If a few million dollars—or more—fell into your lap tomorrow, what would you do?
Sudden wealth isn’t a common or reliable way to get rich, but it can and does happen. Some big drivers of sudden wealth include:
- Receiving a substantial inheritance
- Getting a major settlement in a divorce or a lawsuit
- Receiving a big payout because of stock options or the sale of your company
- Winning the lottery
But while sudden wealth may sound like a dream come true, it’s often accompanied by serious challenges resulting from the “sudden” aspect of that money. With sudden wealth, everything about being rich—the good and the bad—happens all at once.
In contrast, most people who build wealth slowly are able to address issues and concerns incrementally over time. The result: Sudden wealth can be an emotionally charged and overwhelming experience. Sometimes there are emotional challenges because of the source of the money—a relative who died, for example.
Feelings of panic or guilt can go hand in hand with the feelings of excitement. All those swirling emotions can cause recipients of sudden wealth to make bad—sometimes exceptionally bad—decisions about the money and about their lives. Here’s a look at how you—or someone you care about, such as your children—can prepare to deal with sudden wealth effectively to realize amazing opportunities while avoiding the many pitfalls of “striking it rich.”
FOUR WAYS SUDDEN WEALTH CAN BE RUINED
People who experience sudden wealth can also fall into several traps that can quickly erode or eliminate those assets. These wealth destroyers can impact anyone, of course, but we see them hit the suddenly wealthy especially often.
1. Giving Away Too Much Money. If you give too much of your wealth away, you can end up in your own precarious financial position faster than you might imagine. Even loaning money can prove problematic and occasionally disastrous.
2. Extravagant spending. There is nothing wrong with treating yourself well and enjoying a good life. But if the money needs to last a long time, excessive spending can jeopardize your financial future. The key is to identify the necessities, the “nice to haves” and the “not that importants” and balance them.
3. Poor investing and planning. If you don’t properly protect the estate assets’ value, you could be in breach of your fiduciary duty. Consulting with a professional will help you to properly react to market conditions as they change. These actions can include selling a home, performing an estate sale or engaging a financial professional to manage the investment portfolio.
4. Lawsuits. Your sudden wealth can make you a target for unscrupulous litigants. One way to address this possibility is by safeguarding your assets. By working with a wealth manager who is well-versed in asset protection planning, you can potentially insulate yourself from prospective deceitful and ruthless litigants—legally.
Some examples: Family and friends may knock on your door looking for funds from someone they now see as a financial “white knight.” A sibling might be looking for an investor in her new business, or a distant relative might ask for help paying medical bills. A friend might hit you up for a loan. Your marriage can be impacted, too. Shared decisions about how to spend, save and invest the new wealth can create friction. Before you got rich, your money was used largely to pay the bills. Now, with a lot more money, the myriad
possibilities can create a wedge between spouses. Sudden wealth can also impact new relationships. Are new friends—and, especially, new potential romantic partners—interested in you, or your money?
As executor, you are liable for the estate and its distributions. If you make distributions from the estate—handing out money to family members, for example—before taxes and other liabilities are paid, you are personally responsible. The same is true if you make disproportionate payments to family members. Such distributions, known as “at risk” distributions, should be avoided. That’s not to say you can’t make these distributions. But a miscalculation or unexpected claim puts you at risk—if, say, you need to get money back from a family member to pay a tax bill but that person has already spent it all.
- Assess your situation. You need a solid understanding of how much money there really is, and what you need and want to do with it. Often that requires slowing down and working through some of the emotions that accompany sudden wealth in order to think rationally about the windfall and its impact. A wish list, a balance sheet and a cash flow statement can all play a part in evaluating where you are and what you are considering.
- Rely on consummate professionals. You want to work with true experts—recognized authorities who understand the difficulties you face due to becoming suddenly wealthy, and who are able to help you chart a financial course that matches your needs and wants. Consummate professionals can also act as a sounding board when it comes to most aspects of dealing with your newfound wealth. Their extensive experience, expertise and ability to see your situation rationally rather than emotionally can be useful in helping you think through different matters and plans.
- Make reasoned decisions. To make a windfall work best for you, you need to make intelligent and informed decisions, such as avoiding impulse buying and suffering buyer’s regret. Moreover, it is crucial to always recognize that you are in charge and to take responsibility.