Financial Planning Tips for Managing a Sudden Inheritance or Windfall — Planning to Wealth

1. Take a Time-Out.  Resist the temptation to jump on immediate investment opportunities, quit your job, start that expensive home renovation, or buy that expensive sailboat for at least six to nine months.  Those decisions, purchases and investments would be emotional financial decisions, and financial management is always at its worst when emotions drive decisions.

Moreover, many people tend to spend inheritance money more frivolously than money they’re personally earned and saved. This “mental accounting” means many people that have inherited money tend to view the assets as found money, so they tend to slack on fundamental saving, budgeting and spending habits. People with newfound wealth should keep this top of mind as they start to think about how they will spend their wealth.

What you really need is time to gain some perspective and sort out the emotional stresses of a big inheritance or windfall.  Take a vacation with your family to relax and clear your head.  

During this initial phase, it’s probably best to keep your sudden wealth relatively quiet and to avoid making any sort of financial commitments to family and friends. Your sudden wealth could bring out the worst in people as family, friends and/or strangers may be looking to cash in on your newfound success. Discretion about your new situation may attract opportunistic lawsuits, dubious investments or even worse, like threats to your safety.

While discretion is important, it’s important to continue to participate in the activities and social interactions you enjoy. Many people with newfound wealth withdraw from society, friends and family due to the stress. You’ll need activities you’ve always enjoyed to reduce stress and anxiety, just resist the urge to pick up the tab more often than before the inheritance.

During this initial time-out phase, don’t feel the pressure to invest your money right away. Putting together an appropriate investment and asset allocation plan in place should probably come later. Perhaps it makes sense park the funds in liquid, safe investments until after your initial cooling off phase ends. For a $1,000,000 inheritance, one route to take would be to put $250,000 into four bank savings accounts each to stay within the FDIC coverage limits.

2. Investigate Potential Lifestyle Changes.  As time passes, it’s best to start making a list of purchases and attaching dollar values to them, and to start to investigate the viability of larger decisions.  For example, this is the time to rent that sports car you’ve always dreamed of to see if it makes sense to buy it down the road. If you’re thinking of quitting your job and working in the nonprofit sector, it’s best to start by volunteering first.

During this period, it’s important to have a frame the sudden money funds in a less traditional way. Instead of thinking of the inheritance as an asset, we encourage people to think of it as a long-term stream of income. For example, it’s not $1,000,000, it’s $40,000 of income per year for life, assuming an annual 4% spend-down rate. This reframing can help maximize the impact of the funds and help you avoid pitfalls.  

3. Build Your Team.  Finding the right mix of tax, legal, estate, risk management, and financial advisors can lay the right foundation for effectively managing your newfound wealth.  The financial tax and legal implications of an inheritance/windfall are complex, and you need to be sure that you have a team of objective and skilled financial advisors with your best interests in mind. With the right team in place, you’ll maximize your money so that it lasts as long as possible. Moreover, you’ll need a team that understands and respects that you probably won’t make decisions quickly at first, since you’ll need to think through your new situation. It may make sense to also seek out a therapist to deal with some of the emotional issues of a sudden windfall or inheritance. Your CPA or tax specialist is probably the first person to add to your team, since you could have a large tax liability related to the inheritance or windfall and want to set aside that money early on.

Investigate each financial planner’s background, expertise and approach to ensure that not only that they have the right skills but can provide you with the service you deserve.  Make sure to understand clearly how your advisor is paid and if they are a “fiduciary.” Non-fiduciary advisors aren’t legally required to put your interests first, and advisors compensated by various product providers are likely compromised from giving truly objective advice.

Preview the client experience by checking references and by having trial meetings with prospective advisors, and check to see if there is any disciplinary information on the advisor’s regulatory body, like the state bar association for attorneys, the state board of accountancy for CPAs and the SEC’s Investment Advisor Public Disclosure website for financial advisors.  (For more, check out Top 5 Tips for Choosing the Best Financial Advisor)