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How to handle a sudden financial windfall

Think of it as a problem we would all like to have. But consider it a potential problem nonetheless.

After all, to manage your hard-earned money wisely, you need a plan. The same is true when wealth appears seemingly overnight.

Sudden wealth can take many forms. A lump sum pension payment, a substantial inheritance, damages in a lawsuit, and the sale of a business can all lead to riches that can reshape the lives of beneficiaries, for better or worse. Indeed, with large amounts of money comes an array of decisions, each with the potential to waste or invest money, increase or decrease happiness, and strengthen or torpedo relationships. narrow.

“I find the first stages very stressful. It’s hard for your mind and body to absorb change,” says Susan K. Bradley, a Palm Beach, Fla.-based financial planner and founder of the Sudden Wealth Institute, which trains financial advisors to help clients manage all aspects of their life. a boon.

Working through all the issues that come with sudden wealth takes time – typically three to five years – before windfall recipients feel more grounded, Ms Bradley found.

In her work at the institute, Ms Bradley met a woman who once sold shoes in a department store before inheriting a multi-million dollar estate. Coping with her new lifestyle was just one of the challenges. Other family members – and heir apparent – ​​received nominal inheritances, and the heiress struggled to cope with their anger and resentment. “It took her three years to create a new life and feel like she belonged in the world,” says Ms Bradley.

Two key elements

Two things are important in dealing with a multi-million dollar windfall, she says. The first is a confidant – usually a trusted friend or family member – who becomes a sounding board to help work through all the ideas and possibilities that come with newfound money. Mrs. Bradley knows a Catholic nun, a teacher, who won a lottery jackpot and confided in the school crossing guard, who was a good friend.

The second key is a team of advisors who can review the client’s existing finances, such as mortgage and credit card debt, college savings plans, and charitable donations. Longer term, advisors can help you navigate investment options, establish an estate plan, develop tax strategies and ensure adequate insurance coverage.

Ms Bradley also suggests that windfall recipients consider a mental health professional who can help with the emotional aspects of sudden wealth because, she says, it “can throw your head off”.

Advisors would work together like a board of directors to track and manage the windfall recipient’s finances, Bradley says. Together they can repel predators – friends or family members who plot aggressively for handouts. Financial accounting should be transparent to all board members, creating a system of checks and balances that could detect theft or mismanagement.

Recipients should carefully research potential advisors when building the team, as not all professionals are honest. Case in point: In July, a New York lawyer who called himself “the lottery lawyer” was convicted of wire fraud and money laundering in connection with scams that defrauded the big winners of the lottery over $100 million.

This advisory team is structured like a family office, which is a private wealth management company that serves several generations of a very wealthy family. At Summit Trail Advisors, a Chicago-based family office, about 20% of clients are entertainers or professional athletes, many of whom come from modest backgrounds, says founding partner Peter Lee.

“My biggest piece of advice is to do nothing for a little while,” he says. “Just because you can do a lot of extra stuff doesn’t mean you should. What does ‘do nothing’ mean? A way to store capital, usually in preservation-oriented investments,” such as municipal bonds .

Many professional athletes go “from living in a dorm with five roommates to signing a $50 million contract,” he says. Their impulse is to immediately buy houses or distribute huge sums of money to family members, coaches and mentors who have helped them succeed. .

Instead, the firm’s advisors find smart ways for their clients to help others. Mr. Lee has a client who signed a huge NBA contract and wanted to give his five brothers opportunities instead of cash. The company created a strategy for the player to fund businesses that the brothers could run, creating their own revenue streams.

Help the client have “an open and transparent dialogue about what is right and what will work. Then come up with a plan,” says Lee. “When there’s no game plan, everyone is drinking from the same punch bowl. There is no governance.

A little sting

Boulevard Family Wealth, a family office in Beverly Hills, California, has worked with a number of clients who have received millions of dollars in inheritance or proceeds from the sale of a business. “We try to be open and honest, even if it stings a bit,” says Matt Celenza, the firm’s managing partner. If a customer wants to buy an expensive plane, for example, their company will research various options, including fractional ownership. and aircraft leasing instead of outright purchase. The same goes for real estate purchases and other major expenses.

The goal, says Celenza, is to protect and increase assets that will benefit current and future generations. Its not always easy. His company created a portfolio for a client that was designed to generate a steady stream of income. But the client liked to leverage his assets to make private investments on the side.

“This was eating into his liquidity and would soon affect his ability to make withdrawals without touching his principal,” Celenza says. The firm’s advisors gave the client long-term projections based on his current spending, helping him realize that the risks weren’t practical. “We’re very vocal about what’s right and what’s wrong.”

money and happiness

Dealing with a sudden windfall, however, isn’t just about making sure there’s enough money. It’s also about making sure the money is used to make the recipient happy. Otherwise, it’s just money for money.

According to a 2019 study, over the long term, how people choose to spend their windfall has the biggest impact on their overall happiness. The authors, Israeli academics in behavioral economics, developed a model showing short- and long-term effects on recipient happiness, which fluctuated over time. In general, winners who quit their jobs and engaged in a lifestyle of passive leisure were less happy than winners who spent their wealth on social pursuits and other activities that gave them pleasure, such as travel, leisure and volunteering, according to the authors.

The idea that many lottery winners end up broke and homeless is largely a myth, says Robert Östling, professor of economics at the Stockholm School of Economics. He was part of a team that looked at the long-term effects of lottery winnings on psychological well-being. The study, published in 2020, analyzed the results of a Swedish government survey that included responses from 4,800 people who had won the lottery five or more years earlier.

Research found that the long-term effect of winning the lottery on happiness was too small to detect, says Dr Östling. But there was a slight improvement in overall life satisfaction. “That’s not particularly surprising, because wealthier people tend to have higher life satisfaction,” he says.

The purpose and methodology of each study was different, but both essentially try to answer the question: Can money buy happiness?

“Compared to other life events, money does little in terms of life satisfaction and happiness,” says Dr. Östling. “One way or another, it’s instinctive that everyone wants to get more money. But people overestimate its effect on their happiness.”

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