Money Read Time: 8 min

8 Tips for Managing Sudden Wealth

Coming into a large amount of money in a small period of time can be overwhelming. Maybe you’re processing the death of a loved one, maybe you’re celebrating the sale of a business or maybe you’re even feeling the joy of winning the lottery. Regardless of how you acquired the money, you now have new financial options to consider.

Take Your Time

It’s important to allow yourself time before making any long-term decisions. Before making a major purchase like that boat you’ve had your eye on, moving homes or investing the money in an entrepreneurial idea, do your due diligence in weighing out the pros and cons. If you haven’t created a solid financial plan for your wealth yet, now is a great time to partner with our team. We can help you create a roadmap for your money that allows you to make these new financial decisions confidently. If you’ve already built a plan, consider revisiting it to make sure it fits with your new situation.

Consider Your Debts

It’s no secret that debt can be a financial burden. Now that you have some extra cash, you might start to consider paying off any outstanding debt you have. Loans that have a high interest rate, like credit cards and private student loans, are a great place to start. However, keep in mind that not every type of debt you carry is hurtful to your finances. It may be tempting to simply thrust all your newfound money towards long-term debts like mortgages and car payments, but depending on your situation, that may not be in your best interest. By discussing your goals and aspirations with our team, you create an opportunity for us to help you decide which debts should be paid off initially and which debts can continue to be carried.

Look at Potential Tax Implications

When you receive a lump sum of money, new tax implications may need to be considered. Reaching out to a Certified Public Accountant is a great course of action here, as they can help you understand the tax implications of your newfound wealth. After that, think about sharing that information with our team, so we can make sure any tax strategies are implemented consistently across your entire financial plan. We can also continue to evaluate any decisions you make on a tax basis, as well as look at any impact legislative changes may have on your overall financial plan.

For example, an increase in wealth could put your total net worth over the lifetime federal gift & estate tax exemption, which in 2024 is $13.61 million per person or $27.22 million per married couple. Any wealth over that amount could be subject to a 40% estate tax. In 2026, the exemption amount is scheduled to drop by about half to roughly $7 million per person, or $14 million per couple. Giving cash gifts to family or making charitable contributions are both possible ways to minimize your amount that could be subject to that 40% tax.

Reevaluate Your Insurance

Generally, when you face significant changes to your assets or net worth, it’s a good idea to get your insurance plans reviewed. If you have assets above the maximum liability coverage on your auto, home or renter’s insurance policies, you might also consider getting an umbrella insurance policy. The cost for umbrella insurance depends on multiple factors – like where you live, what you own and what kind of job you have – but it’s generally a low-cost form of coverage. If you do already have umbrella insurance, it might be in your best interest to make sure your coverage level is still appropriate.

Our team can be a great resource for reviewing your risk management plan, as we can evaluate your current insurance policies, assets, risk tolerance and more to give their objective advice on what the best coverage for you is.

Revisit Your Estate Plan

Your estate plan might have been designed to care for your loved ones after you’re gone. Now that you have this newfound wealth, it’s worth considering the idea of building a legacy on top of that. You may want to protect your heirs’ inheritances and create a comprehensive plan for multigenerational wealth transfers, or you may want to set up a charitable trust to benefit an organization you care about. When creating this legacy, tax considerations are important. We can help you with tax planning and can conduct an estate plan review to ensure your plan aligns with your financial wishes. If you don’t have an estate plan yet, reach out to our team and we can help you identify specialists that can work with you to create the necessary documents.

Revisit Your Savings Plan

While you may feel comfortable with the wealth you have acquired, there is still opportunity to invest in your future. If you haven’t already been maximizing your contributions to your 401(k) and IRA, now may be the perfect time to start. In 2024, the limit for pre-tax contributions to a 401(k) is $23,000, and the limit for an IRA is $7,000.  At age 50, these amounts increase by $7,500 and $1,000 respectively. Along with your regular retirement accounts, you should also consider maxing out your Health Savings Account if you have a high-deductible health plan. Single people can contribute up to $4,150 in 2024, and families can contribute up to $8,300. If you’re 55 or older, you can also contribute an extra $1,000 per year to your HSA. A perk of these health savings accounts is that any unused funds automatically carry over into the following year. And on top of that, they can serve as another retirement savings account that allows you to invest a portion of your balance into stocks and mutual funds – without taxing your investment gains.

If you’re looking to invest in a loved one’s education, you have the ability to put aside college tuition money in a tax-advantaged account like a 529 plan. With these accounts, contributions are made with after-tax dollars and grow tax-deferred within the account. Any withdrawals used for qualified educational expenses are also tax-free.

Look Into Donating

If you’ve had a philanthropic calling that you now have the means to fulfill, donating to a charity may be a great option for you. When doing so, you have multiple options aside from simply giving direct cash gifts. Donating noncash assets, making an organization the beneficiary of an IRA or establishing a donor-advised fund are all strategies that have tax benefits for both you and the charity. We can help determine what the right charitable strategy is for you.

Protect Yourself From Financial Scams

Lots of people will want a piece of your money pie, and that includes scammers. It’s going to be vital to keep your personal information secure. If you receive a random call, email, text or any other form of internet communication asking for your information, do not give it out. Anyone with honest intentions will not ask for your information over the phone, and especially not out of the blue. You’ll also want to avoid clicking on any suspicious website links. If you’re sent a link and are curious about it, simply go to the organization’s verified website.

Family members and friends may also see your good fortune as an opportunity to fund their own personal interests. They may want you to invest in their revolutionary business idea, ask for help paying off long-standing debt or even feel like they can financially rely on you. Be mindful of what you give away – pick and choose the causes you feel are right for you to contribute to. Turning away family can be difficult at times, but one way to mitigate this is to tell them you need to speak with our team before you make any decisions. When you do so, we can analyze your options and even work as a buffer when needed.

Don’t fall victim to Sudden Wealth Syndrome. If you want to create a solidified plan that can help your good fortune stick, reach out to our office.

Your Checklist for Managing Sudden Wealth

Making thoughtful decisions around newly acquired, large amounts of money is necessary to protect your financial future. To guide yourself through these decisions step-by-step, use this downloadable checklist.
Download the Checklist

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.

Have A Question About This Topic?

Thank you! Oops!

Related Content

Do Our Biases Affect Our Financial Choices?

Do Our Biases Affect Our Financial Choices?

Even the most seasoned investors have biases affecting their financial choices.

Everything You Need To Know About Tax-Free Family Gifting

Everything You Need To Know About Tax-Free Family Gifting

With a well-planned gifting strategy, you can transfer wealth tax-free to your beneficiaries.

"I'm Not Getting Older - I'm Getting Better!"

"I'm Not Getting Older - I'm Getting Better!"

Why turning a blind eye to aging risks your financial well-being – and what to do about it.