Coming into a Large Sum of Money: Making The Right Choices With A Financial Windfall

By Grace S. Yung, CFP

Although most people would love to have the “problem” of deciding what to do with a sudden windfall of funds from an inheritance, the sale of a home or business, a lottery winning, or even gaining access to funds in a trust, the truth is that a sudden influx of cash can really become a negative issue if you don’t make the right choices with the money.

Protecting and Preserving Your Newfound Funds

One of the first orders of business is to ensure that you protect the funds. There are several things to be aware of here, depending on how you have come into the money.

Sometimes the shock of a sudden windfall can set off a whole host of behaviors, including lavish spending and generous “giving” to friends and relatives. This typically happens because it can be difficult to understand the limits of the newfound wealth—especially if the amount is quite large. With that in mind, it is best to allow yourself some time—ideally six to twelve months—to adjust to your new financial circumstances before making any large purchases for yourself or for others.

During this time, you should assemble your financial team, if you have not done so already. This group of professionals should include a financial advisor, as well as a tax advisor and an attorney, who can guide you on how best to proceed.

It is also a good idea to only let those who are closest to you know how much money you’ve come into. Unfortunately, in many instances, you may find that you have long-lost friends calling you from far and wide, wanting to “share in the wealth.” And while you may want to be charitable, it’s often best to hold back.

Even doing things such as co-signing on a loan for someone else can come back to haunt you by negatively affecting your credit if the borrower ends up defaulting. If you do opt to help someone out financially, it may be better to offer them a personal loan, with official paperwork drawn up by your attorney. Even though there’s no guarantee that you’ll be repaid, at least you won’t damage your credit.

Protecting your funds should also include protecting yourself from lawsuits and other situations where you could end up losing the money just as fast—or faster—than you inherited it.

For example, caution should be exercised even in the little things you do. Be sure that you have the proper amount of insurance on your home, your car, and yourself. If someone becomes injured on your property, you could become the target of a lawsuit. Likewise, if you’re in an auto accident, you could also end up getting sued—even if someone else was driving your car.

You may want to consider an umbrella insurance policy to provide additional coverage that goes beyond the limits of your home and auto insurance plans, giving you an extra layer of security if you are at risk of being sued for damages to other people’s property, or for the medical bills of others who are injured in an accident. In any case, it is essential to be sure that you have the right amount of insurance coverage, and that you understand the coverage that you have.

Getting Your Financial House in Order

Although it may be tempting to use the funds that you’ve come into on new purchases like a new car or home, it is important to ensure that your personal financial house is in order first.

For instance, do you currently carry any high-interest credit-card debt or other unpaid loans? If so, you might consider using some of the money to pay these off. By going this route, you will in essence obtain an immediate return of whatever the interest rate is on those loan balances.

Also, if you don’t already have one in place, now would be a good time to set up an emergency fund. Having roughly six months’ worth of living expenses available in a savings or money-market account for a “rainy day” is essential. Depending on how much of a windfall you’ve come into, these funds could get you there.

Investing the Funds for Growth

You could also help yourself move closer to retirement (or improve your future retirement lifestyle) by adding funds to your savings or investment account(s). In doing so, you can essentially increase the amount of income that you’ll have to live on in the future. You may want to consider investing your savings more conservatively, because with more savings overall, you won’t need as high of a return in order to reach your ultimate savings goal. Certain “indexed” investments offer market-related growth opportunities without the risk of market losses.

Protecting Your Assets

Some investment strategies can offer additional built-in protection for your funds. The cash value and death benefit of life insurance and annuities are protected from creditors in the State of Texas (and certain other states), unless there is a statutory exemption such as fraud. This means that if you were to be sued, the money in these accounts would be untouchable.

Depending on your situation, there are other asset-protection strategies that could also help ensure that the funds you have come into are safe. These may include setting up various types of trusts or limited partnerships. An attorney can help in providing you with trust options that are right for you.

Deciding Who Gets What

For those who are married, a financial windfall may require some discussion between you and your spouse in terms of who is going to receive what. For example, Texas law classifies property that is owned by married couples as either “separate property” or “community property.” Community property is the property that either spouse purchases during the marriage, such as cars and homes. Separate property is anything that was owned before the marriage, anything inherited by one spouse, anything that one spouse receives as a gift, and a certain portion of a personal-injury suit recovered by one spouse.

Therefore, if a spouse happens to receive an inheritance, it would be considered solely his or hers during the marriage and during that person’s lifetime—although that person would be free to share it with their spouse if they desired to do so. For instance, the inherited funds could be left in a will or trust, which would entitle the surviving spouse to receive all of the funds.

If you’re receiving a sizeable windfall from the sale of a business, for instance, it can be a little more complicated for same-sex couples. For example, legally married couples can transfer an unlimited amount of assets to a spouse, either while he or she is alive or at death (assuming one’s spouse is a U.S. citizen). Before marriage equality was the law, this was not an option for same-sex couples.

For same-sex couples who are not legally married, federal law permits up to $14,000 annually (for 2015) to be transferred to other persons—i.e. an unmarried partner, etc.—without having to pay a federal gift tax.   

The Bottom Line on What to Do with a Windfall

A financial windfall can be life-changing, especially if it is unexpected. In any case, you’ll want to ensure that the funds you have received have a positive effect on you, your spouse or partner, and your family. In order to do so, you will want to take the time to really plan out what you want and need to do with this money.  As part of your plan, you and your financial advisor should work together to set aside a reasonable portion of the money for enjoyment and fun. Not having a plan is what gets folks in trouble.

Working closely with a financial professional can help you to set goals and create a plan for pursuing them. And because many rules have changed with regard to same-sex marriage, it is a good idea to work with someone who is also focused on the financial issues of the LGBT community.

Personal finance-related questions may be emailed to [email protected].

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.

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