Immediate Actions to Take if You Acquire Sudden Wealth

February 8, 2021
By Bart Zandbergen CFP

Are you prepared for what to do if you acquire sudden wealth?  Selling your company, benefiting from an IPO, inheriting a large sum of money, winning a lawsuit, or receiving a lump sum from a divorce are all events we call ‘sudden wealth’.

Unfortunately, many people are not prepared for the stress sudden wealth brings or the increased financial management complexities that go along with it. Recipients of sudden wealth are often overwhelmed with unsolicited advice, loan requests from family and friends, and a plethora of potential investment opportunities.

Here are a few tips for you to consider if you find yourself the recipient of a financial windfall.

Hold off on large purchases

It’s easy to be impulsive when you’ve come into a large sum of money but resist the temptation to make large purchases. Most decisions made during this time will be emotional, which could have repercussions later. Also, don’t feel pressured to invest it all right away. You can address investments later once you have a chance to revisit your financial plan.

Keep it quiet

In the beginning, it might be best to keep your sudden wealth quiet. Unfortunately, your new wealth may attract new friends, long-lost family members, requests for loans, or even opportunistic lawsuits. Discretion is key, at least until you have met with your sudden wealth team and made a plan for your money.

Build your sudden wealth team

Speaking of your sudden wealth team, let’s talk about who should be on your team. The legal and financial implications of an inheritance or windfall are complex, and you’ll need a skilled team that includes a CPA, financial advisor, tax specialist, and an attorney.

Your CPA and/or tax specialist is probably the most critical person to bring in first if you don’t already have one. They will help you understand the amount of taxes that need to be paid upfront before doing incorporating your sudden wealth into your plans.

If you don’t know where to start with assembling the team, start with your CPA or financial advisor, and ask for referrals. Chances are they will know people they already trust that can help you. Research each person’s background, expertise, and approach to ensure they have not only the skills but can provide you with the level of service you deserve.

This is also probably a good time to note that it will be necessary to clearly understand how your current financial advisor is paid (assuming you have one) and whether they are a fiduciary. Fiduciary advisors are legally required to put your interests first and have an ethical duty to recommend what is in your best interest. Not all financial advisors are fiduciaries, so it is essential to find out.

It’s also important to note that the financial planner you are currently using might not be used to handling large sums of money. If this is the case, you should not feel pressured to stay with your current advisor and should consider looking for someone who is experienced in working with high-net-worth individuals.

Modify your plans

When your team is in place, it’s time to review your comprehensive investment strategy to incorporate your newfound wealth. Many people find it helpful to map out a clear picture of their goals and what is important to them and write down any specific ideas they have for their sudden wealth. Once you’ve created your goals, your financial advisor can help you modify your financial plan, so your money aligns with those goals.

You might then want to consider meeting with your financial advisor and CPA to review your net worth, cash flow situation, and investment summary quarterly. This will help you keep your finger on your financial pulse and make adjustments if needed.

Consider controlling your access to cash

One last tip and this one is critical if you happen to love to shop or are an impulsive spender. Consider limiting the amount of cash you have access to. Studies show that lottery winners are more likely to declare bankruptcy within three to five years than the average American. And one-third of people who received an inheritance had negative savings within two years of receiving it, according to the study by economist Jay Zagorsky at the Ohio State University in Columbus, Ohio. 

Setting up “guard rails” of some sort can help ensure you are making wise decisions with your money and not letting your emotions take control.

With proper financial planning, your sudden wealth can help provide you and your family with a bright financial future. As always, please feel free to contact us if you have any questions.

Share This Post

The Zandbergen Group is a DBA of Axxcess Wealth Management, LLC a Registered Investment Advisor with the SEC. Bart A. Zandbergen, CA Insurance License #OA96242. Letitia S. Berbaum, CA Insurance License #OH19537. Zandbergen Group, LLC is a DBA of Axxcess Wealth Management, LLC (“Axxcess”), a registered investment advisor. Advisory services are only offered to clients or prospective clients where Axxcess and its representatives are properly licensed or exempt from licensure.