Financial Planning for Windfalls

Many Americans dream of receiving a windfall in their lifetimes, and a large inheritance can help fulfill this dream. According to recent studies, over nine million American households reported receiving an inheritance of at least $100,000, and baby boomers will likely inherit around $8.4 trillion during their lifetimes.

While inheritance may be the most conventional way to receive sudden wealth, many people also hit it big by playing the lottery, landing a short-term, high paying job (e.g. professional athletes like Jeremy Lin of the New York Knicks), or making fortunate financial decisions (e.g. David Choe, the artist who may receive $200 million when Facebook goes public).

Often time, however, those who realize windfalls do not take steps to ensure that their new found wealth is maintained or well planned for. Some strategies for maximizing windfalls are below:

• Do not begin spending your money right away. Instead, create goals and an outline for what you would like to do with your windfall before making any drastic purchases.
• Consult with your advisor before investing in any “can’t miss” pitches, even if it is pitched by a family member.
• Calculate your “end-of-the day” number by subtracting taxes and debts from the gross windfall to determine how long the money will last. Store the money in short-term CDs or a money-market account, but set aside a reserve fund that will cover at least 18 month of expenses.
• Update estate planning documents, including beneficiary designations, powers of attorney, and wills. Consider a spriging power of attorney that will become effective at incapacitation. Consult with an estate planning attorney to create trusts to shield assets from estate taxes and to keep assets secure for beneficiaries.
• Make long term investments in stocks, bonds, and real-estate investment trusts, but keep a portion of the assets in cash as well.
• Minimize takes by donating to charity—donor-advised funds allow the donor to make a direct investment, receive a tax deduction, and make donations on his own timetable.
• After creating a solid financial plan, begin having fun with your windfall by making dream purchases.  

See Jessica Silver-Greenberg, Too Rich, Too Soon, The Wall Street Journal, Feb. 25, 2012.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.