What Issues Should I Consider If I Experience A Sudden Wealth Event?

Sale of a business or real estate, an inheritance, lottery winnings, or a legal settlement.

An increase in wealth, especially when unexpected, large, and/or sudden, requires thoughtful planning. This is a critical time for us to provide guidance and value to our clients and offers a unique opportunity to make a significant positive impact.

• The nature, timing, and terms of the wealth event

• Cash flow impact

• Liquidity considerations

• Tax planning matters

• Long-term planning opportunities

Transcript:

Hi, Todd Populiot, Gateway Financial, visit us at mygatewaymoney.com. I wanted to give you this exciting video today since we just had a billion-dollar winner, not million, a billion-dollar lottery winner. I thought I would do a wonderful checklist that talks about what issues I should consider with a sudden wealth event. And, in lieu of the lottery winnings, we have to consider other sudden wealth events and those could be leading to a tremendous financial windfall that could be a sale of a business, real estate, an inheritance, obviously the lottery winnings that are there, or a large legal settlement. And, this increase in wealth, which is usually unexpected, large, or sudden requires thoughtful planning. It's a critical time for us to provide guidance and value to our clients that have this unique opportunity and it may make a significant positive impact on their lives. So, in this checklist, I'm going to cover a few main areas for you. We’re going to look at the nature, timing, and terms of the wealth event. We’re going to look at the cash flow impact, liquidity considerations, tax planning matters, and long-term planning opportunities. So, here we are, we're going to share those screens with you again so we can look at our checklist and look at cash flow. I know there's a tremendous wealth event, but how it happens can in fact impact that cash flow. So, do you need to set aside cash or make a plan to fund any income tax liability that may result from this? So, make sure you have a CPA like we have access to for our clients to talk about what is the plan on the taxation of this vehicle that you’ve just received, be it an inheritance, be it a sale, legal settlement, or what have you. And, do you plan to make any large expenditures in the near term? Obviously here we are in 2022, and we’ve had a volatile market. We want to make sure we're holding adequate cash to fund the upcoming expense. Do you need to revisit your routine spending habits? Sometimes they can get a little out-of-line when we see people have extra funds or extra wealth. And, are you able to save more? Obviously, we always have extra checklists for you to check out. What accounts should I consider if I want to save more? Obviously, this really goes into the tax planning as well as the cash flows here. And, will it affect any regular expenses that are tied to income? Tax, financial aid, student loans, and Medicare costs. Don't forget IRMA. Those automatic adjustments happen with income increases. Asset and debt issues. Did you receive illiquid assets? Did you get notes, real estate, or interest in a private company? Consider how to manage those assets and potential strategies for divestment and diversification. Again, you don't want all your eggs in one basket. Did you receive the cash? Consider how much you're willing to invest for long-term growth. The sound investment strategy. We really want to make sure that that is all laid out. “What Issues Should I Consider When Reviewing my Investments?” checklist. Another wonderful checklist for you. Does the wealth event have a foreign source? Don't forget about the reporting requirements. Again, working with a qualified CPA or tax preparer. And, are there any conditions that must be met to keep up the new financial interests? So, make sure we understand those conditions that are part of the wealth or the sudden event. Asset issues continued. Do you have any debts? Consider any credit card debt, pay off the balance, prioritize cards with higher interest. We want to get out of debt as soon as we can, I don't like seeing debt. Student loans, again, understand your repayment options and the effects of those balances in a lump sum. Again, the “What Issues Should I Consider When Paying Off my Student Loans?” checklist. Do you have a mortgage? My last video, believe it or not, was about mortgage payoff. Compare the merits of paying off in a lump sum, making it an increased monthly payment, or maintaining the status quo. Again, that's not always a black-and-white answer, but that video was wonderful about paying off mortgages. Did you receive a gift or inheritance of non-cash assets? Understand the cost basis of the assets in your hands and the future tax consequences. I'll tell you it's wonderful when somebody comes in and they've received a large trust and it's wonderful news for them, but how do they move out of those assets without paying it all in taxes in one year? Having a really good plan for that matters, and I tell you, I appreciate it when people listen and get educated on how to handle those assets and the future tax consequences of those assets. Have you made loans to family members? Consider the gift and income tax consequences associated with any forgiveness of payments or loan balance. A really good way to look at that, not obviously coming out smelling like a rose to a fellow family member could be wonderful. Insurance. Have your life insurance needs changed? If you put policies in place to replace your income or eliminate debt from your untimely death, review how these newly acquired assets might reduce those needs. Also, if your increase in net worth exposes you to federal or estate taxation, look at utilizing life insurance to fund your liability. So, it may be one or the other. I don't need life insurance anymore, or I do need life insurance now, or I may need to increase my life insurance because of the way that things go. That's what's great about financial planning is allowing you to pivot in case we do have these sudden wealth events. Does your wealth increase expose you to lawsuits? I would say the answer's probably yes. Consider an additional umbrella insurance protection. A very low-cost way to protect you from any liabilities. Are you able to control the timing and terms of the wealth event? So, for instance, that billion-dollar lottery winner could have taken a cash option or a yearly payment. Obviously, the cash option is you know, a bird in the hand is worth two in the bush, but how much are they going to pay in taxes? Obviously, that was such a large, irregular lottery winning. We want to know the payout options. So, those transactions can be strategically stretched across tax years. Tax liability is not a one-year solo event. You want to look at not only paying the lowest taxes for one year, yes, that's appropriate, but paying the lowest tax for your entire lifetime. Will the wealth event have ordinary income tax consequences? Inherited traditional IRAs. Remember RMDs are due. Bonuses, severance pay, certain settlements. How is this all going to work together? This is why text prep is one thing, tax planning is a very important thing. If tax is not withheld, reserve adequate cash to pay income tax and make the estimated payments if necessary. You don't want to pay those penalties. If you're on Medicare and you’re above the IRMA limits, you might be subject to Part B & D surcharges in 2 years. Remember, Medicare is a 2-year look back. Do you have net investment income? And, if the income increases your modified adjusted gross income you may be subject to the NIIT tax. So, you want to make sure it's not just one part of the tax code you need to worry about, it’s several, and coming up with a coordinated tax plan is very very important. Also, capital gains, are those consequences of capital gains. Understand what those rates are, and consider harvesting losses to offset the gains. So, that instance from before with the estate, the trust moving on to the beneficiaries, what a wonderful time to take advantage of those opportunities with the market correction. Do you want to reduce your taxable income, minimize and stay below certain thresholds? Pre-tax retirement plans, an FSA, HSA, and charitable giftings – wonderful ideas – I love utilizing that with the Cystic Fibrosis Foundation. Now that's tax planning, and boy, we could spend an entire video on that, and I don't want to hold you up on that, but long-term we need to figure out, is it enough to dramatically impact your financial position? Some people say, “Well, gee, I'm not going to get involved in the lottery till it gets to a certain number.” or sell a business until it gets to a certain number. Reevaluate your overall financial plan in light of the change in your circumstances. Adjust appropriately your risk tolerance and time horizon. Hopefully, risk tolerance is something you've been taught, but also learn what risk capacity means. You may have much more risk capacity now in light of a change in risk tolerance. Adopt wealth preservation strategies that are tailored to your new situation. And, do you have children or grandchildren? Consider those 529 accounts or an education trust. The “What Issues Should I Consider to Find my Child's Education?” checklist is very appropriate here. And, do you need to look at your estate plan? Again, holistic financial planning should include an estate plan. Financial information for your attorney and the disposition and possible taxation of your estate at death. Do you want to make gifs for your family and friends? So, here we are, this year the annual exclusion amount is $16,000 per year per donee. So, if you have a spouse you can double that. So, make sure that's available to you as well. Are you charitably inclined? Obviously my wife and I with the Cystic Fibrosis Foundation. You can make direct gifts to charities, or a donor-advised fund, or another advanced strategy such as charitable trusts. Private foundations can reduce that income tax liability and fulfill your philanthropic goals. It's a wonderful way to take care of tax planning and also do good and do well for others. Also, will it be publicized? So, for instance in this lottery, possibly your business sale might be in the paper. Make sure you understand what it means. So, there's the lottery, look at protecting your privacy. Don't forget frauds and scams. I write a lot of articles on that on our Facebook page, Linkedin, and social media, and our blog about fraud that's going to occur. You will become a target very very quickly and be prepared to address requests from friends and family members for financial assistance. Have a good plan for that. Talk about that with your spouse and your financial advisor so we can help educate you on how to have these conversations and fulfilling your wishes as a client. Do you need to increase protective measures whether physical or cyber security measures are warranted? And, any state-specific issues that you may have. What a great topic to discuss. I love talking about sudden wealth events because you see people come in here smiling. Unfortunately, those smiles turn upside down when they see the taxation on some of the assets that they've accumulated. And, that's why I'm looking at how to structure the sudden wealth event, the terms of the sudden wealth event can be really marred if you don't sit down with a really good financial professional and say, “Hey, the sale of the business is happening.” Maybe instead of doing it as a lump sum payout, you can annuitize that over a ten-year payout period, help reduce taxes, and have some control over those assets. It's a wonderful discussion topic. We'd love to have you join us here at Gateway Financial. Visit us at mygatewaymoney.com. Connect with us, and have a wonderful day, and be well.