How to Manage a Windfall

1. Hire an attorney. Obtain counsel from an attorney who has expertise in estate planning, preferably one who has experience working with large estates. This attorney will work with you to complete standard documents such as a health proxy, power of attorney and a will. They will evaluate and advise on the need for other more complex documents such as trusts or prenuptial agreements for you or your heirs. The attorney will also review the potential receipt of the funds and work with your other professionals to protect your assets from future taxes or creditors’ claims.

2. Hire a CPA. An accountant is a key professional to enlist, since income, inheritance and estate taxes will be of particular concern. While many states no longer have an estate tax, as of 2023, the federal government’s share of an estate is currently 40 percent of all assets above the $12.92 million threshold (individual). If you are receiving assets from an estate and estate taxes are paid, the assets in your name will be taxable when you pass away as well. An accountant, collaborating with your attorney, can assist you in postponing future estate taxes or possibly eliminating them by creating entities that will be out of your estate but still provide you with income. In addition to estate taxes, inheritance taxes, determined on a state-by-state basis, are also a consideration. Finally, income taxes are very important to evaluate and mitigate. The highest marginal tax rate is close to 40 percent; combined with state income taxes and the possible Medicare surtax, the total income tax rate could be close to 50 percent. An accountant can certainly assist with planning strategies in order to minimize the “tax bite.”

3. Work with a financial advisor. A financial advisor can assist you with coordinating your full financial picture. They can help you determine your risk tolerance and how your newly acquired funds should be invested, as well as what growth, income, gains, or tax issues should be considered relative to the investment of the assets. Regarding heirs, a financial advisor can guide you in opening and managing other optional accounts. For example, Uniform Transfers to Minors Act (UTMA) accounts, 529 education plans, or other types of investment vehicles could be established in multiple names to minimize or defer taxes for future generations.

4. Hire an insurance professional. For any newly or otherwise wealthy individual, adequate insurance is also important and various types of insurance should be considered. All liability coverage for cars, homes, boats, etc., should be reviewed to potentially increase the limits of liability. Liability coverage is not usually a significant expense but should be a priority. An umbrella policy that provides excess coverage in the event of insufficient liability coverage on other policies may also be in order. Life insurance and long-term care insurance should be evaluated as it’s important to determine what your needs will be if you pass away suddenly or become disabled. You don’t want to have a large portion of your inherited wealth spent on estate taxes or long-term care expenses without a plan to replenish those assets.

5. Review all major outlays carefully. Before paying off the mortgage, buying a second home, leasing a car, etc., all of your major decisions should be reviewed by your team of advisors, with your financial advisor taking the lead. Your team will help review what your intentions and goals are; you may want to make “green investments,” retire early, volunteer for various charities, go back to school or change careers. While these goals are not necessarily financial decisions, they certainly influence the larger financial picture, since they may create a need for additional income.

At Modera Wealth Management, our advisors help our clients face both expected and unexpected changes to their overall financial picture, especially when it comes to sudden wealth. We invite you to get in touch with us to learn more about how we can work with you to help safeguard your finances today and for years to come.