Steps for Managing a Financial Windfall

By Sally Hanley-Whitworth, CFP® | Executive Vice President, Wealth Services | 08.10.2018

Events that take place once in a lifetime present unique challenges for preparation. Many of us may never receive a financial windfall, but some of us will find ourselves in this situation once or twice in our lives (or perhaps more if you live a truly charmed existence).

Managing a life-changing one-off payout can be made more challenging than infrequency alone would suggest: The timing may also be arbitrary and unexpected. The suddenness that can define a windfall makes it a prime candidate for a bit of advanced consideration, and its rarity means you probably won’t find insightful lessons in your own experience to help with planning. With this in mind, we set out to detail the characteristics of different types of windfalls and provide insight on how to consider managing them.

Liquidity Events | This group encompasses proceeds from one-time transactions, like the sale of a business or real estate. These events can have the benefit of beforehand attention and planning, which will provide time to resolve the life-transition events that typically follow. A business sale often means your proceeds will need to be relied upon for income, and a property transaction can coincide with total uprooting and all the work it entails.

Sellers need to have a clear understanding of the tax obligations that will result from a liquidity event. Large one-off payouts typically trigger large one-off tax bills, so it’s important to think about proceeds in after-tax terms. Clarity on taxes can be a major factor in making good business decisions many years before a sale, so it’s important to think strategically far in advance.

Strategic planning can also enable you to develop an exit strategy—identifying and cultivating buyers­—on your preferred timeframe.

Out of the Blue | This group includes inheritances, settlements, and even winning the lottery. It’s possible that the eventuality of receiving an inheritance or settlement can be known but anticipating the timing far in advance with any degree of precision is pretty much impossible.

A settlement is compensation intended to make someone whole; the proceeds can help offset the complications from an injury or not working for a long stretch of time.

An inheritance can follow a sobering, perspective-shifting milestone and come with a sense of responsibility­—that is, you may feel a loyalty to do right, whether in your own life or the lives of others, by your newfound wealth. It may also prompt you to think about your own legacy and what type of estate you want to preserve for the next generation.

Once you have a fully formed idea about what you intend to accomplish with an inheritance, it can be smart to seek professional counsel on how to achieve it, especially if your goals include passing large sums to younger relatives.

The common thread connecting each type of windfall is that they enable a total reevaluation of your personal finances. Managing a windfall will require a lot of questions and research. But then you have a genuine opportunity to make life changes that increase your well being, and the well being of those you care about.

If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.

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