Windfall Imaginings

Have you ever thought about what you would do if a windfall dropped in your lap? It’s not that unusual. After all:

• The U.S. is experiencing the greatest wealth transfer in history. Nearly $68 trillion, mostly held by baby boomers, will be transferred to heirs in the next 25 years.¹
• Since 2018, individual lottery windfalls in the U.S. have ranged between $688 million and $1.59 billion.²
• Lots of entrepreneurs build up businesses from scratch and then sell them for a substantial profit.³

No matter your situation, if you are blessed with a windfall, we encourage you to work with professional advisors. You may need several, such as a financial advisor, tax professional and estate planning attorney. We can help you get started with this process by tapping these types of professionals within our network. If there is a windfall in your future, it’s never too early to start preparing for it. Contact us for more information.

In the case of a cash windfall, request a direct transfer into your account at an institution that you trust. This will simplify any issues related to disruptions in mail, delivery services and the potential for excess paperwork. Also, make sure you understand the wire transfer instructions in order to correctly input the necessary information for the proceeds to be wired directly to your account.

In the case of the sale of a private business or business interest, it’s important to consult with an experienced tax advisor, as you may be able to take advantage of valuation discounts for gift tax purposes — should you want to share some of those proceeds with children or other beneficiaries. Valuation discounts will likely not be available if you make cash gifts after receiving the windfall. Another option is to invest the windfall and then use it as collateral for other investments. That way, the asset continues growing and you don’t have to cash out and pay taxes on gains in order to use the money for other endeavors.⁴

The same holds true if you’d like to defer some of your windfall to a charity or other trusts that you or your family members will manage. Before initiating the asset transfer, work with an estate-planning attorney to establish trusts, limited partnerships (LLCs) or other planning vehicles to retain, manage and transfer your new wealth. For a charity, bear in mind that you can create your own private foundation or direct a donor-advised fund to manage the assets and direct them to specific charities. This also can help manage tax liabilities and maximize those financial assets over time.

If you win big with the lottery, you’ll need to decide whether you want to receive the assets as a lump sum or as an annuity. There are plenty of tax and lifespan decisions to consider with this one, so it’s a good idea to consult with a financial professional before you take distribution of the money.⁵

Recognize that it can take time to set up certain accounts, trusts and various strategies for receiving and managing a windfall. Don’t be in too big of a rush to make decisions and take the chance on not setting up your newfound wealth properly to meet your goals. Also, don’t be in a big rush to reinvest it quickly, assuming you cannot simply transfer ownership and retain the current investment strategy. It’s important to understand if and how your life may change with this new influx of money. For example:⁶

• Can you and do you want to quit working altogether? You’ll have to manage your assets to last the rest of your life.

• Do you want to invest in a new endeavor, such as your own startup? You’ll need to make sure you have enough in reserves to live on until you receive income from the venture, as well as have backup reserves in case it fails.

• Do you want to share your new wealth with family, friends or charitable organizations? Get tax advice first because you may be able to offset your own tax liability if your beneficiaries receive part of the windfall.

• If you’re planning to invest your windfall, work with a financial professional to coordinate how your “new” money aligns with the asset allocation of your “old” money. For example, you may want to keep it separate with a higher or lower risk strategy. Or, you may want to incorporate it into your current asset allocation strategy.

• If you are older, you may want to disseminate much of this windfall to keep it out of your estate, for tax purposes. Investigate gifting and giving options.

The key is to understand what you want your money to do for you, just the same as when you determine your retirement goals. If it’s enough money to substantially change your life, then you should take some time to figure out what you want your new life to look like. Either way, the bigger the windfall, the more time and professionals you’ll need to consult to determine how to manage your assets going forward.

Content prepared by Kara Stefan Communications.

¹ Kate Dore. CNBC. July 12, 2021. “Are you prepared for tax impact of the $68 trillion great wealth transfer? Here are some options to reduce the bite.” https://www.cnbc.com/2021/07/12/the-great-wealth-transfer-has-a-big-tax-impact-how-to-reduce-the-bite.html. Accessed March 18, 2022.

² Jennifer Sangalang. Florida Today. Oct. 5, 2021. “Who won the Top 10 largest lottery jackpot prizes ever? List of Powerball, Mega Millions winners.” https://www.floridatoday.com/story/news/2021/10/05/lottery-jackpots-all-time-list-powerball-mega-millions-winners/6001715001/. Accessed March 2, 2022.

³ Issie Lapowsky. Inc. Feb. 6, 2020. “$243 Million: Crunchbase’s Very Rosy Picture of the Average Startup Exit.” https://www.inc.com/issie-lapowsky/average-successful-startup-exit.html. Accessed March 2, 2022.

⁴ Chuck Marr, Samantha Jacoby and Kathleen Bryant. Center on Budget and Policy Priorities. Nov. 13, 2019. “Substantial Income of Wealthy Households Escapes Annual Taxation Or Enjoys Special Tax Breaks.” https://www.cbpp.org/research/federal-tax/substantial-income-of-wealthy-households-escapes-annual-taxation-or-enjoys. Accessed March 2, 2022.

⁵ Investopedia. Jan. 13, 2022. “The Lottery: Is It Ever Worth Playing?” https://www.investopedia.com/managing-wealth/worth-playing-lottery/. Accessed March 2, 2022.

⁶ JP Morgan. 2021. “What will you do if you suddenly become rich?” https://www.jpmorgan.com/wealth-management/wealth-partners/insights/What-will-you-do-if-you-suddenly-become-rich. Accessed March 2, 2022.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. We cannot provide tax or legal advice and you should consult with a qualified professional for guidance before making any purchasing decisions.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.

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