How to Manage a Windfall: Five Crucial Steps

More money, more potential problems?

There are several issues that should be addressed quickly whether your expected windfall is from an inheritance, a business sale, a large bonus, or winning the lottery.  Below, we share five crucial steps:

1. Hire an attorney. It is very important to obtain the right team of advisors. First, obtain good counsel from an attorney who has expertise in estate planning, preferably one who has experience working with large estates. In addition to completing standard documents such as a health proxy, power of attorney and will, and possibly a trust, the attorney will also review the potential receipt of the funds and work with the other professionals to protect your assets from future taxes or creditors’ claims. For example, perhaps you or your child is a single person who is planning to marry. In this case, a prenuptial agreement should be considered to protect your child’s assets in the event that the marriage dissolves in the future.

2. Hire a CPA. The accountant is also a key professional to enlist since taxes are always a concern for both income tax purposes and estate tax purposes. As of 2021, while many states no longer have an estate tax, the federal government’s share of an estate is currently 40 percent of all assets above the $11.7 million threshold (individual)¹. If the assets are being received from a decedent’s estate, and if estate taxes are paid, the assets in the recipient’s name are also going to be taxable when that person passes away. The accountant, collaborating with the attorney, can assist you in postponing future estate taxes or possibly eliminating them by creating entities that will be out of your estate but will still provide you with income.In addition to estate taxes, inheritance taxes are also a consideration.  These are determined on a state-by-state basis. Income taxes are a concern since the highest marginal rate is close to 40 percent, and with state income taxes and the possible Medicare surtax, the total income tax rate could be close to 50 percent. The accountant can certainly assist with planning strategies in order to minimize the “tax bite.”

3. Work with a financial advisor who is coordinating your full financial picture. A financial advisor should be involved to help you determine your risk tolerance and how your newly acquired funds should be invested. This will help you determine whether growth, income, gains, or tax issues are to be considered, and in what dimension relative to the investment of the assets. If there are children or grandchildren who will receive gifts, then possibly other accounts, such as Uniform Transfers to Minors Act (UTMA) accounts, 529 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 wealthy individual, insurance can also be a key consideration. There are various types of insurance that should be reviewed. All liability coverage for cars, homes, boats, etc., should be reviewed to increase the limits of liability. Liability coverage is not usually a significant expense, but still should be a priority. An umbrella policy that provides excess coverage in the event of insufficient liability coverage on other policies should also be considered. This is also a good time to review life insurance and potential long-term care insurance issues. For the newly wealthy, 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 the team of advisors, typically headed by your wealth manager. Both tax and non-tax issues need to be considered… The team of advisors would also review your desire, for example, to make “green investments,” to retire early, to volunteer for various charities, or to go back to school and change careers. While these goals are not necessarily financial decisions, they certainly have an effect on the larger financial picture since the need for additional income may be necessary.

At Modera Wealth Management, our advisors help our clients as they face both unexpected and expected changes to their overall financial picture.  We invite you to get in touch with us to learn more about navigating sudden financial wealth.