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How to
Manage Sudden Wealth
Suddenly
being showered in riches — through inheritance, a successful deal or even
by winning a lottery — is a major life-changing event, but not always for
the better. You may quickly find yourself confronted with a number of
complex issues, and you will need to set aside your emotions to make
clear-headed financial decisions.
What right-thinking person wouldn’t
want to win the lottery, inherit a substantial amount of money or be awarded
a large legal settlement? Unfortunately, handling sudden wealth is much
harder than it may seem.
“There’s this myth that money is
good and more is better, but the truth is that money is complex and sudden
money is very complex,” says Susan Bradley, founder of the Sudden Money
Institute. “It becomes one of those pivotal events in life — a
before-and-after event. Nobody knows how they’re going to react.”
Survival Tips
Bradley, author of Sudden Money:
Managing a Financial Windfall, counsels wealth recipients on how to
develop a healthy new lifestyle that has a solid financial and emotional
footing. She says that people are used to living within certain limits, and
it’s not always an easy fit when those boundaries change.
“I’ve yet to meet anyone who has
come into sudden money who has done exactly what they thought they would
do,” she says. “Sometimes, it’s radically different.” In fact, some
people who acquire sudden wealth engage in destructive behavior by acting
out or going into a state of denial.
To make the most of a financial windfall, Bradley
offers these tips:
- First, get used to the fact that this is a big
life event. It can have a huge effect on your relationships with your
spouse, your children, and your friends. Bradley suggests entering what
she calls a “decision-free zone.” Don’t make any critical
decisions until your financial and life planning are done.
- Consider the lifestyle choices the new wealth
presents. Will the money be used to replace earned income or to secure
your retirement? Who, if anyone, do you wish to share the money with?
How much and when? “Who should be involved, and who is an equal
partner in this? There are different gradations of sharing money,”
notes Bradley.
- Follow your philanthropic impulse. How do you
wish to affect your family, your community, your world? Develop a policy
statement that specifies what the money means to you in terms of your
values, beliefs and goals. Discuss how you wish to share the wealth:
will it be used for education only, healthcare needs or new cars for
each heir? Also, clarify the procedure you would like to use for
distribution. “To put it all in writing really helps crystallize how
you feel about your new wealth,” says Bradley.
- Play “what if?” with your professional
advisors. Prioritize what’s important and test the money in different
scenarios. Do you want to buy a summer home? Clear your debt? Take your
family on a safari? “Most people with a new lifestyle don’t know how
much they’re going to spend in a year. Try to be conservative,”
Bradley advises. “Give room for the unknown.”
- Put the money someplace where there is limited
market risk. Pay attention to tax consequences and how the asset is
held. Involve your Investment Advisor and other professional advisors to
deal with investment strategies, tax and legal issues. Bradley also says
it’s wise to retain a “life coach” to help usher your family
through the transition. Different family members may have opposing
viewpoints about money, risks and limits. “The more talking you do,
the better it will be,” she adds. “There will be surprises, but
that’s just the nature of life and money.”
Challenges and Transition
The challenges of sudden wealth transcend age,
gender, education, sophistication and culture. An inheritor is not
necessarily going to be more prepared than a lottery winner or someone who
has sold a business or won a legal settlement. On top of that, children,
spouses, extended family, and friends may be on different learning curves.
Bradley says to expect the transition from
“what was” to “what is” to take as long as five years. After a
year or two, some families get tired of being guardians of the new money
and feel a desire to spend it, use it up, or otherwise get rid of it.
That’s a time to take special care, keeping your advisory team close at
hand.
“Professional advisors can give you guidance
— and room. Even though you want to get on with your life, it’s
important to keep monitoring everything,” Bradley says.
The overarching key to managing sudden wealth is
to accept the challenges that come with it and view them as part of an
ongoing process. “Managed well, sudden money can transform your life —
and the lives of your heirs — for the better, in ways you probably
can’t even imagine,” Bradley says. -
CIBC
March 2007
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