More money, more problems?Submitted by The Clarke Group on November 14th, 2018
More money, more problems?
By: George T. Clarke, CPA/PFS, MSF
So what would you do with an extra $10,000 or $20,000? Ok, you'd pay off some debt, get rid of some college loans, or take an extra vacation. But, what if you suddenly had an extra million or $10 million or more? Coming into a windfall that large gives you some issues to deal with. Whether it is from inheritance, the sale of your business, life insurance or a big gain coming out of your downsizing, you'll need to re-evaluate your financial position and consider how your sudden increase in liquid wealth will affect your financial and, importantly, your life goals.
Evaluate your new financial position
Just how wealthy are you now? You will want to figure that out before you make any major life decisions. Your first impulse may be to go out and buy things, but that may not be in your best interest. Now is the time to watch your spending habits carefully. A sudden increase in wealth can turn even the most restrained person into an impulse buyer. Although you may want to quit your job, gift assets to family members or to charity, or buy a Ferrari, a huge house, or other luxury items, this may not be in your best interest. You'll want your current wealth to last, so you need to consider your future needs, not just your current desires.
Questions like these may help you re-evaluate your short- and long-term plans:
- Do you have debt to pay off?
- Do you need, or would you like, more disposable income?
- Have you finished paying for your children's education?
- Do you need to bolster your retirement savings?
- Are you planning to buy a second home?
- Are your parents in need of additional care now or in the future?
- What do you want your lasting legacy to be now?
- Are you considering giving to loved ones or a favorite charity?
- Are there ways to minimize any upcoming income and estate taxes?
By answering these and other similar questions, you have begun to formulate a financial plan. Remember, there is no rush to make these planning decisions. You can put your funds in an accessible interest-bearing account until you have time to plan and think things through. And, of course, you and your partner, don’t have to go it alone as experienced or knowledgeable professionals are available to help you with your financial and life planning needs and guide you through this new experience.
Impact on insurance
Although you may now be able to pay for any injury or loss through self-insurance, you probably want to re-evaluate your current insurance policies. Nobody I know likes to think about buying insurance but your additional wealth results in your having more at risk in the event of a lawsuit. Thus, you may want to purchase, or increase the limits of your umbrella liability policy that will protect you against actual loss, large judgments, and the cost of legal representation. If you plan to buy expensive items such as jewelry or artwork, you likely need more property/casualty insurance to cover these items in case of loss or theft. Finally, this may be the right time to re-examine your life insurance needs. Additional life insurance may be used to cover your estate tax bill so your beneficiaries receive more of your estate after taxes.
Impact on estate planning
Now that your wealth has dramatically increased, it's also time to re-evaluate your estate plan. Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.
Does your Will need to be revised? You'll want to make sure that it still accurately reflects your wishes. If your newfound wealth is significant, you should meet with your attorney as soon as possible.
It's certainly a good idea to consult a tax attorney or financial planner to look into the amount of federal estate tax and state death taxes that your estate may have to pay upon your death and if necessary, discuss ways to minimize them. Four common ways to do so are to (1) set up a marital trust, (2) set up an irrevocable life insurance trust, (3) set up a charitable trust, or (4) make gifts to individuals and/or to charities.
Carefully consider whether the beneficiaries of your estate are capable of managing a larger inheritance on their own. For instance, if you have minor children or grandchildren, you should consider setting up a trust to protect their interests and control the age at which they receive their funds.
Is gift giving part of your overall plan? You may want to provide gifts of cash or property to loved ones or to your favorite charities. Just like holding back on spending, it's a good idea to wait until you've come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:
- If you forgive a debt owed by a family member, you may owe gift taxes on the transaction
- You can make individual gifts of up to $15,000 (2018 limit) each calendar year without incurring a gift tax liability. That limit is $30,000 if you are married, and you and your spouse can split the gift
- If you pay the school directly, you can give an unlimited amount to pay for someone's education without having to pay gift tax (you can do the same with medical bills)
- If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income
Note: You should consult a tax professional for more information before making sizable gifts – as you may need to reserve a big portion of what you have received to pay taxes.
You should also guard against those who offer get-rich-quick schemes or otherwise want to share in your windfall. If you have hired a financial or legal professional to help you manage your new wealth, it might be a good idea to refer all of the requests that you receive to that person. After all, you don’t want to spend the rest of your life evaluating and responding to those many requests; you want to enjoy yourself.
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There is much to be cognizant of when your wealth suddenly jumps. Stay calm, stay stable and seek the advice of a competent professional advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.