“Wealth consists not in having great possessions, but in having few wants.”
Epictetus, Greek Philosopher, 55-135
“Be careful what you wish for” is a motherly and cautionary statement. Mom is usually right and there’s no exception to the rule as this declaration applies to the receipt of sudden and unexpected wealth.
For some this event is a dream come true, and when it does, now matter how — the sale of a business, good luck or the unexpected loss of a relative or friend — sudden wealth inevitably changes lifestyles and attitudes.
Luxury problem or not, when an individual or family experiences a significant wealth event unexpected and complex challenges may arise. These can be both financial and emotional. First, take a deep breath. If you’re the recipient the first thing you may want to do is nothing. No major changes immediately. Stop and consider what the meaning of life is for you. Take the time to consider what you’d like to accomplish and how you might satisfy those desires. You now have the time for introspection.
Guilt and fear
Confusion and stress over suddenly changed circumstances are common. You’ll need to work through those thoughts as well as the not-unreasonable fear that scams and scoundrels may confront you. Even savvy investors can be taken by the not so well intentioned opportunists lurking about. You may benefit by consulting a top-notch attorney, accountant and financial advisor.
Professionals experienced in such situations often recommend a family meeting to openly discuss newfound wealth. Sudden riches can complicate life in ways we never imagine. It’s time for cautious, considerate thought and action.
Here’s a staggering statistic which validates mom’s advice of “be careful what you wish for” — as many as 70 percent of wealthy families have lost control of their wealth by the end of the second generation; as many as 90 percent lose it by the end of the third. Those are figures from a 2009 study by the family wealth consulting firm Williams Group. The question is, “Why?”
A key to the success of the smaller percentage of families that do indeed preserve and grow their wealth across the generations seems to be an intelligent transference of family values. Passing along wealth without the family values that accompanied its creation is a recipe for failure. Sustaining a family’s legacy across multiple generations depends on four distinct types of capital: human, intellectual, social and financial — all vital elements for success.
Your frame of reference changes. Long-held dreams become real possibilities. Financial decisions take on more weight. Friends, colleagues and family members may view you differently — and may behave differently as well. In short, there’s a new dimension to life. The changes are very real and lead to new feelings and added responsibilities which shouldn’t be minimized.
Sometimes this new reality can be planned for and sometimes it can’t. These are a few ways wealth may find its way into your life; sale of a closely held business, real estate or other family asset, substantial inheritance, lump-sum retirement payout, divorce, legal settlement; or another unexpected financial windfall.
Things to think about before the event are how to assemble your financial team and address potential tax consequences and timing of the event. You’ll also want to establish a cash flow budget. For example, if the event will occur near year-end, you may wish to push receipt of the wealth into the following tax year or even spread receipt into multiple tax years if possible. Staying flexible has its advantages.
After the event implement and continuously monitor your plan with your advisor to properly anticipate and manage risks of significant wealth. Also take time to reflect and outline your financial legacy and how you’d like to affect others.
And don’t forget to update estate-planning documents. Also discuss how your accounts are titled and how their ownership is structured, as these choices can have important tax and estate-planning implications.
One thing is certain; managing the challenges of wealth shouldn’t be done alone. Expert, impartial and customized advice is critical. Assembling a trusted team of professionals who can manage all the “moving parts,” is a crucial first step in addressing the financial, legal and tax consequences.
Emotional and interpersonal challenges may come with wealth. Some are obvious, almost clichés, while others require more personal reflection to determine the best way for you to proceed.
This article provided by Darcie Guerin, financial advisor and branch manager of Raymond James & Associates, Inc. 606 Bald Eagle Dr. Suite 401, Marco Island, 34145. Gulfshore Life Magazine named Darcie as one of the Best Personal Wealth Managers in The Southwest Florida Area for 2009 and 2010. She may be reached at (239) 389-1041, email Darcie.Guerin@RaymondJames.com or visit Website www.RaymondJames.com/Darcie.