Suddenly Wealthy? 7 Steps to Secure Your Financial Future

Your financial situation has just skyrocketed. Whether from an inheritance, a business sale, or winning the lottery, sudden wealth can be overwhelming. What should you do next? Follow these crucial steps to ensure long-term financial security and peace of mind.

Step 1: Buy Time Before Making Big Decisions

First, realize that sudden wealth can be stressful. Be sure to give yourself time before you make any decisions. You might want to lock up your money in multiple certificates of deposit or short-term government bonds to prevent making any impulsive decisions. Having your money locked up can also help you defer decisions on lending or giving away sums of money to needy family members or friends.

Step 2: Define Your Financial Goals

Sudden riches—especially sudden liquid wealth—raise several wealth planning issues. Your first step is to decide what you’d like to accomplish financially. Without goals in mind, you won’t have a direction. Take your time to weigh your priorities.

Step 3: Assemble a Team of Trusted Financial Professionals

You’ll want input from a variety of sources: attorneys, CPAs, financial planners, money managers, insurance professionals, and others. These professionals can each be an important part of your financial management team. While only you can decide how to handle your wealth, each professional can provide a different perspective and give guidance as to how your decisions will affect you and your family. It’s important to assemble a qualified, trustworthy team. Your advisors should be able to challenge your thinking and help you figure out what’s truly important to you.

Just don’t be a patsy. Be wary of unsolicited offers. Many of these “friendly” advisors are chasing commissions and may not be qualified to provide the level of service that you need. Look for advisors that are legally held to a fiduciary standard—a requirement to put your interests first.

Step 4: Develop a Comprehensive Financial Plan

Do you want to retire? Can you? Who do you want to benefit from your wealth? You, your family, a broker earning commissions, Uncle Sam, charity? A financial plan can determine whether you have enough assets to retire comfortably, taking into account how long you plan to work before retiring and your retirement spending goals. Your financial planner will help you decide how to invest your new wealth, considering what kinds of returns will be necessary to ensure your financial future.

For example, if you only need a 3% return to live comfortably, you won’t have to invest in a risky portfolio. Finally, your financial planner can coordinate with your other advisors to evaluate estate planning, insurance, and asset protection options, considering how each element interacts with the others. For example, as a lottery winner, you might need to choose to receive winnings as a lump-sum amount or as an annuity over a period of years. Having professional advice (and discipline) can help you to make the best decisions for yourself.

Step 5: Update Your Estate Plan

Your situation has changed, and the estate laws that apply to you have likely changed as well. Estate planning allows you to control what passes to your heirs after your death. You can use various strategies, such as trusts, family limited partnerships, and gifts, to help you reach your goals. Figuring out what’s right for you depends on your particular objectives and desires. Further, your objectives may change over time, so your planning should be flexible enough to accommodate whatever changes may become necessary.

At a minimum, you will probably need to revise your wills or add a living trust for you and your spouse. You also might want to place life insurance policies into an irrevocable life insurance trust.

Step 6: Strategize to Minimize Taxes

How much tax you’ll pay depends on the source of your windfall. For the most part, you will not pay income taxes on inherited money. However, an inherited IRA or annuity is subject to income taxes. If you’ve won the California lottery, you’ll pay federal taxes on your winnings, but not California tax. If you sold your business, you’ll pay tax on the gain. And no matter what source your windfall, on an ongoing basis, you’ll need to plan for income taxes on the earnings from your new nest egg. Be sure to work with your CPA to develop tax strategies.

Step 7: Consider Charitable Giving

If you are charitably inclined, you can help worthy organizations while lightening your tax bill. Making charitable contributions during your lifetime can have a double benefit. You can save on income taxes as well as estate taxes. There are many ways to structure charitable contributions, including cash, property, donor-advised funds, and trusts. Your tax benefit depends on the structure, amount, and recipient of the donation. If you want information on charitable giving options, be sure to talk to your financial advisor or CPA, or contact your local community foundation.

Final Thoughts: Be True to Yourself

Wealth can alter relationships, but staying grounded and making informed decisions will ensure your financial security. Take your time, seek expert advice, and enjoy the benefits of responsible wealth management.

By following these seven steps, you can navigate sudden wealth wisely and secure a prosperous future.