How to handle a sudden financial windfall

Consider it a problem we all wish we had. However, consider this a potential problem.

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

Sudden wealth can take many forms. A lump sum payment, a substantial inheritance, legal damages in a lawsuit, and the sale of a business can lead to wealth that can change the lives of the recipients—for better or for worse. That’s because huge sums of money come with a host of decisions, each of which has the potential to waste or invest money, increase or decrease happiness, and strengthen or torpedo close relationships.

“I found the initial stages very stressful. It’s hard for your mind and body to absorb change,” says Susan K. Bradley, a Palm Beach, Fla.-based financial planner and founder of the Sudden Wealth Institute, which trains financial advisors to help clients manage all aspects of the unexpected.

Ms. Bradley found that all the problems that come with sudden wealth take time to work out — usually three to five years — before windfall recipients feel more grounded.

While working at the institute, Ms. Bradley came across a woman who had once sold shoes in a department store before inheriting a multimillion-dollar fortune. Coping with her new lifestyle was just one challenge. Other family members—and heirs-presumptive—received a nominal inheritance, and the heiress struggled to cope with their anger and resentment. “It took three years for her to create a new life and feel like she fit into the world,” Ms Bradley says.

Two key components

According to her, two components are important to manage a multi-million dollar windfall. The first is a confidant—usually a trusted friend or family member—who becomes a springboard to help work through all the ideas and possibilities that come with the newfound money. Mrs. Bradley knows about a Catholic nun, a teacher who won the jackpot in the lottery and confided in a school crossing guard who was a good friend of hers.

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

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

The advisers would work together as a board of trustees to monitor and manage the windfall recipient’s finances, Ms Bradley says. Together, they can fend off predators—friends or family members who aggressively try to get a handout. Financial accounting should be transparent to all board members and create a system of checks and balances that could detect theft or mismanagement.

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

This advisory team is structured similarly to a family office, which is a private wealth management firm that serves multiple generations of extremely high net worth families. At Summit Trail Advisors, a family office based in Chicago, roughly 20% of clients are entertainers or professional athletes, many of whom come from modest backgrounds, says Peter Lee, a founding partner.

“My biggest advice is to do nothing for a while,” he says. “Just because you can do a lot of other things doesn’t mean you should. What does ‘do nothing’ mean? Find a safe, smart way to store capital, usually in preservation-oriented investments like municipal bonds.

Many professional athletes go “from living in a dorm with five roommates to signing a $50 million contract,” he says. Their impulse is to immediately buy houses or give away huge sums of money to family members, coaches and mentors who have helped them succeed. .

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Instead, advisors at the firm come up with smart 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 cold, hard cash. The firm created a strategy for the player to fund businesses that the brothers could run, thus creating their own sources of income.

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

A bit of a sting

Boulevard Family Wealth, a family office in Beverly Hills, California, has worked with a number of clients who have received millions of dollars through inheritance or business sale proceeds. “We try to be open and honest, even if it hurts a little bit,” says Matt Celenza, the firm’s managing partner. If a client wants to buy an expensive airplane, for example, his firm will explore various options, including partial ownership. and leasing aircraft instead of buying outright. The same goes for real estate purchases and other big expenses.

The goal, Mr. Celenza says, is to protect and enhance assets that will benefit 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. However, the client liked to use his shares so that he could invest private individuals on the side.

“It disrupted his liquidity and would soon affect his ability to collect without affecting his principal,” Mr Celenza says. The firm’s consultants provided the client with long-term forecasts based on his current spending, which helped him realize that “We’re very vocal about what’s right and what’s wrong.”

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Money and happiness

But dealing with sudden unexpected events isn’t just about having enough cash. It is also about using the money to make the recipient happy. Otherwise, it’s just money for the sake of having money.

According to a 2019 study, how people choose to spend unexpected expenses has the biggest impact on their overall happiness in the long run. The authors, Israeli academics in behavioral economics, developed a model showing short-term and long-term effects on the happiness of recipients that fluctuated over time. In general, according to the authors, winners who quit their jobs and pursued a lifestyle of passive leisure were less happy than winners who devoted their wealth to social activities and other activities that brought them pleasure, such as travel, hobbies and volunteering.

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

The research found that the long-term effect of winning the lottery on happiness was too small to detect, says Dr. Östling. But there was a slight improvement in overall life satisfaction. “It’s not particularly surprising because wealthier people tend to have higher life satisfaction,” he says.

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

“Compared to other life events, money does little for life satisfaction and happiness,” says Dr. Östling. “It’s kind of instinctive that everyone wants to get more money. But people overestimate its impact on their happiness.”

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