Thursday July 2nd, 2009
Handling a Financial Windfall Part 1
Everyone fantasizes about instant riches – the kind associated with hitting the lottery, finding out you have a distant aunt who named you as her sole beneficiary, coming up with the next great American invention, winning a reality game show, or even finding a duffel bag full of cash along a deserted road. While these instant riches scenarios aren’t common, people do sometimes receive a sudden windfall of money, due to the sale of a business, rolling over a 401(k) plan, or inheriting it from Mom and Dad.
The chance to win with every “search”- why not enter a contest for 2 million ( talk about a windfall)!
While many people think life would be easy if only they were rich, the fact is that history is filled with stories of people who received a windfall of cash, only to end up in worse financial shape than they were initially.
Consider the famous story of Baby Doe Tabor, who with her husband, became one of the richest couples in the nation in 1890, only to die without a penny in 1935. Or, more recently, consider the New Jersey resident, Evelyn Adams, who won her state lottery, not once, but twice (1985 and 1986) to the tune of $5.4 million dollars. Today the money is gone, according to her attorneys.
Does this mean you should refuse any windfalls you receive? Of course not. The key is to follow certain steps that will help protect yourself from losing all of your sudden money.
Step One: Consider all of the tax situations before you do anything with your money: Very often, when it comes to sudden money, taxes are the last thing people consider. But they should be the first.
Realize that if you win the lottery or sell your business, your income taxes may be much higher than you usually pay, and could be as much as 40% more, depending on the amount of the windfall.
Before you spend the sudden money, meet with your CPA and see what you tax implications are, so you can plan for them.
Then meet with your tax attorney to find out if you can legally defer some of the money over several years, perhaps with an annuity payout over time. If you received the money due to a real estate transaction, you may want to investigate the possibility of doing a 1031 exchange.
