Managing Newly Acquired Wealth

By John Bailey, CFP^® – Senior Vice President & Wealth Management Advisor

Recently, the Mega Millions jackpot reached $1.5 billion and the Powerball jackpot totaled $750 million.  If you were one of the lucky winners of either lottery, your financial worries are over, correct?  Unfortunately, no.  In many cases, your worries have really just begun.  Lottery winners are besieged by multiple new friends, well-wishers, and advisors.  They are also tempted by a world of seductive purchases – items that many never dreamed they could afford.  More often than not, lottery winners see their financial windfall result in an unhappy ending.

While your chance of winning a lottery jackpot is extremely small, the challenges associated with managing a large influx of money are actually quite common. Whether expected or not, an inheritance, divorce settlement, severance package, pension payout, proceeds from the sale of a business, life insurance death benefits, or legal judgments can all place in one’s hands the equivalent of several years of ordinary earnings.

When you find yourself in this position, you’re at a crossroads—suddenly called upon to switch from wealth accumulation to wealth management. You will, of course, face circumstances unique to your situation. However, there are some general guidelines that apply to almost all such transitions.

Taking your time

Financial windfalls often come with an emotional price tag: the loss of a loved one, a serious injury, leaving a long-time career, or selling a business.  Even for the lottery winner, euphoria may make long-term planning a challenge.  Fortunately, in most situations, major decisions are not immediately required.  In fact, it is advisable not to make any major financial decisions for six months.  Cash may be parked in a money market account, short-term CDs, or US Treasury bills, allowing you time to work through emotions and make well informed decisions regarding the best strategy for moving forward.  Give yourself time to regain your emotional composure and consider how you wish to use your new wealth to benefit yourself, your family, or your favorite charities.

Setting goals

Is your sudden wealth large enough that you can consider retiring?  If retirement is attractive to you, you should think of your assets—new and old—not as a lump sum, but in terms of the after-tax annual income that they can produce over the course of your life.  Is that figure enough to support the lifestyle that you envision for yourself and your family?

Or, if you continue with your current career or position, would you like to eliminate debt, ensure the future funding of your children’s or grandchildren’s college education, invest for your retirement, and provide for those who will survive you at your death?

In either case, you’ll need to update your estate plan to accommodate your newly acquired wealth and provide for the management of your assets in the event of your incapacitation with a durable power of attorney and revocable living trust.

Taxing matters

Is your new wealth taxable?  It’s taxable as ordinary income if it comes from lottery winnings, royalties, severance payments, mineral rights, and the like.  Legal judgments are taxable, except to the extent that they are compensation for physical injury.

If your financial windfall comes from the sale of a business, it may be subject to capital gains tax. Proceeds from the sale of a personal residence are also subject to capital gains tax, but the first $500,000 of gains may be exempt for a married couple—$250,000 for single individuals.  Pension payouts are taxable and may be subject to an early penalty tax, depending upon your age.

However, income tax may be deferred if the proceeds are rolled over into an IRA.  IRAs and other retirement plans (except Roth IRAs) are taxable as funds are withdrawn, and so allow for the deferral of income taxes over several years.  Most other inherited assets are received with a stepped-up basis and, thus, are subject to little or no tax if sold soon after acquisition.  An experienced tax advisor may help you uncover ways to minimize the impact of taxes as you explore options and assess your situation.

Investing

You’ll need to consider your assets as a whole, essentially starting from scratch.  How do the new assets blend with your existing portfolio?  There may be positions in assets you inherit that you will want to keep, perhaps for sentimental reasons.  View these investments objectively as you determine how they fit into your overall financial picture.  As previously mentioned, take your time – there is no need to rush.  Selling and investing slowly over time as opportunities present themselves may lessen the probability of major mistakes.

Getting help

The planning and decision making required when you receive a large lump sum of money can be overwhelming.  And very few people have the investment management expertise needed.

First things first, surround yourself with a team of trusted professionals – Certified Public Accountant (CPA), tax attorney, estate planning attorney, investment manager, Certified Financial Planner (CFP^®), etc.  Some of these professionals may charge a fee based on the service provided or the amount of assets under management.  You may wish to avoid those who rely on commissions from the products they sell.  If you’re unsure, ask for an explanation of all forms of compensation.  Obtain references and thoroughly vet each potential partner prior to entering into any agreement.

Like many others, you may desire to partner with Central Trust Company for the management of your wealth.  Our team of financial advisors and investment management professionals represent decades of experience dealing with the challenges and opportunities that wealth presents.  Central Trust Company is a fiduciary.  We always act in the best interests of our clients.  In fact, we are legally obligated and ethically bound to provide wealth management advice without conflicts of interest.

Central Trust Company has extensive experience building and managing prudent investment and financial plans for high-net-worth clients.  From coordinating the activities of your team of trusted advisors to crafting a customized long-term plan tailored to your unique needs, we are here to serve you.