“We’re in the Money!”
How to Handle a Financial Windfall

By Douglas Charney

Everyone fantasizes about instant riches – the kind associated with hitting the lottery, finding out you have a distant aunt who named you as her sole beneficiary, coming up with the next great American invention, winning a reality game show, or even finding a duffle bag full of cash along a deserted road. While these instant riches scenarios aren’t common, people do sometimes receive a sudden windfall of money, due to the sale of a business, rolling over a 401(k) plan, or inheriting it from Mom and Dad.

While many people think life would be easy if only they were rich, the fact is that history is filled with stories of people who received a windfall of cash, only to end up in worse financial shape than they were initially. Consider the famous story of Baby Doe Tabor, who with her husband, became one of the richest couples in the nation in 1890, only to die without a penny in 1935. Or, more recently, consider the New Jersey resident, Evelyn Adams, who won her state lottery, not once, but twice (1985 and 1986) to the tune of $5.4 million dollars. Today the money is gone, according to her attorneys.

Does this mean you should refuse any windfalls you receive? Of course not. The key is to follow certain steps that will help protect yourself from losing all of your sudden money.

Step One: Consider all of the tax situations before you do anything with your money: Very often, when it comes to sudden money, taxes are the last thing people consider. But they should be the first. Realize that if you win the lottery or sell your business, your income taxes may be much higher than you usually pay, and could be as much as 40% more, depending on the amount of the windfall. Before you spend the sudden money, meet with your CPA and see what you tax implications are, so you can plan for them. Then meet with your tax attorney to find out if you can legally defer some of the money over several years, perhaps with an annuity payout over time. If you received the money due to a real estate transaction, you may want to investigate the possibility of doing a 1031 exchange.

After these various meetings, calculate the actual money you will have left to spend or invest, using the following formula: (Sudden Money + Previous Savings) – (Taxes Due + Total Debt) = Actual Money to Use. Don’t buy anything, invest the cash or make any money decisions until you know this figure.

Step Two: Beware of family and friends who “come out of the woodwork.” 

Once you have more money than your friends and family, it is common for people to approach you about loans, business deals and investment opportunities that are “guaranteed” to pan out. Many of these people will gladly write you promissory notes. While being able to help family and friends in need is a great benefit of having money, be careful, or you can quickly lose every penny – and then some.

To protect your money, and not hurt anyone’s feelings, consider putting the money in trust, where your trustee disperses you a monthly income and extra money, as needed, for special approved situations. Your trustee then becomes “the heavy” by disallowing the funds requested for crazy ideas or questionable investments. Of course, if you need the funds to help your mom with some medical bills or so you can take a vacation, you will have access to your money. The trustee simply protects you from loaning or investing your money haphazardly.

Step Three: Learn about handling large amounts of money: Managing any amount of money requires having the proper knowledge. Take some time, therefore, to assemble a financial team to help you make smart decisions with your windfall. The professionals you want to include on this team are your CPA, to help with tax planning and tax preparation; your financial advisor or trust officer, to help with investing your money; and your attorney, to help you set up a trust and for insight in other legal matters. By working together, these people will be able to teach you about finances, help you develop a strong financial plan, and monitor your money so you potentially grow it wisely. The key here is for your team to work together. I believe each should be an expert in his or her field and not cross over into another area or try to compete with another expert.

Ultimately, the final decision about how you spend or invest your money rests with you; however, you probably don’t have the combined knowledge or know-how of your CPA, your financial advisor and attorney together. So let these advisors advise you on their area of expertise. Listen to what they say, think about it, and then implement the plans and strategies that make sense for your goals. Let the experts help you. After all, that is their job.

Step Four: Create your wish list: Now that the groundwork is in place, you can start having some fun. Brainstorm all the things you want to do with your money, no matter how crazy the idea may seem. Review your list and categorize the items into two groups: the “Would Likes” and the “If Possibles.” The “Would Like” list should contain such things as buying a house, paying for your children’s education and funding your 401(k). The “If Possible” list should contain such things as quitting your job, traveling the globe and gifting money to the family.

Next, consult with your financial advisor to find out which things on your list are realistic. He or she will help you determine if you can do everything you want without going through all your money and getting into financial trouble. Focus on the “Would Like” list first, as these are the important items, and then move on to the “If Possible” list.

Step Five: Monitor your investments:    After you put your plan in place and invest a portion of the money, meet with your CPA and financial advisor every six months to one year to make sure your investments are performing well. Additionally on a quarterly basis, check the following financial indicators:

1.      Your net worth, which determines how much you are worth after you pay off all your debts. Excessive spending and poor investments can eat away at your assets and decrease your net worth over time.

2.      Your cash flow, which is a running tally of your income and expenses. You should be able to see exactly what you earned and what you spent over a designated period of time.

3.      Your investment summary, which shows how your investments are performing. While one quarter of underperformance shouldn’t be cause for alarm, several quarters might be.

These three quarterly reports, along with your semi-annual or annual meetings, should enable you to keep your finger on your financial pulse and help alert you to any possible impending financial setbacks.

Step Six: Keep your spending in check: Whether your windfall totals millions of dollars or a few hundred thousand, when you handle the money properly and invest it wisely, this sudden money could help you for the rest of your life. Even though you may feel “rich,” realize you will still need to live on a budget if you want to stay “rich.” Listen to your advisors and live within your means, because every barrel of money, no matter how deep, eventually has a bottom.

Keep Your Fortune for the Future: If you suddenly find yourself rich overnight, remember you can lose all that money just as quickly, if you don’t follow some essential steps. While having money is certainly a blessing, it’s also a huge responsibility. So before you buy that dream house on Maui or the Lamborghini, do your homework, and know what is realistic for your circumstances. The more careful you are with your windfall today, the more money you could have for tomorrow and beyond.

Wachovia Securities does not render legal, accounting or tax advice. Please consult your CPA or attorney on such matters.

Doug Charney is Vice President/Investments with Wachovia Securities in Harrisburg, PA. For more information, call Doug Charney at 888-529-2974, e-mail him at dcharney@wachoviasec.com, or visit www.charney.wbsec.com.

The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of Wachovia Securities or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of Douglas Charney, a Senior Vice President-Investments with Wachovia Securities in Harrisburg, PA. For more information, please call him at: 888-529-2973. Wachovia Securities, LLC, member New York Stock Exchange and SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wachovia Corporation 2006 Wachovia Securities LLC.  Investments in securities and insurance products: NOT FDIC-INSURED/NOT BANK GUARANTEED/MAY LOSE VALUE