How to deal with a financial windfall

Consider it a problem we would all like to face. But consider it a potential problem nonetheless.

After all, to manage your hard-earned money wisely, you need a plan. The same is true when fortunes appear overnight.

Sudden wealth can take many forms. Paying a lump sum pension, a large inheritance, and legal damages in a lawsuit and sale of a business can lead to fortunes that can reshape the lives of your beneficiaries—for better or for worse. This is because huge sums of money come with a host of decisions, each of which has the potential to squander or invest money, increase or decrease happiness, and enhance or undermine close relationships.

“I find the initial stages very stressful. It’s hard for your mind and body to absorb change,” says Susan K. Bradley, a financial planner in Palm Beach, Fla., and founder of the Sudden Wealth Institute, which trains financial advisors to help clients work through all aspects of unearned gains. Expected.

Ms. Bradley has found that working through all the problems that come with sudden wealth takes time – usually three to five years – before sudden recipients feel more confident.

While working at the institute, Mrs. Bradley came across a woman who was selling shoes in a store before inheriting a multimillion-dollar estate. Dealing with her new lifestyle was just one challenge. Other family members—and heirs presumptive—received a token inheritance, and the heiress struggled to overcome their anger and resentment. “It took her three years to create a new life and feel like she fit in with the world,” says Ms. Bradley.

Two main components

She says two components are important to dealing with a multimillion-dollar windfall. The first is a confidant—usually a trusted friend or family member—who becomes a sounding board to help work through all the ideas and possibilities that come with your newfound money. Mrs. Bradley knows of a Catholic nun, a teacher, who won the lottery jackpot and was confided in the school’s crossing guard, and was a good friend.

The second key is a team of advisors who can review a client’s current finances, such as mortgage, credit card debt, college savings plans, and charitable giving. In the long term, advisors can help navigate investment options, develop an estate plan, strategize on taxes, and ensure adequate insurance coverage.

Ms. Bradley also suggests that sudden wealth recipients consider a mental health professional who can help with the emotional aspects of sudden wealth, because, she says, “it can mess with your head.”

Advisers such as the board of directors will collaborate to track and manage the finances of a surprise beneficiary, Ms. Bradley says. Together, they can ward off predators—friends or family members who aggressively scheme for handouts. Financial accounting must be transparent to all board members, and establish a system of checks and balances that can detect theft or mismanagement.

Recipients should carefully research potential advisors when assembling the team, as not all professionals are honest. Case in point: In July, a New York attorney who called himself a “lottery attorney” was found guilty of wire fraud and money laundering in scams that netted major lottery winners more than $100 million.

Formed much like a family office, this advisory team is a private wealth management firm serving multiple generations of a very high net worth family. At Summit Trail Advisors, a Chicago-based family office, nearly 20% of clients are professional performers or athletes, many of whom come from humble backgrounds, says co-founder Peter Lee.

“My biggest advice,” he says, “is to do nothing for a little while. Just because you can do a lot of extra stuff doesn’t mean you should. What does ‘do nothing’ mean? Finding a safe and smart way to store capital, usually in investments Preservation-oriented,” such as municipal bonds.

Many professional athletes, he says, go “from living in a dorm room with five roommates to signing a $50 million contract.” The motive is to buy homes on the spot or distribute huge sums of cash to the family members and coaches and mentors who helped them succeed.

Instead, consultants at the firm figure out clever ways for their clients to help others. Mr. Lee has one client who signed a huge NBA contract and wanted to give his five brothers opportunities instead of hard cash. The company has developed a strategy so that the player can finance businesses that the brothers can run, thus creating their own income streams.

Help the client have an “open and transparent dialogue about what is fair and what will work. Then come up with a plan,” Mr. Lee says. “When a game plan is lacking, everyone drinks from the same bowl of battering. There is no governance.”

small sting

Boulevard Family Wealth, a family office in Beverly Hills, California, has worked with a number of clients who have received millions of dollars in inheritance or proceeds from the sale of a business. “We try to be open and honest, even if it hurts a little bit,” says Matt Silenza, the company’s managing partner. If a customer wants to buy an expensive aircraft, for example, his company will look for various options, including part ownership and leasing the aircraft rather than buying outright, and the same is true for the purchase of real estate and other major expenses.

The goal, says Mr Silenza, is to protect and increase assets that will benefit both current and future generations. This is not always easy. His firm created a portfolio for one client that was designed to generate a steady stream of income. But the client liked to use his property to make private investments on the side.

“It was an infringement on his liquidity and will soon affect his ability to make withdrawals without touching his manager,” says Mr Silenza. The company’s advisors gave the client a long-term forecast based on his current spending, which helped him realize that the risks were practical. “We are very vocal about what is right and wrong.”

Money and happiness

However, dealing with a windfall isn’t just about making sure you have enough funds. It is also about making sure that the funds are used to delight the recipient. Otherwise, it’s just money for the sake of getting money.

In the long run, how people choose to spend their windfall has the greatest impact on their overall happiness, according to a 2019 study. The authors, Israeli academics in behavioral economics, developed a model that shows the short-term and long-term effects on recipients’ happiness, which fluctuate by the time. Overall, winners who quit their jobs and engaged in a lifestyle of passive leisure were less happy than winners who devoted their fortunes to social pursuits and other activities that gave them pleasure, such as travel, hobbies, and volunteering, according to the authors.

The idea that many lottery winners end up bankrupt and homeless is largely a myth, says Robert Ostling, professor of economics at the Stockholm School of Economics. He was part of a team that looked at the long-term effects of lottery winnings on psychological well-being. The study, published in 2020, analyzed the results of a Swedish government survey that included responses from 4,800 people who won the lottery five or more years ago.

The research found that the long-term effect of winning the lottery on happiness was too small to detect, says Dr. Ostling. However, there was little improvement in overall life satisfaction. “This isn’t particularly surprising,” he says, “because wealthier people tend to have a higher level of life satisfaction.”

The purpose and methodology of each study was different, but both essentially attempt to answer the question: Can money buy happiness?

“Compared to other life events, money doesn’t do much in terms of life satisfaction and happiness. Somehow it’s instinctive for everyone to want more money. But people overestimate the effect it has on their happiness,” says Dr. Ostling.

Leave a Comment