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Tips for Managing a Sudden Inheritance or Windfall

A significant number of people who receive a large inheritance have little to show for it within several years. Unfortunately, most people are not prepared for the tremendous amount of emotional stress, the changing dynamics of personal relationships and the heightened complexities of financial management that accompany being thrust into wealth.

The Emotional Toll of Suddenly Receiving Wealth

Sudden wealth can take an emotional toll. The newly wealthy often are overwhelmed with unsolicited advice and a multitude of potential investment opportunities and financial planning tips from friends and family. This can result in distrust and fear of the true motives of others, even for those within one’s inner circle.

When receiving an inheritance, the loss of a loved one is already a potentially devastating event, but that, coupled with possible feelings of paranoia, unworthiness and insecurity for not having earned the money, is more than many people can handle. Young adults named as beneficiary of a large trust may feel resentment toward their benefactor because they were kept in the dark about the money. If they’d known earlier, they may have made different life or career choices.

Even many business owners who sell their business are not immune to the emotional perils of a sudden influx of wealth, despite what might be years of financial planning and preparation. With a pile of cash in place of what was the business they built from the ground up and managed seven days a week, there’s often a sudden loss of identity and purpose in the months, if not years, after the business sale. (For related reading, see: The Importance of Planning When Selling a Business.)

The following are some financial planning best practices that help people deal with this sort of challenging financial change. 

1. Take a Time-Out

Resist the temptation to jump on immediate investment opportunities, quit your job or buy that expensive sailboat for at least six to nine months. Those purchases and investments would be emotional financial decisions, and financial management is always at its worst when emotions drive decisions. What you really need is time to gain some perspective and sort out the emotional stresses of a big inheritance or windfall. Take a vacation with your family to relax and clear your head.

2. Investigate Potential Lifestyle Changes 

As time passes, it’s best to make a list of purchases with dollar values attached and to start investigating the viability of larger decisions. For example, this is the time to rent that sports car you’ve always dreamed of to see if it makes sense to buy it down the road. If you’re thinking of quitting your job and working in the nonprofit sector, it’s best to start by volunteering first.

3. Build Your Team

Finding the right mix of tax, legal, estate, risk management and financial advisors can lay the foundation for effectively managing your newfound wealth. The financial and legal implications of an inheritance or other windfall are complex, and you need to be sure you have a team of objective and skilled financial advisors. Investigate each advisor's background, expertise and approach to ensure not only that they have the right skills but can also provide you with the service you deserve. Preview the client experience by checking references and by having trial meetings with prospective advisors.

As you build your team, it’s important to also learn the basics of investing and financial management. This will help you have more substantive conversations with your advisors and help you successfully manage your wealth.

4. Plan for the Future

With a team in place, it’s time to translate the windfall or inheritance into sustained lifelong wealth. When financial planning for your inheritance, you’ll think through the answers with your advisors to important wealth management questions. Will you co-mingle your inheritance with your spouse’s assets? What will your asset allocation look like? How much will you afford to spend on a monthly basis? How do you ensure that your newfound wealth won’t negatively impact your children, family and friends? Answers to these key wealth management questions will put your inheritance planning on the path to success.

Overall, with proper financial planning for your inheritance and a thorough understanding of the potential pitfalls, receiving an inheritance or windfall can provide you and your family with sustained financial security and a bright future.

(For more from this author, see: How You Withdraw Your Retirement Assets Matters.)