On August 15, 2023 someone in Florida won the Mega Millions lottery jackpot worth over $1.5 billion dollars. Although the odds that anyone might win the lottery, much less one of the largest jackpots ever, is hundreds of millions to one, surprise windfalls in the form of a gift, discovery of a valuable coin or painting, the sudden increase in value of pre-IPO stock when the company goes public or even just an inheritance are not uncommon. Receiving such a large windfall is both exciting and overwhelming; something advisors should anticipate while planning for their client. Even smaller windfalls can be life changing events. Here are some recommended actions to consider taking to help your client manage their newfound wealth responsibly.
Pause and Reflect
Encourage your client to take some time to process the news and emotions surrounding the windfall. Help them avoid making hasty decisions while they adjust to the new financial reality.
Keep it Private
Avoid sharing the news widely until your client has had a chance to plan and seek broader professional advice. Playing things close to the vest can help protect your client from potential scams, undue pressure and unrealistic expectations from others, including all those long lost friends and relations they never knew they had.
Seek Professional Guidance
Presumably you, the reader, check one of these boxes, but properly managing wealth requires a team of professionals, so consider teaming with:
- A qualified financial advisor, specifically one who has experience managing windfalls, can help your client assess their financial goals, risk tolerance and create a customized financial plan.
- An estate attorney can help ensure that all legal aspects are handled properly and that your client's estate plan is up to date.
- A Tax Professional can help both you and the client better understand the tax implications of the windfall. Whether it's income tax, estate tax or capital gains tax, a tax professional can guide your client in minimizing tax liabilities.
Assess Your Client's Finances
- Create a Budget: Develop a detailed budget that accounts for your client's current and future expenses, including debt repayment, savings and investments.
- Debt Management: Consider using a portion of the windfall to pay off high-interest debts. This initial spend can free up more of your client's funds for long-term financial goals.
Set Clear Goals
- Short-Term: Identify any immediate financial needs or goals, such as paying off debts, covering medical expenses or funding education.
- Long-Term: Determine and map out your client's long-term financial goals, such as retirement, homeownership, travel or philanthropy.
- Create a diversified investment portfolio that aligns with your client's risk tolerance and long-term goals. Diversification helps manage risk and potential losses.
- Avoid making big investment decisions based on emotions or sudden impulses. Make informed choices by considering the long-term implications.
- Ensure your client has a sufficient emergency fund to cover unexpected expenses without compromising their investments or lifestyle.
Estate Planning. If your windfall changes your financial situation significantly, update your estate plan, including wills, trusts, and beneficiaries, to reflect your new circumstances.
Charitable Giving. If you're interested in giving back, consider establishing a charitable giving plan or donating to causes you care about. Consult a financial advisor to maximize the impact of your donations. Using charitable trusts can result in significant tax savings as well.
Avoid Lifestyle Inflation. While it's natural to want to enjoy some luxuries, be mindful of lifestyle inflation. Avoid making permanent changes that might strain your finances in the long run.
Every individual's windfall is unique, so it's crucial to tailor these suggestions to your client's specific circumstances and goals. Seeking professional advice across disciplines and taking a thoughtful and disciplined approach will help your client to make the most of their windfall and secure their financial future.