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What to Do With a Financial Windfall

by Justin Vossen, Partner, Lutz Financial

A financial windfall can come at different times from different places. Some are emotional and unexpected like the death of a loved one and others may be planned like the sale of a business. Whatever the case, it may bring about a certain level of excitement and also a certain level of anxiety. There are sometimes more questions than answers in these situations. It is important to put a plan in place to guide you through the process.

First – Don’t do anything but find a safe and liquid place to park any proceeds for the near term. If your windfall is public, you can bet many will seek you out with their own opinions of what you should “do” with the proceeds. Many of these people will just happen to know “the best” thing for you to do with your money after you have earned it. Be careful. Some of these suggestions, such as annuities and other investments, will come with steep redemption penalties if you find later that it wasn’t “the best” option for your situation.

Instead, be pragmatic about the funds in the short-term. Keep it in an insured account at a bank, insured with multiple banks, a Treasury bill, repurchase agreement or short-term high grade money market fund. Keep it very liquid, safe and close at hand. There is plenty of time to plan what to do with it!

Second – Assemble a team of trusted professionals who have experience working with clients that have had similar windfalls. Depending on the size of your windfall, it will be important to work with multiple professionals. You may need an estate attorney, a CPA and a certified financial planner to help with the transition.

The attorney should specialize in estates and the CPA should bring extensive tax background to the table. The certified financial planner should have experience with this and should be the one to knit all the pieces together for you. These advisors shouldn’t sell you anything, rather work as a team to address your personal issues and help you find solutions.

Third – Some things will need to be addressed on a timely basis. Working with your advisors quickly will give you some opportunities for some time-sensitive tax minimization strategies, estate and financial planning ideas and other items that may need to occur within the calendar year of the transaction. If you know this windfall will be coming, you should meet with your team ahead of time. This will allow you to strategize your approach and may mean more money in your pocket. They should give you first a short-term plan to address any time sensitive issues. After that, you can work on your longer-term plan.

Fourth – With a windfall of wealth comes responsibility, as well as the opportunity to help others. This responsibility begins with you and your family, but extends to your friends and community. You need to think about if and who you are going to share it with and plan in advance.

You are entitled to do what you want with your wealth; however, others may realize your good fortune and potentially want a piece of it. Whether you share it or not is up to you. Having a plan in advance on who you share it with and when will provide a framework for you to communicate with others. You can be proactive with your sharing instead of reactive when somebody approaches you asking for a loan, donation, investment or even a handout. To put it simply, you are giving yourself the ability to say “no” when approached. A plan will help you keep and share the wealth on your terms, not at the whim of others.

Lastly – Depending on the size of the windfall, you may find yourself financially independent. If you are, it’s important to understand how much or how little risk you need to take to maintain the lifestyle you desire. This is crucial as unintentionally taking too much risk in the markets could jeopardize your financial independence.

Sometimes windfalls are the result of a calculated risk that one has taken, like owning a successful business. It’s important to understand your good fortune and protect it, not take the same risk again and lose it. Addressing your options and examining your need or desire for additional risk is important. Your team should work with you to mitigate any risk as you need to in order to maintain your financial independence.

Lutz Financial is a SEC Registered Investment Advisor and an affiliate of Lutz & Company, PC. Lutz Financial provides comprehensive financial planning and investment advisory services.