How to handle a sudden financial windfall

Think of it as a problem we all wish we had. But still consider it a potential problem.

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

Sudden wealth can take many forms. A lump sum pension, a sizeable inheritance, legal damages in a lawsuit, and the sale of a business can lead to riches that can reshape the lives of the beneficiaries, for better or for worse. That’s because large amounts of money come from a series of decisions, each with the potential to squander or invest money, increase or decrease happiness, and strengthen or torpedo close relationships.

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

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

In her work at the institution, Ms. Bradley came across a woman who once sold shoes in a department store before inheriting a multimillion-dollar estate. Coping with her new lifestyle was just one of her challenges. Other family members – and heir presumptives – received nominal inheritances, and the heiress struggled to cope with their anger and resentment. “It took her three years to create a new life and feel like she adjusted to the world,” says Ms. Bradley.

Two basic components

Two components are important to coping with a multimillion-dollar windfall, he says. The first is a confidant, usually a trusted friend or family member, who becomes a sounding board to help process all the ideas and possibilities that come with the new money. Mrs. Bradley knows a Catholic nun, a teacher, who hit a jackpot in the lottery and confided in the school’s transit guard, who was good friends with her.

The second key is a team of advisors who can look into the client’s existing finances, such as mortgage and credit card debt, college savings plans, and charitable donations. Long-term, advisors can help navigate investment options, set up an estate plan, devise tax strategies, and ensure adequate insurance coverage.

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

The advisors will work like a board of trustees to track and manage the windfall beneficiary’s finances, Ms. Bradley says. Together they can fend off predators: friends or family members who aggressively scheme for alms. Financial accounting should be transparent to all board members, creating a system of checks and balances that could detect theft or mismanagement.

Recipients should research potential consultants carefully when assembling the team, as 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 scammed lottery winners out 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 extremely high net worth family. At Summit Trail Advisors, a Chicago-based family office, about 20 percent of clients are professional entertainers or athletes, many of whom come from modest backgrounds, says Peter Lee, founding partner.

“My biggest advice is to do nothing for a while,” she says. “Just because you can do many other things doesn’t mean you should. What does ‘do nothing’ mean? way to store capital, typically in conservation-oriented investments,” such as municipal bonds.

Many pro 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 out huge amounts of money to family members, coaches and mentors who have helped them succeed.

Instead, the firm’s consultants come up with clever ways for their clients to help others. Mr. Lee has a client who signed a big contract with the NBA and wanted to offer his five brothers opportunities instead of cash. The company created a strategy so that the player could fund businesses that the brothers could run, thus creating their own income streams.

It helps the client have “an open and transparent dialogue about what is right and what will work. So come up with a plan,” says Mr. Lee. “When a game plan is missing, everyone drinks from the same punch bowl. There is no government.”

A small sting

Boulevard Family Wealth, a family office in Beverly Hills, California, has worked with numerous clients who have received millions of dollars in inheritances or proceeds from the sale of a business. “We try to be open and honest, even if it hurts a little,” says Matt Celenza, managing partner at the firm. If a customer wants to buy an expensive jet, for example, his company will look at various options, including fractional ownership and aircraft leasing instead of an outright purchase. The same goes for real estate purchases and other major outlays.

The goal, Celenza says, is to protect and augment resources that will benefit both current and future generations. It’s not always easy. Her company built a portfolio for a client designed to generate a steady stream of revenue. But the client loved to exploit his holdings to make private investments.

“It was breaching his liquidity and would soon affect his ability to make withdrawals without touching his capital,” Celenza says. The firm’s consultants gave the client long-term projections based on his current spending, helping him realize that the risks were impractical. “We’re very explicit about right and wrong.”

Money and happiness

Dealing with a sudden windfall, however, isn’t just about making sure there’s enough cash. It’s also about making sure that the money is used to make the recipient happy. Otherwise, it’s just money for the sake of having money.

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

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

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

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

“Compared to other life events, money does little in the way of life satisfaction and happiness,” says Dr. Ostling. “Somehow it’s instinctive that everyone wants to get more money. But people overestimate its effect on their happiness.”

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