You’re the Beneficiary of a Financial Windfall! What Do You Do Now?

A relative of a friend of mine had a run-in with serious wealth. His favorite numbers finally hit in his state lottery. He hired a limousine to show up in style to collect his millions, but when he arrived, they drove into a parking lot filled with limousines. “As it turned out,” my friend told me, “he had just become a thousandaire.”

My friend’s relative apparently has a great sense of humor. He laughed off the disappointment and spent most of the money on a party for his friends. Then the following day, though a little worse for wear, he returned to the job he had quit after learning of his winning lottery ticket.

But what if he had been the sole winner? In 2023, fifteen people nationwide hit the jackpot with ten winning Mega Millions and five winning Powerball, four of whom won over a billion dollars. Or what if he were the beneficiary of a more likely windfall story, like an inheritance or the sale of a house?

“The first thing to do when you learn you have come into a large amount of money is take a deep breath,” says Matthew Costigan, CFP®, CPA/PFS, a principal and senior financial advisor with HBKS Wealth Advisors. “Then call your financial advisor. And if you don’t have one, get one—before you quit your day job.”

If you’re not careful, what starts out as a dream can quickly turn into a nightmare. According to the Certified Financial Planner Board of Standards, nearly one-third of lottery winners file for bankruptcy within three to five years, surpassing the rate for the average American. Even if you consider yourself financially savvy, it is imperative to consult with a financial advisor. Large sums of money come with different financial considerations than you’ve likely dealt with before. You need to understand what those issues are and how you personally want to handle them. The best time to do that is upfront before you make short-term decisions that might not prove wise in the long run.

When a windfall happens, you will want to engage at least the following three professionals to advise you, that is, to develop the accounts, documents, and strategies key to protecting your new wealth and your plans for it:

1. Tax Advisor: Specifically, a Certified Public Accountant (CPA) who will determine the taxes you owe now on the windfall itself as well as develop a tax strategy for the years ahead
2. Financial Planner: Specifically, a Certified Financial Planner (CFP) who will create a plan to manage your money, including investments, paying down debt, savings for the future, and decisions about how your assets will be distributed at your death
3. Estate Planning Attorney: Works with your other advisors to develop the legal documentation required to secure an estate plan that will fulfill your wishes for the distribution of your wealth

These advisors will provide expert guidance in navigating the complexities of financial management, legal issues, and investment strategies for your windfall, including:

Taxes

“The decision of whether or not to sell a house can be an emotional as well as financial one,” Costigan said. “If you decide to hold on to it, you have to consider the ongoing expenses, like property taxes, insurance, and upkeep. That’s a decision with long-term implications. Some people decide to keep the house and rent it out as an additional source of income, but that decision includes many factors and becomes another aspect of your long-term financial plan.”

Your goals and related expenses
“Once we determine the actual amount of money you will have after taxes, we want to build a picture of your wealth: your net worth, your ongoing cash flow, your goals for the money,” Costigan noted.

A first consideration is paying off existing debt, except perhaps a mortgage with a low interest rate. Then ensure that your emergency savings, typically six months of anticipated expenses, is fully funded.

Then consider the savings required to achieve your long-term goals. Your retirement savings always come first, then perhaps, savings for your children’s educations. There are multiple ways to plan for both, subjects of more conversations with your financial advisor.

Your financial advisor will also be key to determining what to do with an inherited portfolio of stocks, bonds and other investments. For example, if the money is invested aggressively, such as in growth stocks, you might want to take a more conservative stance, that is, a greater focus on “conserving” your wealth. The mix will also reflect your decision to pass some of your windfall down to future generations or otherwise as your legacy.

Helping out others
You might find you have more friends and family members than you ever knew about when you come into a windfall. That’s one more great reason to be working with a financial planner. He or she will help you develop a strategy for how much you can afford to give or lend and to whom—and in so doing, take the heat, at least some of it, off you.

Once you determine those worthy of gifting, including your children and other family members, there are, as always, tax considerations. For 2024, the limits on gifting are up to $18,000 per year to an individual without affecting your lifetime gift tax exemption ($13.610 million for 2024); as a couple, you can gift up to $36,000.

Gifting should be top of mind in 2024 and 2025. On January 1, 2026, unless our government votes to make a change, federal lifetime gift tax exemptions will be reduced to 2017 levels (adjusted for inflation) or roughly half of what they are now, to about $7 million per person or $14 million for married couples. An exception is donating to a 529 plan for someone’s education. In that case, you can multiply that $18,000 gift limit by five and contribute a lump sum of up to $90,000, or $180,000 as a couple.

You might also want to use your windfall to support a favorite charity or charities. There are many ways your advisor can help you do that, such as a donor-advised fund, to maximize your contribution and minimize the associated taxes. Donor-advised funds are flexible and easy to set up.

One favorable application: Transfer appreciated securities to a donor-advised fund to get the tax deduction for the entire fair market value transferred and no tax bill when the assets are sold inside the fund.

Estate planning
If you don’t have an estate plan, this is the time to get that and other life-ending considerations in order, including a will and a power of attorney in case you become unable to care for yourself and make sound financial decisions, insurance, and trusts. If you already have an estate plan, a substantial change in your net worth is a time to review it.

Your day job
Until you determine exactly how much cash flow your new wealth is going to generate, it’s best not to upset your current existence by doing something like quitting your day job. If you really hate your day job, your newfound wealth might provide enough security to find something else you will enjoy doing. But a rule of thumb is that it is easy to overestimate what your wealth can do for you and your family in the long term, and underestimate what you’ll need to replace your current income. As well, quitting your day job means the end of your Social Security contributions.

Congratulations on your windfall. We hope you will enjoy using it to improve your life and the lives of those close to you. But there are too many stories about how a financial windfall has resulted in personal as well as financial ruin. Work with your financial advisor to ensure your wealth, and the joy it brings, endures.

IMPORTANT DISCLOSURES

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.