Preparing for Sudden Wealth

May 16, 2019  |  

Preparing for Sudden Wealth

Whether your expected windfall is from an inheritance, a business sale, a large bonus or simply winning the lottery there are several issues that need to be attended to fairly quickly. 

1. Defer. The first issue is to pretend initially that your windfall was never received. Before making any decisions, the money should be held instead of received, in order to avoid significant adverse tax consequences. For instance, if a loved one passes away and you will be receiving an inheritance, don’t request a partial distribution immediately, which may or may not include a distribution from an annuity or retirement plan. Once the funds are claimed and received, it becomes harder to postpone taxes and utilize other creative wealth protection options.

By not taking the money right away, you (the beneficiary) have an opportunity to take a “step back” and determine your current and future priorities. It also gives you the time to obtain the professional advice you need in order to invest your assets as effectively and as efficiently as possible.

2. Hire an attorney. It is very important to obtain the right team of advisors, and there are four types of advisors that you should look for. First, obtain good legal counsel from an attorney who has expertise in estate planning, preferably one who has experience working with large estates. In addition to completing standard documents such as a health proxy, power of attorney and will, and possibly a trust, the attorney will also review the potential receipt of the funds and work with the other professionals to protect your assets from future taxes or creditors’ claims. Perhaps you or your child is a single person who is planning to marry. In this case, a prenuptial agreement should be considered in order to protect your child’s assets in the event that the marriage dissolves in the future.

3. Hire a CPA. The accountant is also a key professional to enlist, since taxes are always a concern for both income tax purposes and estate tax purposes. While many states no longer have an estate tax, the federal government’s share of an estate is currently 40 percent of all assets above the $11.4 million threshold (individual) or $22.8 million (married couple). If the assets are being received from a decedent’s estate, and if estate taxes are paid, the assets in the recipient’s name are also going to be taxable when that person passes away. The accountant, working with the attorney, can assist you in postponing future estate taxes or by possibly eliminating them by creating entities that will be out of your estate but will still provide you with income.

Income taxes are a concern since the highest marginal rate is close to 40 percent, and with state income taxes and the possible Medicare surtax, the total income tax rate could be close to 50 percent. The accountant can certainly assist with planning strategies in order to minimize the “tax bite.”

4. Hire an investment manager/financial consultant. This professional needs to be involved as soon as possible to help you determine how your newly acquired funds should be invested and to determine your risk tolerance. This will help you determine whether growth, income, gains or tax issues are to be considered, and in what dimension relative to the investment of the assets. If there are children or grandchildren who will receive gifts, then possibly other accounts, such as Uniform Transfers to Minors Act (UTMA) accounts, so-called 529 plans or other types of investment vehicles, could be established in multiple names in order to minimize or defer taxes for future generations. Most investment managers are able to provide sample portfolios with projected income and growth before a person decides to establish an investment relationship with them, and different investment options should be considered as opposed to going with only one proposal from an advisor.

5. Hire an insurance professional. For any newly wealthy person, insurance is also a key consideration. There are various types of insurance that should be reviewed. When someone does not have a lot of assets, there is not a significant liability if a person is sued. However, with newfound wealth, you can become a target for lawsuits. All liability coverage for cars, homes, boats, etc., should be reviewed to increase the limits of liability. Liability coverage is not usually a significant expense, but still should be a priority. An umbrella policy that provides excess coverage in the event of insufficient liability coverage on other policies should also be considered. This is also a good time to review life insurance and potential long-term care insurance issues. For the newly wealthy, it’s important to determine what your needs will be if you pass away suddenly or become disabled—you don’t want to have a large portion of your inherited wealth spent on estate taxes or long-term care expenses without a plan to replenish those assets.

Other financial concerns should be considered, such as your personal goals and any issues regarding education for children and grandchildren.

6. Review all major outlays carefully. Before paying off the mortgage, buying a second home, leasing a car, etc., all of your major decisions should be reviewed by the team of advisors, typically headed by your wealth manager. Both tax and non-tax issues need to be reviewed in order to preserve as much wealth as possible. The team of advisors should also review your desire to make “green investments,” to retire early, to volunteer for various charities, or to go back to school and change careers. While these goals are not necessarily financial decisions, they certainly have an effect on the larger picture since the need for additional income may be necessary.

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience.  Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.  Diversification does not eliminate the risk of market loss an A long-term investment approach cannot guarantee a profit.  This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice.  All content is of a general nature and solely for educational, informational and illustrative purposes.  Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients.  Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.


About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.
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