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How to handle a sudden financial windfall

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Consider it a problem we’d all like to have. But consider it a potential problem nonetheless.

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

Sudden wealth can take many forms. A lump-sum pension payout, a substantial inheritance, legal damages in a lawsuit and the sale of a business can all result in riches that can reshape the recipients’ lives—for better or worse. That’s because vast amounts of cash come with an array of decisions, each with the potential to squander or invest the money, increase or decrease happiness, and bolster or torpedo close relationships.

“I find that the beginning stages are very stressful. It is hard for your mind and body to absorb the change,” says Susan K. Bradley, a Palm Beach, Fla.-based financial planner and founder of the Sudden Wealth Institute, which trains financial advisers to help clients work through all aspects of a windfall.

Working through all the issues that come with sudden wealth takes time—typically three to five years—before windfall recipients feel more grounded, Ms. Bradley has found.

In her work at the institute, Ms. Bradley came across one woman who once sold shoes at a department store before inheriting a multimillion-dollar estate. Dealing with her new lifestyle was just one challenge. Other family members—and presumed heirs—received nominal inheritances, 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

Two components are important to coping with a multimillion-dollar windfall, she says. The first is a confidant—typically a trusted friend or family member—who becomes a sounding board to help work through all the ideas and possibilities that come with newfound money. Ms. Bradley knows of a Catholic nun, a teacher, who won a lottery jackpot and confided in the school crossing guard, who was a good friend.

The second key is a team of advisers who can review the client’s existing finances, such as mortgage and credit-card debt, college savings plans and charitable giving. Longer term, the advisers can help navigate investment options, set up an estate plan, strategize on taxes 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 sudden wealth, since, she says, it “can mess with your head.”

The advisers would collaborate like a board of directors to track and manage the windfall recipient’s finances, Ms. Bradley says. Together they can fend off predators—friends or family members who aggressively scheme for handouts. Financial accounting should be transparent to all board members, creating a system of checks and balances that could spot theft or mismanagement.

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

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

“My biggest piece of advice is to do nothing for a little bit,” he says. “Just because you can do a lot of additional things doesn’t mean you should. What does ‘doing nothing’ mean? Finding a safe, intelligent way to store the capital, typically in preservation-oriented investments,” such as municipal bonds.

Many pro athletes go “from living in a dorm room with five roommates to signing a $50 million contract,” he says. Their impulse is to immediately buy houses or hand out massive amounts of cash to family members, coaches and mentors who helped them succeed.

Instead, advisers in the firm figure out smart ways for their clients to help others. Mr. Lee has one client who signed a huge contract in the NBA and wanted to give his five brothers opportunities instead of cold, hard cash. The firm created a strategy so the player could finance businesses that the brothers could run, thus creating their own income streams.

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

A little sting

Boulevard Family Wealth, a family office in Beverly Hills, Calif., has worked with a number of clients who received millions of dollars in inheritances or proceeds from the sale of a business. “We try to be open and honest, even if it stings a little,” says Matt Celenza, managing partner of the firm. If a client wants to buy an…

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2022-11-24 13:20:04

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