Receive a Windfall? What to Do?


We often wonder what we would do with lottery winnings. We also realize that the chance of winning the lottery would be a miracle at best. However, there are real life situations where you are more likely to receive a windfall in terms of dollars such as an inheritance, a divorce settlement, a severance payout or a pension payout. The windfall could come from the proceeds of a life insurance payout or a legal settlement. All of a sudden your faced with the task of managing this new found wealth. What do you do?

First and foremost you must proceed cautiously before making any decision as to what to do with this new found wealth.  Many of these financial windfalls are the result of a personal tragedy – an inheritance or insurance payout due to the loss of a loved one – a legal settlement due to a serious injury. Some are the result of significant change in your personal life such as a divorce settlement or severance payout.

The wisest decision may be to place these monies in a money market fund or a short term bank CD.  Even though the current interest rates are not attractive, by placing these monies in a short term investment it will afford you the time to sort out your financial priorities and decide what your next course of action will be. You don’t want to make any immediate knee jerk investments that you are invariably going to regret.

Payouts from a pension plan can be left in place for a reasonable period of time. An inherited IRA, for example, gives the beneficiary until December 31 of the year following the death of the owner to decide between cashing in immediately, or within a five-year period, or over his or her life expectancy. Again, give yourself some time to catch your breath before making a decision.

There are going to be tax issues that have to be addressed with this new wealth.  How are these monies going to be taxed? Before making any permanent investments you should discuss the tax implications with your tax advisor.
You should also decide on who is going to help you with the management of this new found wealth. Here you have to do some homework.  For example, do the professionals charge a fee based on the amount of assets under management or rely on commissions from the products that they sell? Be sure to ask for and check references before entering into any agreement.

Lastly, one of your goals should be a review and update of your estate plan, so as to include your increased assets. You also will want to consider a revocable living trust and/or a durable power of attorney to provide for the management of your assets in the event of incapacity.

Remember it’s time, not timing that matters most in these situations.

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About Ira Brower

I have been in the financial service industry for more than 40 years primarily providing wealth management solutions for retired and soon-to-be retired individuals. I am President and Founder of Garden State Trust Company. Our clients depend on us for elder care solutions, such as; trust and estate planning, investment services, and lifestyle management. We also administer to “special needs” or “supplemental needs” trusts.

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