As the Powerball jackpot continues to skyrocket, friends and family love to ponder: “What would we do if we won the lottery?”
The truth is, there are much more realistic financial crossroads than a huge lottery windfall that people reach every day. Maybe you sold a business, exercised some stock options, inherited money from a relative, or sold a piece of property, it is important to know some simple steps when you face a liquidity event.
Step 1: Let the dust settle
A sudden influx of money can feel overwhelming. Your mind will be consumed with luxuries, projects and gifts that once seemed out of reach.
But before you spend a dime, take a moment to take a deep breath.
Recently, I was thinking of a situation where someone needed to sell stock options and suddenly, they had $1,000,000 sitting in their checking account.
The first step is to take a deep breath and then follow the steps below.
Step 2: Meet with your CPA
Whenever you have a liquidity event, you need to carefully consider the tax implications. I like to sit down with a CPA and calculate the taxes, determine what may be owed and discuss the deadlines.
For this example, when someone suddenly had $1 million in their checking account, we would first call their CPA. After talking with their CPA, we realized there is a $330,000 tax bill associated with this stock exercise. This meant only $670,000 of the $1 million is yours.
Without meeting with a CPA, you might start planning, investing, and spending $1 million instead of $670,000 and that could cause huge issues.
Step 3: Meet with your advisor
A sudden influx of money could alter your financial plan. So, it is important to sit down with your financial advisor and adjust your strategy.
How do these new assets alter your estate plan?
An advisor can examine your assets and say “you were on track to have X and now you have Y.”
Some of these assets can be put in a trust to shield it from estate taxes and other assets might be gifted or used philanthropically to avoid taxes.
This is a very client specific conversation.
Step 4: Meet with your estate attorney
After you have met with your CPA and your advisor and established a financial strategy, it’s time to sit down with your estate attorney.
He can update your estate plan and set up any necessary trusts to protect your wealth for generations.
Step 5: Invest
Next, your advisor can step back in and help you invest long-term.
It is important to determine WHEN you need money and how you want to use it.
A portion of the money may remain in cash. (Perhaps you have a home improvement project or a small purchase you want to make.) But then you may want to invest some money that you don’t need for 15 or 20 years.
The most important lesson is to surround yourself with a great team. By carefully working together and going through each step, you’ll make fewer mistakes and create generational wealth from a liquidity event.
Stephen Carrigg is the Director of Investment Analysis, Private Wealth Advisor at Integrated Partners. Send him an email at steve.carrigg@iwcadvisory.com