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Suddenly wealthy


With the fragile economy, this might seem like an unlikely time to explore the issues that attend “sudden wealth.”  

But even in difficult economic times, people can come into money suddenly. The most routine sources of sudden wealth are inheritances and lump sum distributions from employer retirement plans.  

Other events include:

• divorce settlement

• insurance settlement

• sale of a business

• exercise of employer stock options


As much as we all might wish for a windfall, there is a well-documented record showing evaporation of sudden wealth. Inexperience with tax and investment issues is one part of the problem, of course; but there’s also an emotional component that needs to be addressed. Especially if the wealth is an inheritance, there may be issues of grief and loss intermingled with the possibility of financial security.

The recipient of the windfall may be put into a vulnerable posture. The sudden change of financial circumstances can lead to unfortunate decisions. Behavioral worries to watch for include:

• “ticker shock,” a cycling of hope and anxiety over the market’s volatility

• guilt over the good fortune

• paranoid thinking or concern about being exploited or hurt by others

These are signs a team of professional advisors could be helpful.

The first steps one needs to take upon receiving a windfall involve setting realistic long-term goals and developing strategies. Matching resources to those needs comes next, followed by a strategy for investing and managing one’s new assets. Until these steps have been taken, major temptations such as the following should be avoided:

• Early retirement. You need enough financial resources to cover the unexpected as well as what you can foresee.

• Relocation.  Before permanently moving to a new city or state, it may be wise to live     there temporarily, to become confident that it will be all that is hoped for.

• Major gifts.  Family members, friends, even charities may approach and make requests for help.  Be certain you really can afford to part with the capital.  Don’t overlook the fact that major gifts to friends and family may trigger gift tax obligations as well.

If your estate plan includes a substantial legacy for a younger family member who lacks full financial maturity, consider using a trust for the bequest. A gift or bequest in trust can provide for a lifetime of financial security.  



Rob Dancu, CTFA, VP, is trust officer at First Tennessee Bank. If you have any questions, please feel free to call or e-mail Dancu at 865-971-2165 or rmdancu@ftb.com/

 

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