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How to Handle a Financial Windfall
By Cameron Short, CIMA

Itís a great problem to have, figuring out what to do with a financial windfall. Perhaps youíve received this windfall from the lottery, an inheritance, or some entrepreneurial activity. As problems go, the anxieties which come from receiving a large windfall may not be at the top of your fear list. However, managing a windfall normally does lead to a high level of stress for those fortunate enough to be put in this position. The beneficiaries of a windfall often wither through an inheritance, the selling of their company, being part of an initial public offering, or other such process.

As a financial advisor for the past 25 years, I have been associated with many individuals who have received a windfall through the sale of their businesses or medical practices, an inheritance, or being part of an initial public offering, all of which has led to a change in lifestyle or, more accurately, the ability to live a lifestyle to which they are not accustomed. Itís obviously a major life-changing event.

Take a Step Back

Once youíve received a windfall, donít be afraid to do nothing. Psychologists specializing in money management say most people need 6 to 12 months to settle down after all the emotions that accompany a life-changing windfall. Allowing some time to pass can potentially keep you from making irrational financial decisions.

One of the first things I recommend to those clients who receive a windfall is to park it for the short term in a relatively secure place, such as a money market account, and give themselves time to absorb what has just happened and to take the pressure off. Interestingly, many of those clients who have received their windfall from successful entrepreneurial activity were already leading a pretty comfortable life. One thought is to spend the day after your windfall as you did the day before. What was once desirable because you felt it was not realistic based on your previous financial comfort level may not be as desirable now that itís easily attainable.

Assemble a Support Team With your money temporarily parked where you feel it will be safe, now itís time to assemble a strong team of advisors, which should include a tax advisor, an estate attorney, and a financial advisor.

Designate one of these advisors as the go-to person to handle the parade of requests from family and friends that tend to follow a public windfall. Itís easier to defer such requests for funds to a person with no emotional ties.

In many instances, these windfalls, inheritances, lottery winnings, etc. come as a shock and are not expected. The sale of businesses and initial public offerings tend to be more premeditated windfalls. This gives the person time to plan for these occurrences, both mentally and psychologically. Itís not as much a shock to the system. For my clients who have sold their businesses or practices, the "dayafter" syndrome has proven to be a source of anxiety in itself for many of them, realizing that the day after the close of the sale, they no longer have control of the business which they successfully built over many years.

Prioritize Your Needs and Goals

In order to avoid any potential surprises, I suggest setting aside funds to pay for the estimated taxes on your windfall. Then consider paying off your existing debt.

If you donít already have one, you should also think about establishing an emergency fund consisting of 6 to 12 months of living expenses should your financial situation take a turn for the worse down the road. Once you have an emergency fund in place, you can begin addressing larger and/or longer-term concerns, such as setting aside money for your childrenís college education or the purchase of a new home. Is your windfall significant enough that it will allow you to retire early?

Finally, youíll want to address your legacy. How will your wealth be distributed to your heirs in the future? Are there any charitable organizations you would like to support? You can answer these questions by establishing a proper estate plan through your attorney.

Determine What You Want to Accomplish With Your Wealth

Calculate the amount you need to spend annually and create a budget. Determine what is needed to generate that income through conservative investment vehicles. Donít make a decision until this number is known. Your first priority should be, if possible, to establish a stream of income throughout your lifetime.

Make it a priority to understand basic finance. The financial team you have in place should be able to explain your financial plan in a clear and precise way, but itís your responsibility at the end of the day to understand what is being proposed to you. Take time to understand all that is being presented to you.

Monitor your finances. Meet with both your CPA and financial advisor, and be sure these two parties are not one and the same. It helps to have an independent CPA review your asset base on a yearly basis and provide a personal net worth statement.

Spending/Giving Compulsions

Avoid spending or giving impulsively. Itís interesting how even the most conservative person can become a compulsive spender when psychological and financial restrictions are lifted through a windfall. What used to be hopeful purchases now become necessities. One suggestion I tend to offer clients with newfound wealth is to consider living within their previous means going forward. Most will find they are still living a very fortunate life.

Before deciding to give to family or friends, or before making charitable contributions, have a plan in place for giving. Consult your estate attorney to ensure your plans for giving benefit both the recipient and your estate. Keep in mind, in regard to charities, giving can be accomplished in a way that benefits the charity of your choice as well as your estate planning. Again, be sure to have a solid estate attorney on your team.

Avoid Opportunities That Seem Too Good to Be True

Many of the individuals associated with premeditated windfalls have had experience with business opportunities being presented to them. For those who have come into inheritances or lottery winnings - out-of-the blue wealth - these opportunities may be a new experience. You should defer most investment opportunities to a third party for review. This person, hopefully part of the team of advisors youíve assembled, will be able to offer an unbiased opinion. By directing all opportunities to be put in writing and directed to this advisor, youíd be amazed how toned down the final assumptions will be once they are put in writing and the emotions are no longer part of the decisionmaking. History has shown much newfound wealth has been lost based on poor business decisions or investments. There are many such examples among professional athletes, for example.

Avoid Publicity

Do what is needed to avoid publicity of your windfall. You will need time to digest this life-changing event. This may be difficult to do if you come into an inheritance, unless it is passed to you by trust. When assets are passed by trust, they avoid probate proceedings that would become a matter of public record. When a windfall comes from an inheritance, a lottery, or entrepreneurial activity, itís just a matter of time before news of your newfound wealth is made public. The longer you extend the privacy of this event, the more time you have to establish a plan for your wealth.

Consider How You View Wealth Currently

Try to consider what this windfall means to you. Sudden wealth has a tendency to disrupt peopleís lives in ways they would not expect. They question who they were before the windfall and how this life-changing event will affect who they see themselves being in the future.

Understanding your current relationship to wealth may help you. The average lottery winner is back to his or her previous financial level in seven years. Below a certain income level, we work hard to accomplish more and gain more wealth, while once weíve reached a certain level, we may become uncomfortable and spend to regain our comfort zone. This basic concept can be useful for many other aspects of your life.

Cameron Short, CIMA is a Senior Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, and can be contacted in the Pittsburgh office at (412) 456-0208.