Handling a Windfall: Tips for Financial Success

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By: The American Academy of Estate Planning Attorneys
We’ve all dreamed of suddenly becoming wealthy by winning a lottery jackpot, receiving an unexpected inheritance, or some other happy accident. However, few of us consider what steps we would take to manage a windfall.

Without careful management, your dream come true could quickly turn into your worst nightmare. What steps should you take to ensure that you stay out of trouble – and that your windfall is there to enhance your lifestyle for many years to come?

Step One: Seek Solid Tax Advice

You don’t have to pay income tax on every type of windfall. For instance, inherited money is not subject to income tax (although there will likely be other tax issues to be aware of). Lottery winnings or a casino jackpot, on the other hand, are taxable income and must be reported to the IRS. It’s crucial to know the rules. Running afoul of the IRS can spell financial and personal disaster.

That is why, when you come into money, whether expected or a surprise, your first order of business is to find out whether you owe a portion to the IRS. Estate planning attorneys are educated in the details of these kinds of tax issues, can tell you whether you owe income tax, and, if so, how much.

Step Two: Put Your Money to Work

After you’ve figured out the details of your tax situation, you may be tempted to go on a shopping spree, buying everything you’ve always wanted. Or – if you’re a little more altruistic – to start sharing your newfound fortune.

Before you take either of these steps, make an appointment with a financial planner. He or she can assess your age, your overall financial situation, and your financial goals and help you decide how to best invest your money to maximize your returns. Putting your money to work in this way will help your wealth grow, giving you and your family long-term financial security.

Ultimately, this will result in more money for you to spend, give away, or use as you see fit.

Step Three: Create or Update Your Estate Plan

Wealth does not mean much if you don’t have a plan for taking care of your family (not to mention your finances) in the event of your death or disability.

After you establish a financial plan, you should meet with an estate planning attorney. At the very least, you’ll need a basic estate plan including documents such as:

  • A Financial Durable Power of Attorney allowing you to appoint someone you trust to manage your finances on your behalf in case you become incapacitated.
  • A Power of Attorney for Healthcare allowing you to appoint someone you trust to make medical decisions in case you are sick or injured to the point that you cannot make such decisions for yourself.
  • A Revocable Living Trust to provide for the management of your property in the event of your incapacity during life and to allow for the smooth transfer of your assets to your designated beneficiaries, without the need for probate, after your death.
  • A Will to appoint a guardian for your minor children.

If you already have an estate plan, it is just as important to meet with your estate planning attorney to ensure it is current and updated to take into account your new financial wealth.

If you have received a large windfall, your estate planning attorney may also recommend that your estate plan include advanced planning and asset protection options. This includes taking steps to minimize gift and estate taxes and to protect your assets from creditors during your lifetime. You may also want to use strategies to shield your beneficiaries’ inheritances from creditors, predators, and mismanagement after your death.

Part of managing your financial good fortune is seeking expert advice to help you grow and protect your windfall, ensuring that it will be there when you and your loved ones need it. An estate planning attorney can give you the advice that will put you on the road to a secure future.

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