgage rates are often lower than a typical long-term rate of return. As always, your financial consultant will advise on what they think is best for your situation.

Splurge a Bit

We’re all human, and we deserve to enjoy our money. With your protections and plans in place and taxes paid, you’ll have a better idea of how much you can safely spend. So, take a vacation, spread the wealth, and buy yourself something nice. Your advisor will always be on standby to help you stay on the correct path.

In Conclusion

Handling a sudden windfall requires calm, calculated steps and an informed approach with the help of professionals to guide you safely through the pitfalls that await you. From impulse buying to surprising tax bills to investing mistakes, plenty can go wrong on the path to securing lifelong financial security.
WealthGen Advisors has helped several families successfully sell businesses and transform their windfalls of wealth into lasting legacies for generations to come. As fiduciary advisors, we work with your best interests at heart to develop effective strategies for managing, growing, and protecting your wealth.
Ready to turn your windfall into a strategic, lifelong advantage? Click the button below to start the process.

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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