When a mega-lottery jackpot reaches the hundreds of millions, or even billions, people dream of all the ways their lives could change with a sudden massive windfall. Regardless of the virtually impossible odds, the fantasy of how you’d spend it jovially wanders through your mind.
No matter how extravagant your dreams may be, there’s a way to translate this wishful thinking into realistic, practical planning. You just have to dial back your expectations a bit.
A person is much more likely to receive an inheritance, legal settlement, or other assets that alter financial status. It might not be billions, millions, or even hundreds of thousands, but it’s still enough that requires preparation. So, what do you do?
Where do windfalls come from?
Lottery/gambling: This is the most fun to dream about. You bought a winning lottery ticket or hit a massive jackpot at the casino, turning a random row of numbers or symbols into millions.
Inheritance: The odds are heavily in your favor to receive something after a family member, loved one, or friend passes. After the estate is settled, if that property has value (house, investments, cash, jewelry) you now have to factor it into your own net worth.
Legal settlement: Unlike winning or inheriting money, legal settlements usually come with a high cost -- often in the form of pain, suffering, permanent damage, and years of court battles. This isn’t so much a prize as a way to get your life back together, but a sizeable settlement still requires proper planning to make the most of the money.
Business: There’s a reason Shark Tank is such a popular show, and it’s not because of Mr. Wonderful’s lovely personality. If you toil away for years on a special project and end up flipping it for lots of money, it can be a shock. Granted, this is earned money, but you might be unaccustomed to any form of wealth after all those years of working toward success. The same applies if an investment you made at some point in your life turns out to be a winner.
Now that you’re familiar with the scenarios, here’s what you could consider doing:
Keep it a secret and take it slow
This might be just as difficult as picking the winning lottery numbers. It’s human nature to want to share the news of your good fortune with everyone, but you must show restraint. There are only two types of people who can help you at this point:
- Those you trust with your life: spouse, immediate family, closest friend in the world.
- Professionals: attorney, accountant, financial advisor, money manager, insurance agent.
If you post anything about it on social media (“just hit progressive slots for $2.3 mil, go to hell boss!”), or share the news with people outside of your trusted/professional circle, prepare for the floodgates to open with every scammer/person-expecting-a-handout relentlessly pursuing your newly acquired moolah. You might feel like you’re the same person, but to everyone else you’re a walking money bag.
Whether it’s a winning lottery ticket or a huge check that shows up in the mail, once you’re sure the money is yours, take some time to get your head together. You need to get a solid plan in place before making any decisions. And that plan involves a team of professionals.
We can’t stress this point enough: You need to hire people who know exactly how to deal with large sums of money.
Whatever you thought you knew about taxes, trusts, or charitable donations is completely out the window. You’re in a new league where the rules are complicated and the penalties can be brutal. Don’t let pride get in the way of making a smart decision. It’s OK to admit you’re in over your head and need help.
If you already have a lawyer, accountant, financial advisor, or insurance agent, you’re already a step ahead of the game. Call them, and get your plan rolling.
If you don’t have any pros in your corner yet, make assembling a team your top priority. These are the people who will advise and protect you, so choose wisely. If an attorney or advisor requires a percentage of your entire windfall to work with you, thank them for their time and leave their office immediately. Payment for services should be retainer-based, an hourly fee, or in the case of financial advisors, a percentage of the assets they will be in charge of managing.
If you have no idea where to start, turn to family you trust for recommendations. If your family can’t help, stealthily ask friends or colleagues if they know anyone, but don’t tell them why. Keep it vague, along the lines of, “I might need some legal or financial assistance and have to find someone trustworthy and qualified.” If a referral works out well, you can always reward that person in the future.
You’re the boss now; time for a strategy
What do you want this money to do for you? The advisors and lawyers you hire are now your employees, which means you need to provide them with direction. Some places to start:
Big purchases: What are the things you need or want? Keep a running list. Homes, vehicles, lavish trips, medical treatments not covered by insurance. You can write down whatever you want, knowing this list can be altered depending on how much you’ll be able to spend.
Biggest worries: What are some of the issues or problems you see arising from your newfound fortune? Do you have greedy family members who might be out for blood? Are there unsavory people in your past who might come out of the woodwork for a handout? Are you concerned about taxes eating away at your fortune until there’s nothing left? Write down every possible worry you have as a starting point for when you speak with your team of pros and trusted family or friends.
Eliminating debts: This is a chance to erase all those debts and loans that have been haunting you. But before you pay them off, you need to talk with an advisor since there are ways debts can work to your advantage (another reason an expert is key).
Retirement: Even though you may never have to work another day in your life, these funds will still offer you tax breaks and benefits for those golden years.
Emergency: Fill up an emergency fund that can’t be touched unless you absolutely have no other option.
Insurance: If you don’t already have life insurance, now’s the time to look into buying a policy. There are also other types of insurance products, which can protect your money and estate against lawsuits and other unforeseen events. This can also help assuage your list of worries, so be prepared to add a registered insurance agent to your roster of professionals.
529 college savings accounts: This tax-free gift will put your money to great use in the form of educating future generations.
Helping people: You’re looking forward to the moment when you can help out your friends, family, favorite causes, and charities. However, you shouldn’t just hand over an envelope of cash or write a check. This is where, once again, your team of pros will help make sure you get all the tax benefits while helping as many people as possible.
Play it cool
While you’re devising a solid plan, don’t make any massive, life-changing decisions. Having new-found wealth can be like grocery shopping when you’re hungry. You end up buying a lot of regrettable stuff you don’t need. Don’t purchase anything you wouldn’t normally buy. No mansions, Lamborghinis, yachts, islands, Rolexes. At least not yet.
You’ve undoubtedly heard stories about lottery winners going broke. The reasons are simple and all too human: They think the money will never run out so they spend more than they have. Everything runs out eventually.
Your goal should be simple: Get the most use out of the money or assets while you can, and preserve what’s left for those you love.
Paper trail: Update beneficiaries and other important people
Do you have a will? Have you named a power of attorney? Perhaps you put these off because you thought you didn’t have anything valuable enough to protect. Well, once you come into money, everything changes.
Let’s start with the standard aspects of a typical estate. If you have a 401(k) or other retirement fund, who did you designate as the beneficiary? Maybe you named a sibling and never changed it to your spouse after you got married. Maybe you got divorced and never got around to changing the beneficiary to your kids or an immediate family member. If you own a home, how do you want it to be passed on with the least amount of hassle and taxes?
Regardless of your current financial status, you need a will. If you happen to receive a cash windfall, a will is no longer an option. It’s a necessity. You need to make sure all your assets are accounted for and going exactly where you need them to go. You also need a power of attorney to name a person who can make financial decisions on your behalf in case something happens to you.
Less than 60% of Baby Boomers have an official will, which would change if people realized how easy and affordable one is to create. If you get a windfall you’ll have no valid excuses to avoid this planning cornerstone. But since your estate will inevitably become more complex, you can now let an attorney do all the hard work. Then all you need to do is revisit it every few years to make sure it’s up-to-date.
DTA: Don’t trust anyone
Perhaps we’re being a little paranoid, but money makes people crazy. Unless a person is already part of your inner circle, or you’re paying a pro to manage your money and legal affairs, you need a force field to protect you from people who want what you have.
If your windfall is publicized (gambling winnings or settlements), you might need to get new phone numbers, unlist your address, change how you behave on social media, and display general awareness that you are now a juicy target for telemarketers and get-rich-quick scammers looking to bleed you dry.
Imagine a guy from high school constantly begging you to dump money into his fizzling business. He just needs $500,000 and you have plenty to spare, right? Or a minor traffic accident results in a massive personal injury lawsuit. You get the point. You don’t have to live in a bubble, but you do need to limit any unpleasantness from money-grubbing parasites.
Don’t go changing…
It’s easy to say that you’ll remain the same humble, down-to-earth person regardless of what you have in the bank. And that may be true in your heart. But there’s a good chance the people around you might change. This is why you need budgets and responsible parameters. Athletes are known for blowing through huge contracts, which made this story about an NFL wide receiver living on a $60,000 annual budget and saving the rest so inspiring.
You don’t have to live beyond your means to be happy. You can live comfortably within them and even splurge for luxury when you like − “2-ply toilet paper? Don’t mind if I do!” − without becoming a person who foolishly lost a fortune by not keeping a responsible mind on your money.
Things to Consider:
- Not all windfalls are massive and life-altering, but they can still help you achieve some goals if you approach it responsibly.
- Take a deep breath, hire a financial professional, and get a strategy together.
- What are your biggest financial worries right now, and how can you address them even if you don’t strike it rich?
- Regardless of your current financial status, you still need to get your estate planning documents in order.
This article is provided by Everplans — a life and legacy planning company dedicated to transforming the way people get their families organized. For more information, visit: everplans.com
Neither Transamerica nor its agents or representatives may provide tax, investment, or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.