Five Common Pitfalls of Sudden Wealth

Sudden wealth can take many forms, including selling a business, executing stock options or reaching a legal settlement. Most often, however, sudden wealth is the result of an inheritance.

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Receiving a large inheritance, especially when tied to the death of a parent or loved one, can trigger powerful and conflicting emotions that may lead to risky financial decision-making.

A trusted financial adviser can provide stability and insight to help individuals navigate these complicated and confusing times. In addition, there are different strategies individuals can employ to avoid five of the pitfalls that oftentimes accompany sudden windfalls.

Pitfall #1 – Hasty decision-making

No matter the source, windfalls can trigger visceral emotional responses to this sudden change in circumstance.

The best course of action to take after a windfall is to do nothing — at least for a moment. Prioritize what decisions you have to make in the short term, like tax planning and settling an estate, and what decisions you can wait to make, such as how to maximize the impact of your newfound wealth. In the meantime, keep the money in the same manner you received it. If you received cash, keep it liquid until you know how much you need. If you received equities, make sure you fully understand the tax implications before selling anything.

When the time comes to begin planning for more long-term initiatives, it is important to think in broad strokes about the legacy you want to create with these assets. Often, individuals wish to honor their families’ values after receiving inheritances. For example, if the deceased loved one placed a particularly high priority on education, one may look to preserve that legacy by establishing a trust to fund college tuition for future generations or to endow a scholarship in the person’s memory.

Pitfall #2 – Losing perspective

Many people feel a considerable sense of expectation and responsibility to the deceased family member after receiving an inheritance, which can affect the decisions they make about how to spend or invest it.

For example, some inheritors feel pressure to distribute virtually all of the money among the rest of the family or compelled to only use it for philanthropic causes. It’s also not uncommon to experience feelings of guilt, which can make many people vulnerable to opportunistic family members and others. This stress can cause irresponsible or unsustainable spending as inheritors work through these feelings.

Pitfall #3 – Withholding information

Receiving a windfall prompts many people to become close-lipped about their finances. While some may feel uncomfortable about their new wealth, others feel isolated from their former peers and others still are wary of those seeking handouts.

This instinct to withhold information has the potential to extend to your financial adviser as well. However, during every significant transition, it is critical to provide your adviser with a full picture of your financial situation. Your adviser should serve as a partner to assist you through the decision-making process and help you spot issues before they become problems.

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Pitfall #4 – Failing to update plans

A windfall of any kind should trigger a full review of your financial documents. Estate plans virtually always require a revisit and revamp, along with insurance policies.

This is also a time when many people look holistically at their spending, saving and giving. Some inheritors will increase their support of charitable organizations or even to give to a cause that has become important due to the passing of a loved one, whether research of a disease that he or she suffered from or an organization where he or she volunteered.

While some of these decisions, such as major philanthropic ventures, can be finalized over time, it is important to review your current beneficiaries and insurance needs soon after receiving an inheritance.

Pitfall #5 – Being caught off guard

While the exact timing of many windfalls is unknown, the eventuality of many inheritances, especially from parents, might be expected. To be as prepared as possible, start by assembling your team — a financial adviser, a lawyer and an accountant. Your financial adviser can lead this team to create a plan for your future that provides for various contingencies while staying true to your priorities and goals as your financial situation changes.

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Grant Rawdin is Founder and CEO of Wescott Financial Advisory Group LLC. He founded the firm in 1987, which grew from the tax, business and estate services he provided to clients at Duane Morris LLP, a venerable AMLaw 100 law firm. Grant is an attorney, an accountant and a Certified Financial Planner™ and has served as adviser to many businesses, providing strategic, ongoing, and M&A advice. Grant and Wescott are recognized as leading the investment and financial planning industry in innovation, growth and size.

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