Considerations for Handling Wealth Windfalls

A sudden, but significant increase in wealth may be viewed as a welcome surprise, but it is not without challenges. It creates new responsibilities and requires well-thought-out choices to be made.

A sudden, but significant increase in wealth (a “windfall”) may be viewed as a welcome surprise, but it is not without challenges. The sudden rise in wealth creates new responsibilities and requires well-thought-out choices to be made. There is even a psychological term for it: “sudden wealth syndrome.”

Windfalls can occur from winning the lottery, selling a business or having an equity stake in a startup company that goes public or is acquired. A more common source is inheritances.

BMO Wealth Management cited research from Accenture estimating that $12 trillion in financial and nonfinancial assets will transfer from the greatest generation to baby boomers. An additional $30 trillion is expected to pass from baby boomers to their heirs over the next 30 to 40 years, according to cited research from Capgemini.

A BMO survey asked 1,000 individuals age 35 or older how their financial priorities would change if they were to receive a sudden windfall. More than half (53%) said that they would share their wealth with family, friends and charity. A nearly equal number said they would pay off debt (51%) or invest their newfound wealth (49%). Just 43% believed their goals would stay the same as before the windfall occurred. Notably, only 18% think they would “splurge and spend freely.”

As far as what recipients of a windfall should do, BMO suggests resisting the urge to act quickly and instead focus on creating a plan based on the increased wealth. A goals-based planning approach is suggested to ensure the money is invested properly to help a person achieve their goals. Any terms associated with an inheritance should be assessed. The tax consequences should also be identified and worked through. Estate plan documents need to be updated; if no will exists, it should be created.

We agree with BMO about moving slowly and examining any restrictions placed on the windfall, the tax impacts and the impact the money has on one’s outlook. Inherited IRAs, for instance, have specific rules regarding withdrawals (see “Inherited IRA Rules for Spouses, Heirs and Trusts” in the July 2017 AAII Journal for more information). We also agree with BMO about the importance of having conversations with family members. In the cases of inheritances, ideally such conversations should occur before the time of death. They can help to prevent disputes among heirs and pass along wishes about how the transferred wealth should be used.

Source: “A Sudden Windfall: A Blessing, Not a Burden,” BMO Wealth Management, December 2018.