How to handle a sudden financial windfall

Consider it a problem that we would all like to have. But consider it a potential problem nonetheless.

After all, to manage your hard-earned money wisely, you need a plan. The same is true when riches appear seemingly overnight.

Sudden wealth can take many forms. A lump-sum pension payment, a substantial inheritance, legal damages in a lawsuit, and the sale of a business can result in life-changing wealth for the beneficiaries, for better or worse. That’s because big money comes with a variety of decisions, each with the potential to waste or invest money, increase or decrease happiness, and strengthen or torpedo close relationships.

“I think the initial stages are very stressful. It’s hard for the mind and body to absorb change,” says Susan K. Bradley, a Palm Beach, Florida-based financial planner and founder of the Sudden Wealth Institute, which trains financial advisors to help clients work on all aspects of a windfall

Solving all the problems that arise with sudden wealth takes time, usually three to five years, before unexpected beneficiaries feel more grounded, Bradley found.

At her job at the institute, Ms. Bradley met a woman who once sold shoes in a department store before inheriting a multi-million dollar estate. Dealing with her new lifestyle was just a challenge. Other family members, and heirs presumptive, received nominal inheritances, and the heiress struggled to cope with her anger and resentment. “It took her three years to create a new life and feel like she fit in with the world,” says Ms. Bradley.

Two key components

Two components are important in dealing with a multi-billion dollar windfall, she says. The first is a confidante, usually a trusted friend or family member, who becomes a sounding board to help explore all the ideas and possibilities that arise with newly discovered money. Mrs. Bradley meets a Catholic nun, a teacher, who won a lottery jackpot and confided in the school crossing guard that she was a good friend of hers.

The second key is a team of advisors who can review a client’s existing finances, such as mortgage and credit card debt, college savings plans, and charitable donations. In the longer term, advisors can help navigate investment options, establish an estate plan, develop tax strategies and ensure adequate insurance coverage.

Ms Bradley also suggests windfall recipients consider a mental health professional who can help them with the emotional aspects of windfall wealth, as, she says, “it can mess with your head.”

The advisers would collaborate like a board of directors to track and manage the windfall beneficiary’s finances, Ms. Bradley says. Together they can fend off predators: friends or family members who plan aggressively for handouts. Financial accounting should be transparent to all board members, creating a system of checks and balances that could catch theft or mismanagement.

Beneficiaries should carefully research potential advisors when assembling the team, as not all professionals are honest. Case in point: In July, a New York lawyer calling himself “the lottery lawyer” was found guilty of wire fraud and money laundering in scams that defrauded lottery big winners out of more than $100 million .

This advisory team is structured much like a family office, which is a private wealth management company serving multiple generations of a very high net worth family. At Summit Trail Advisors, a Chicago-based family office, about 20% of clients are professional artists or athletes, many of whom come from modest backgrounds, says Peter Lee, founding partner.

“My biggest piece of advice is to do nothing for a while,” he says. “Just because you can do a lot of extra stuff doesn’t mean you should. What does ‘do nothing’ mean? way to store capital, typically in conservation-oriented investments,” such as municipal bonds.

Many professional athletes go “from living in a dorm room with five roommates to signing a $50 million contract,” he says. His drive is to buy houses right away or hand over large amounts of cash to family members, coaches and mentors who helped them succeed. .

Instead, the firm’s advisors find clever ways for their clients to help others. Mr. Lee has a client who signed a big NBA contract and wanted to give his five brothers opportunities instead of cash. The firm created a strategy so that the player could finance businesses that the brothers could run, thus creating their own streams of income.

Help the client have “an open and transparent dialogue about what is fair and what will work. Then come up with a plan,” says Mr. Lee. “When there’s no game plan, everyone drinks from the same punch bowl. There is no governance.”

a little sting

Boulevard Family Wealth, a family office in Beverly Hills, California, has worked with several clients who received millions of dollars in inheritances or proceeds from the sale of a business. “We try to be open and honest, even if it hurts a little,” says Matt Celenza, the firm’s managing partner. If a client wants to buy an expensive jet, for example, his firm will investigate various options, including fractional ownership. and aircraft leasing rather than outright purchase. The same applies to real estate purchases and other major outlays.

The goal, says Mr. Celenza, is to protect and grow assets that will benefit current and future generations. That is not always easy. His firm created a portfolio for a client that was designed to generate a steady stream of income. But the client loved to take advantage of his properties to make parallel private investments.

“It was infringing on your liquidity and would soon affect your ability to make withdrawals without touching your capital,” Mr. Celenza says. The firm’s advisers gave the client long-term projections based on his current expenses, helping him realize that the risks were not impractical. “We’re very vocal about what’s right and what’s wrong.”

money and happiness

However, dealing with a windfall is not just about making sure there is enough money. It’s also about making sure the money is used to make the recipient happy. Otherwise, it’s just money for money’s sake.

In the long run, according to a 2019 study, how people choose to spend their windfall has the biggest impact on their overall happiness. The authors, Israeli behavioral economics scholars, developed a model showing short- and long-term effects on recipients’ happiness, which fluctuate over time. In general, winners who quit their jobs and engaged in a lifestyle of passive leisure were less happy than winners who devoted their wealth to social activities and other activities that gave them pleasure, such as travel, hobbies and volunteering, according to the authors.

The idea that many lottery winners end up penniless and homeless is largely a myth, says Robert Östling, a professor of economics at the Stockholm School of Economics. He was part of a team that looked at the long-term effects of lottery winnings on psychological well-being. The study, published in 2020, analyzed the results of a Swedish government survey that included responses from 4,800 people who had won the lottery five or more years earlier.

The research found that the long-term effect of winning a lottery on happiness was too small to detect, says Dr. Östling. But there was a slight improvement in overall life satisfaction. “It’s not particularly surprising, because wealthier people tend to have higher life satisfaction,” he says.

The purpose and methodology of each study were different, but both are essentially trying to answer the question: Can money buy happiness?

“Compared to other life events, money does little in terms of life satisfaction and happiness,” says Dr. Östling. “In some ways, it’s instinctive for everyone to want more money. But people overestimate its effect on their happiness.”

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