While many people dream of winning the lottery, getting a large inheritance, selling a successful business, or otherwise having their “ship come in,” the reality is that sudden wealth often leads to guilt, stress, isolation, depression, and fear. While this initially sounds odd - the reality is that humans naturally undergo stress and uncertainty when faced with change. Suddenly becoming wealthy is a life-altering change… and we can help manage the stress it causes.
From an emotional and physiological perspective, suddenly becoming wealthy can cause reactions that are similar to the natural reactions we experience during other sudden and life-altering changes. Suddenly becoming wealthy can cause isolation from family or lifelong friends for various reasons. You may experience fear of losing your money, making bad decisions, a sense of foreboding about the burden of managing the wealth; you may question your own identity or worth, and have feelings of guilt, insomnia, and experience other stressful effects. Collectively, these symptoms are known as Sudden Wealth Syndrome.
It is very common for someone who wins the lottery or inherits a larger amount of money than they are used to managing to lose it entirely within a few years and even file for bankruptcy. The first step in handling SWS, as well as preventing mismanagement of the funds - is to simply admit that, more than likely, you “don’t know what you don’t know.” Experienced financial advisors and wealth managers spend decades of their lives and countless hours of education learning how to manage money correctly, think through potential liabilities, save taxes, and develop strategies designed to maximize your family’s wealth for generations to come. Billionaires, elite athletes, Fortune 500 CEOs, Senators, Presidents, Kings, and Queens don’t know everything, nor are they “better” than the rest of us. Instead, they all have teams of advisors who coach them and keep them on the right track. Your wealth manager will help build and coordinate your success team. PARAGON does this frequently - we’d ask that you consider us in your search.
As soon as you think you will be the recipient of significant wealth - THAT IS THE TIME to hire a Wealth Manager. While each case is different - the steps you take prior to “constructive receipt” of your funds can be critical! If you hold a winning lottery ticket - a consult with your Wealth Manager, a CPA, and an attorney before you take any action or tell anyone may save you thousands (or even millions) in taxes. If you are receiving a significant inheritance - getting your Wealth Manager involved quickly so as to advise on how to best receive those assets may save months in hassle or thousands in taxes - especially if there are retirement plans, annuities or life insurance policies involved. If you are selling a business - it is likely that options exist to maximize that business value prior to the sale, and it is likely that different options on how to structure the business sale should be explored to determine the best outcome. Either way, get professional advice early and often throughout the process! It is well worth it.
Compensation from a personal injury case or a court award can be paid out in a number of forms - but generally are paid out as either a single lump sum or a structured settlement which takes the form of a series of payments. Once the terms of the award are agreed upon, in most cases they cannot be changed. While, in most cases, legal awards are not taxed, there are still many other factors to consider. You may have incurred significant expenses as a result of the incident which caused the lawsuit in the first place, and have considerable debts to settle. How experienced are you at managing large sums of money? Are there dependent or special needs family members whose care depends upon the settlement? What are the ultimate desires for the money - family legacy, charity, or simply to provide income for as long as you should live?
In most lawsuits and legal settlements, the monetary award is only the tip of the iceberg. More often than not, legal settlements mask the enormous pain of personal injuries that cannot be healed, earnings that must be replaced, or emotional bereavement and grief from the loss of a loved one. Each situation is different - therefore, each financial situation is different. If you are a plaintiff in a lawsuit or expect to be the beneficiary of a legal settlement, the best course of action would be to consult with your attorney AND your financial advisor TOGETHER and make sure they are on the same page to develop a coordinated strategy BEFORE the award is finalized. Creating a financial plan BEFORE your attorney petitions the court on HOW the settlement should be structured can help address not only your immediate financial needs - but the long-term legacy of the funds and the financial stability of your loved ones as well. Get us involved sooner rather than later!
Winning the lottery can be a life-changer - for better, or for worse! This is especially the case if you were not particularly wealthy or “financially savvy” prior to becoming a lottery winner. The sheer amount of money involved can be daunting, sometimes creating the illusion that you are now far wealthier than you truly are. Often this feeling of infinite resources causes lottery winners to make bad decisions, especially soon after claiming their prize. Family and friends suddenly treat you differently, potentially making you feel isolated or uncomfortable around people you have known and loved your whole life. Immediately your tax picture becomes more complex, distant relatives and charities you’ve never heard of begin to contact you, and in the midst of this mess, you have very important, irrevocable decisions you must make immediately - such as - do you claim your winnings as a yearly annuity, or a lump sum?
YOUR FIRST ACTIONS
Step one. Take a breath. Usually there is no rush (well… if it is very close to the end of the tax year… RUN to Step 3)
Step two. Do not tell anyone you have won (ok… maybe your spouse… but that’s about it).
Step three. Give us a call. We will help you figure out what to do next. We will discuss HOW you bought your ticket, and WHO was involved in buying the ticket with you (such as your adult children or grandchildren, right? … Nod your head… yes…). We will get you in touch with experienced tax professionals and asset protection attorneys and begin forming your Wealth Success Team. This is not our first rodeo, and we know who has experience in this area and who doesn’t. We have seen this play out several times and there are several CRITICAL steps that may save you thousands (or even millions) of dollars in taxes, depending upon your specific situation and what has happened up to this point.
Similar to claiming lottery winnings, being notified that you are inheriting a large amount of money can be a positive life-changing event or the beginning of an administrative and tax nightmare.
YIKES! DID YOU KNOW…
that some inherited assets actually lose certain creditor protections as soon as they are inherited?
that if you do not make withdrawals from certain inherited accounts on a specific timetable, the government can tax away 50%?
that inherited land can be taxed at its “highest and best use” even if it is currently only undeveloped land?
that a will has no control over the disposition of certain assets, such as IRA’s, 401k’s, and life insurance? In other words, the will may say one thing… but someone else may actually inherit the money?
that some legal rights and options that an inheritor has under the law can be effectively ignored by insurance and annuity companies?
that tax laws may forgive profits in accounts that you inherit, depending upon how the account is registered?
Some inheritances take years or even decades to fully process and finally put to rest - while others are finished in just a few weeks. Complex, high-net-worth estates will almost always take a little more time to fully settle, but the secret to minimizing stress, costs, taxes, and headache for estates of all sizes lies in thoughtful estate planning prior to death. Ideally, PARAGON should be involved to some degree in the initial estate planning that occurs, and coordinate with your estate planning attorney and CPA while everyone is still alive and legally competent to make decisions. However, if this is not possible, then the next best thing would be to have us involved as early in the probate process as possible so as to maximize any postmortem planning opportunities and help you navigate the confusing maze you’ve just inherited.
We realize that inheriting money can be a touchy subject - especially if the death of a loved one is imminent. However - the old saying “you can’t fix it once you are dead” applies here. If you expect to inherit a large sum of money - or if you are leaving a large sum of money to someone - a working review of your estate plan from the perspective of the inheritors may be in order. On the other hand - if you are receiving an inheritance and cannot change the current estate plan - or the person leaving you the money has already died - most definitely contact us before beginning the process of transferring accounts and making claims. Depending upon the asset types and how they are titled, we may be able to save you many hours of frustration and thousands of dollars in taxes by getting the inheritance into your hands the right way. There are many options on how to inherit assets - and the first option that comes to mind, or the first option presented by a voice on the other end of a 1-800 number is rarely the best one. Give us a call.
