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So You Are Suddenly Wealthy. Now What?

Whether you just received a sizeable inheritance or you just won the lottery, sudden wealth changes people’s lives.

1. Call Your Close Family Together. Remember that, no matter what, your family and close friends come first. Call your close family members together, talk about your newfound wealth, and discuss how to proceed with the next step of surviving this major change in your lives. Just like a ship will break apart if it is bring pulled in multiple directions, it is important for you and your close family to concur on your family’s life goals.

2. Immediately Call an Experienced Attorney and Accountant. Like it or not, your life just got more complicated as a result of having more money. You now have to contend with new tax laws, the risk of losing everything as a result of possible lawsuits, divorce, bad investments, death, incapacity, and any number of other possibilities.

Find an attorney and accountant who has “been there before” with clients, and listen to their advice. Have both the attorney and accountant concur on their recommendations and work together. The legal and financial aspects affect every move you will make.

3. Do Not Accept the Lottery Ticket or Inheritance without Your Lawyer’s Advice.

With a lottery ticket, you have options of accepting a cash payout or payments over your lifetime. There is no “correct” answer on which payout method you should choose. You should discuss your options with your attorney and accountant.

With a large inheritance, transfer taxes can be a major issue. There are many ways to structure settlements for tax advantages. You may want to disclaim part of it and give it to your children to avoid a double transfer tax. You may want to a advantageously split your personal settlement among multiple family members or have an irrevocable trust be the winner. Before you accept and agree to the big divorce settlement, ask your divorce attorney to bring in an estate attorney to help structure what you receive so as to reckon with the tax consequences.

4. Put Together a Team of Professional Advisors. In addition to an attorney and accountant, you will need a full team of other professional advisors, including a life insurance specialist, a property and casualty insurance specialist, an investment advisor, a financial planner, and even a family psychologist or psychiatrist. It is important to interview these professionals and make sure they are top-quality. Reputable advisors will save you money and help you avoid costly mistakes.

There are scoundrels out there who prey on unsuspecting, newly wealthy individuals. These people will present you with umpteen different ways for you to “invest” your money. Keep your advisory team handy for consultations as to proposals you are given. This will reduce the number of bad decisions resulting from these confrontations.

If you are suddenly wealthy, you may be either afraid of advisors or do not trust them. We suggest the following to overcome this “advisor phobia”:

When you are meeting with an advisor, bring along someone you already trust, such as a religious leader, old friend, or elder member of the family. That person can give you a

  • Require your attorney and accountant to evaluate any business before you go into it, and to evaluate any advisor’s reputation before you make a commitment to proceed with that person.
  • Consider using fee-based investment and insurance advisors to lessen the feeling of product sale pressure.
  • Arrange with others who have had sudden wealth experiences to share feelings with them. The professionals involved may be able to introduce you to other suddenly wealthy persons whom they have already helped.
  • Have the advisors set up educational programs for you and your family members.
  • Talk with the psychologist or psychiatrist on the team to find out why the family members are resisting the advisors.
  • The advisors on the team should be working in harmony as they interact with you. If they disagree amongst themselves, they must work it out away from you and come back to you only when they all agree.

5. Work with a Psychiatrist or Psychologist. The sudden wealth will change your life, your values, your environment, and your friends. It will be normal for you to have stress and uncertainties in your mind. Regular consultations with these professionals will help you through your new, fast-changing lifestyles. The future for you is not what it used to be.

It may be a good idea to choose a psychologist or psychiatrist to be present at all the team meetings to observe and determine if there are any psychologist problems. The psychologist may then suggest either individual consultation with the most distressed family members or some type of group therapy. That psychologist can act as a trained mediator to facilitate the settlement of any differences among family members.

One psychological problem or bitter confrontation could destroy all the fun out of the winnings unless the negative energy is dissipated through psychological consultation or mediation.

6. Set up a Strategic Financial and Legal Plan. After you set your life goals, you will want to set up the financial and legal structures and moves as a foundation for reaching those goals. You may need to set up trusts and other legal entities, not only to protect yourself from lawsuits, taxes, probate courts and family squabbles, but also to ensure continuing financial success and safety. Your attorney, accountant, and other advisors will be your architects and engineers to build a family financial fortress for you.

In setting up the strategic financial and legal plan, you usually will need right away the standard legal medical emergency documents — wills, living wills, medical powers of attorney, durable general powers of attorney, revocable trusts, and instructions for funeral and burial. Another need will be to set up irrevocable trusts for the children, grandchildren, and even great-grandchildren, thereby creating receptacles for tax-free gifts and life insurance, ;which will be used to pay the estate taxes on the winnings should you die. In almost every situation with which we have been confronted, we have found that setting up a family limited partnership is helpful for holding all of the money and investments safe from creditors and facilitating discounted tax-free gifting to the next generation. Sometimes, for the more sophisticated family, we will set up a family LLC or corporation to manage the investments; to house any business activities in which the clients want to get involved; and to enjoy fringe benefits, such as a payment of medical bills and the opportunity to deduct the expenses of having family business meetings.

In the accounting area, it is important to have a budget and a means of tracking cash flow, income, and net worth from year to year to evaluate whether the family is “keeping on course” with respect to their visions and objectives upon which they previously agreed.

7. Implement the Necessary Protective Insurance. A client who won a large multi-million dollar sweepstakes prize realized that, if she died, taxes would eat up almost 80% of what she won before her family received any benefits. We immediately arranged to offset that with several million dollars of tax-free life insurance so that the family would not lose a dime to taxes. Umbrella liability insurance in the highest amounts almost is needed to protect the winnings from unfortunate accident lawsuits.

After the insurance has been implemented as needed during the first year, the insurance advisors must continue to evaluate the financial numbers each year to see if any adjustments need to be made.

8. Set Up Trusts and a Foundation with Trustees to Screen You from Shirt-tail Relatives and Charities. If you start giving money to relatives and charities, it will be like feeding the sharks with bloody morsels of meat. Relatives will be angry that you gave more to another relative. Charities will press you for their share of your give-aways. We recommend setting up a trust for the relatives and a private foundation for the charities with loyal trustees who will act as buffers between the family and the solicitors. You, however, set clear written policies of your giving intentions that are consistent with your objectives and your values for the trustees to implement. Trusts must be set up as discretionary spendthrift trusts to protect the newly-gained assets from predator creditors and lawsuits.

It is important for the family to evaluate the “Statement of Wishes” that they have given to the trustees of their family trusts and their charitable foundations. The Statement of Wishes provides instructions to the trustees as to how they should go about giving distributions to the family members and to charities. Because times change rapidly, the Statements of Wishes must be reviewed on an annual basis.

9. Hone Your Survival Skills. You want advisors who will teach you how to manage your wealth. At some point, you will want to be weaned off your advisors for all but periodic legal and financial checkups and emergency advice.

10. Safety First. We have noticed that highly publicized lottery winners or others who suddenly come into wealth are harassed by crank, threatening, and annoying calls. Scam artists pressure the suddenly wealthy to “invest” money with them. Family members come out of the woodwork pleading for financial support. Others have their own ideas about how you should use your money for their good.

To protect your family and maintain some privacy, we suggest that you consider some of the following precautions:

  • Hire a security guard to protect your home.
  • Consider changing your name or using a pseudonym.
  • Get an unlisted telephone number.
  • Move to a security-protected living area.

After you implement these security measures, you can gradually invite loyal friends and relatives who will respect and preserve your privacy back into your life.

Also, the more gradually you change your spending habits, the less attention you will attract to yourself.

These are just some of the key moves that must be made so that you will become part of the 15% to 25% of people who are happy with their sudden wealth.