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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
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.
-
Where to Retire: Living in Portugal as a US Retiree
Living in Portugal as a retirement landing spot has abundant advantages, but do your homework and due diligence first.
By Brian O'Connell Published
-
A Social Security Storm Is Gathering: Here's Your Safety Plan
If Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
By Brian Gray Published
-
A Social Security Storm Is Gathering: Here's Your Safety Plan
If Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
By Brian Gray Published
-
What a Second Trump Term Means for Investing in Water Safety
A new administration focused on deregulation could change the scope of today's water protections. So, what does that mean for the investors who support them?
By Peter J. Klein, CFA®, CAP®, CSRIC®, CRPS® Published
-
How to Avoid These 10 Retirement Planning Mistakes
Many retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
By Romi Savova Published
-
Before the Next Time Markets Sink, Do Your Lifeboat Drills
An eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
By Andrew Rosen, CFP®, CEP Published
-
This Late-in-Life Roth Conversion Opportunity Spares Your Heirs
Expensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
By Evan T. Beach, CFP®, AWMA® Published
-
Women, What Is Your Net Worth?
Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
By Neale Godfrey, Financial Literacy Expert Published
-
Converting Retirement Savings to a Roth IRA? Don't Do This
You might want to convert all of your savings to a Roth in one go, but you could end up paying hundreds of thousands more in taxes than you have to.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
What Is Your 'Enough Is Enough' Number for Retirement?
Chasing a 'magic number' for retirement can be anxiety-inducing. Instead, build your plans around a personal number that reflects your individual circumstances.
By Scott M. Dougan, RFC, Investment Adviser Published