Often when someone is faced with large, life-changing events, they are not thinking clearly. Even if the event is a positive one, such as getting the job they always wanted or winning the lottery, they may be overwhelmed by the lifestyle change. We have all read about professional athletes who have made millions of dollars during their careers ending up homeless within five years of retiring. The immediate reaction is: How can that possibly happen? The answer is easy, if they aren’t emotionally prepared and schooled in the responsibility of handling such wealth.
Often it takes a professional to help a recipient of sudden money to come to grips, and process how their positive change of circumstance could impact their lifestyle.
Winning the lottery
Probably the most random way of becoming extraordinarily wealthy is by winning the lottery. You buy a lottery ticket for $2, go to bed worrying how you’re going to pay your rent or fund your child’s college tuition, and wake up a multimillionaire. There are innumerable issues to deal with: taxes, estate planning, investing, long-lost friends and relatives, new “friends” who generally want something, old buddies who treat you differently, guilt, anxiety and fear.
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A Certified Financial Transitionist (CeFT) may be the liaison that a person who has a sudden positive change in circumstances needs. CeFTs are financial service professionals with training in dealing with the emotional side of money. They help the recipient integrate their newfound wealth into their lives, so they can reach their goals in a positive, non-destructive manner. A CeFT doesn’t tell the client what to do, but rather is their “thinking partner” to help explore options and come up with a plan.
A typical lottery situation
Joe comes from a working-class family. He tends to live from paycheck to paycheck. He generally takes his wife out to dinner for her birthday and their anniversary, but typically they have pizza or Chinese takeout with friends on a Saturday night. Joe’s car is seven years old, his home is well cared for but not fancy. His clothes are not new or fashionable. His wife, Sue, works part time but likes to be home when the children come home from school. Joe likes to buy a lottery ticket or two, but only when the prize is huge. On his way home from work Joe heard the Mega Millions was up to $370,000,000, so he stopped by his favorite corner store and bought a ticket. He put it in his pocket, went home, forgot to tell Sue about his purchase, ate dinner and went to bed. The next morning he heard that not only was there a winner but the ticket was bought in “his” store. He was nonchalant when he fished the ticket from his pocket, but as he checked the numbers in the newspaper, he practically fainted.
After Joe showed Sue the matching numbers they stared at each other in shock. All of the “if I ever won the lottery scenarios” went floating through their minds, but as they sat there the most pervasive emotion was anxiety laced with fear. They never needed a fancy estate plan – just a simple “I love you” will; taxes were taken out of their paychecks, and they didn’t have any investments so their accounting needs were minimal. All of their friends were in similar circumstances. Who could help them? Who could be trusted? They went on an Internet search and ultimately came to the Sudden Money Institute. They called SMI and got the name of a reputable CeFT.
Handling the winning ticket
Joe and Sue were petrified when they arrived at CeFT Jane’s office. Jane explained that although having great wealth most likely would change their physical environment, it didn’t need to change who they were. Jane explained that her job was to guide them through the process – to work with them about the feelings the newfound money created. They needed to have a game plan on issues of how they would handle requests for money from family and friends, if they chose not to work what would they do all day, where did they want to live, how to help the children to adjust. Jane explained part of her role was to help them come to comfortable decisions on these issues.
In addition to the emotional issues, she would help them set up a team consisting of estate-planning attorneys, a CFP who would assist them with their financial planning and investment needs, and any other specialists that they required. The goal of the team was to determine the best way to help Joe and Sue achieve their goals and educate them about their choices while, among other things, taking into account taxes, setting up trusts for their minor children, helping them decide if and how to be generous to friends and families.
Although this scenario focused on winning the lottery, the same principles apply to all large influxes of cash, i.e., inheritances, divorce settlements, exercising large option positions and selling restricted stock units or a business.
Large cash windfall do’s and don’ts:
- Take your time to become mentally and emotionally comfortable with your change of circumstance.
- Don’t make any hasty decisions or promises.
- Surround yourself with a team of professionals including:
Tax attorney
Estate-planning attorney
Certified Public Accountant (CPA)
Certified Financial Planner (CFP)
Certified Financial Transitionist (CeFT) - Make a game plan that gives you structure on how to proceed, including:
Make a budget and keep to it.
Decide who and under what circumstances you may/may not financially help friends and relatives.
Don’t be afraid to say no. - Remember you rule the money. The money does not rule you. It should not dictate what you do. It only allows you the opportunity to do what you want to do with it.
Disclaimer
Securities and Advisory Services offered through Cadaret, Grant & Co., Inc., a Registered Investment Adviser and Member FINRA/SIPC. HMS Financial Group and Cadaret, Grant & Co., Inc. are separate entities.
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