Five Common Pitfalls of Sudden Wealth
Coming into a large amount of money, especially when it arrives in the form of an inheritance, can trigger a wave of emotions. If you're not prepared, you could make some bad moves.
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.
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
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.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
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.
-
Georgia Has a New Income Tax Rate for 2024
Tax Cuts Georgians now have a tax package containing income tax cuts, childcare relief, and potential property tax caps.
By Kelley R. Taylor Published
-
Why Spotify Stock Is Soaring After Q1 Earnings
Spotify beat expectations for the first quarter and its stock is notably higher following the report. Here's why.
By Joey Solitro Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
Now Could Be Time for Private Investors to Make Their Mark
The venture capital crunch may be easing, but it isn't over yet. That means there could be direct investment opportunities for private deal investors.
By Thomas Ruggie, ChFC®, CFP® Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Hot Tips for Home Buyers and Sellers Right Now
Real estate looks to be especially hopping this spring, thanks to pent-up demand and buyers adjusting to higher mortgage rates. Here’s how you can prepare.
By Pam Krueger Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published