How to handle a sudden financial windfall

Consider it a problem we’d all like to have. But consider it a potential problem.

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 riches that can reshape the lives of the beneficiaries, for better or for worse. That’s because large sums of money involve a series of decisions, each with the potential to waste or invest the money, increase or decrease happiness, and strengthen or torpedo close relationships.

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

Working through all the problems that come with sudden wealth takes time, typically three to five years, before windfall recipients feel more grounded, Ms. Bradley found.

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

Two key components

Two components are important to dealing with a multimillion-dollar windfall, she says. The first is a confidante (usually a trusted friend or family member) who becomes a sounding board to help work through all the ideas and possibilities that come with the newfound money. Mrs. Bradley knows of a Catholic nun, a teacher, who won a lottery prize and confided in the school crossing guard, who was a good friend.

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

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

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

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

This advisory team is structured as 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 came 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 things doesn’t mean you should. What does ‘do nothing’ mean? Find a safe and smart person. way to store capital, usually in conservation-oriented investments,” like municipal bonds.

Many professional athletes go “from living in a dorm with five roommates to signing a $50 million contract,” he says. Their impulse is to buy houses right away or hand out huge sums of money to family members, coaches and mentors who helped them succeed. .

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Instead, the company’s advisors look for smart 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 cold, hard cash. The firm created a strategy for the player to fund businesses that the brothers could run, thus creating their own sources of income.

It helps the client to have “an open and transparent dialogue about what is fair and what will work. Then create a plan,” says Mr. Lee. “When a game plan is missing, everyone drinks from the same punch bowl. There is no government.”

A little bite

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 stings a little,” says Matt Celenza, the firm’s managing partner. If a customer wants to buy an expensive airplane, for example, your company will investigate several options, including fractional ownership. and the leasing of aircraft instead of an outright purchase. The same applies to real estate purchases and other major expenses.

The goal, Mr. Celenza says, is to protect and grow assets that will benefit both current and future generations. That’s not always easy. Your company created a portfolio for a client that was designed to generate a steady stream of income. But the client loved to use his holdings to make private investments on the side.

“It was infringing on their liquidity and would soon affect their ability to make withdrawals without touching their principal,” says Celenza. The firm’s advisors gave the client long-term projections based on their current spending, helping them understand that the risks were Not practical. “We are very vocal about what is right and what is wrong.”

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Money and happiness

However, managing a windfall isn’t just about making sure there’s enough cash. It’s also about making sure the money is used to make the recipient happy. Otherwise, it’s just money for the sake of having money.

According to a 2019 study, how people choose to spend their windfall has the biggest impact on their overall long-term happiness. The authors, Israeli academics in behavioral economics, developed a model that shows the short- and long-term effects on recipients’ happiness, which fluctuated over time. In general, winners who quit their jobs and engaged in a lifestyle of passive leisure were less happy than winners who spent their wealth on 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 homeless is largely a myth, says Robert Östling, professor of economics at the Stockholm School of Economics. He was part of a team that looked at the long-term effects of lottery prizes 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 a lottery five or more years earlier.

The research found that the long-term effect of winning the 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 essentially try 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. “Somehow it’s instinctual for everyone to want more money. But people overestimate its effect on their happiness.”

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