By Sheryl Rowling
SAN DIEGO — Windfall!
Q: I’ve just received millions from an inheritance. My head is spinning! What do I need to think about?
A: Oy, such a problem! If you’re single, have I got a girl for you… Seriously, though, dealing with sudden wealth, although a “good” problem, can be quite stressful. Whether your windfall is from inheritance, the lottery, or by some other means, sudden riches – especially sudden liquid wealth – raise several wealth planning issues. Your first step is to decide what you’d like to accomplish financially. Without goals in mind, you won’t have a direction.
Q: What kind of professional advice should I seek?
A: You’ll want input from a variety of sources – attorneys, CPAs, money managers, insurance professionals and others – who can each be an important part of your financial management team. While only you can decide how to handle your wealth, each professional can provide a different perspective and give guidance as to how your decisions will affect you and your family. It’s important to assemble a qualified, trustworthy team. Your advisors should be able to challenge your thinking and help you figure out what’s truly important to you. Just don’t be a shnook – be wary of unsolicited offers – many of these “friendly” advisors are chasing commissions and may not be qualified to provide the level of service that you need.
Q: What issues will I need to address?
A: Issues that will play an important role in your financial future include income taxes, estate taxes, investment choices, risk management, asset protection and nonfinancial issues.
Q: How should I approach my financial plan?
A: First, you should determine whether you have enough assets to retire comfortably, considering how long you plan to work before retiring and your retirement spending goals. Then, you’ll be able to decide how to invest your new wealth, taking into account what kinds of returns will be necessary to ensure your financial future. For example, if you only need a 3% return to live comfortably, you won’t have to invest in a risky portfolio. Finally, evaluate all of the estate planning, insurance and asset protection options, considering how each element interacts with the others. For example, a lottery winner may decide to receive lottery winnings as a lump-sum amount or as an annuity over a period of years. Having the discipline to make careful decisions can benefit you and, ultimately, your heirs.
Q: What should I consider regarding estate planning?
A: Estate planning allows you to control what passes to your heirs after your death. You can use various strategies, such as trusts, family limited partnerships and gifts, to help you reach your goals. Determining what’s right for you depends on your particular objectives and desires. Further, your objectives may change over time, so your planning should be flexible enough to accommodate whatever changes may become necessary.
At a minimum, you will probably need to revise your wills or add a living trust for you and your spouse. You also might want to place life insurance policies into an irrevocable life insurance trust.
Q: How will income taxes impact me?
A: For the most part, you will not pay income taxes on inherited money. However, an inherited IRA or annuity is subject to income taxes. If you’ve won theCalifornialottery, you’ll pay Federal taxes on your winnings, but notCaliforniatax. No matter what source your windfall, on an ongoing basis, you’ll need to plan for income taxes on the earnings from your new nest egg. Be sure to work with your CPA to work out tax strategies.
Q: Should I consider charitable contributions?
A: Of course, if you’re a mensch! Making charitable contributions during your lifetime can have a double benefit: you can save income taxes as well as estate taxes. There are many ways to structure charitable contributions, including cash, property, donor advised funds, and trusts. Your tax benefit depends on the structure, amount and recipient of the donation. If you want information on charitable giving options, be sure to talk to your financial advisor or contact the Jewish Community Foundation at 858-279-2740 (www.jcfsandiego.org).
Q: Do you have any other words of wisdom?
A: Yes. Give yourself time. You might want to lock up your money in multiple certificates of deposit or short-term government bonds to preclude making any impulsive decisions. Carefully consider your personal goals before loaning or giving away sums of money to needy family members or friends. And, finally, focus on what’s important to you. Your friendships might change inadvertently. Just be true to yourself and you’ll get used to your newfound wealth in time.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted at sheryl.rowling@sdjewishworld.com