Getting a handle on prosperity
NEW YORK — When Sylvia Richmond died five years ago, she left her two children about $350,000 each. Naturally, her daughter, Judy Katz, wanted to be careful with such a large sum of money, so she went to her financial adviser.
Her former financial adviser, we should note. While up to that point Katz felt she could trust the man with a variety of investments, his approach toward her inheritance seemed too aggressive, and she decided to look elsewhere for advice.
“It was unbelievable. He kept telling me to refinance my mortgage and put all this money into his investments,” Katz said. “And the market was doing terribly at the time.”
Many baby boomers who gain such a financial windfall — from inheritance, insurance, even the sale of a business — can find it’s more of a curse than a blessing when it comes time to manage their money.
“Sometimes these windfalls aren’t as pretty and clean as you’d like them to be, and it’s all hitting you at times when you can be pretty vulnerable emotionally,” said Nick Childers, a financial consultant with the Merrill Lynch Private Client Group in Beverly Hills, Calif. “There’s a lot of pressure that comes with it.”
The first rule of windfalls, experts say, is to not buy anything, at least for a while. People who come into money, whether it’s $5,000 or $5 million, will find themselves targeted by insurance salesmen, would-be financial advisers, family and friends. Holding on to the money becomes a chore in and of itself.
“Suddenly, the floodgates open, and you get 200 phone calls, faxes, FedEx packages, you name it. Everyone tries to sell you something,” said Fabrice Braunrot, an adviser with J.P. Morgan Private Bank. “Even your local banker, if he’s on the ball, will notice a big deposit and give you a call, offering all kinds of options.”
The next step, then, is to find someone you can trust to discuss how best to manage your money. Often, the lawyers who handle such windfalls, from inheritance or the sale of a business, can recommend an adviser. Those who have experienced similar windfalls in the past can also recommend someone to help with managing the money.
A good, honest adviser will not try to sell someone anything, especially in a first-time meeting. Instead, expect a discussion of how the money should be used within an overall financial plan, how to deal with the tax ramifications of the windfall and any future goals outside of the windfall.
“Good advisers will ask questions before trying to give you answers,” Braunrot said. “A ton of intelligent questions, the process of being questioned itself, may help the person form an opinion about their own needs.”
As much as people may be tempted to immediately start planning uses for their newfound money, needs should be placed before those wants, Childers said. While estate taxes are levied on inheritances prior to receipt, other windfalls may carry tax considerations that need to be addressed first before any money is doled out.
“If you’re withdrawing from a retirement account, doing a business sale, anything else, really, there are always tax considerations,” Childers said. “You want to get with a professional to assess those burdens first and foremost.”
Whether someone has a windfall or not, financial planners also suggest having a six-month cash reserve on hand in case of job loss or hospitalization. While most people don’t have such a reserve, a sudden influx of cash can be used to create that cushion.
Paying off debt is important, especially credit card debt. The interest rates on credit cards are usually much higher than any returns that one could get with a windfall, so advisers say it’s best to pay them off as quickly as possible.
Finally, after all that, it’s time to decide what to use the money for. For someone who doesn’t have enough saved for retirement, that’s a strong option, Braunrot said. Disbursing it among family members is another possibility, though that can create family strife if not handled well.
“Before you start thinking about family, you should be sure that there won’t be any hard feelings,” Braunrot said. “It’s a tightrope walk. You should explain your reasons for handing out money, and feel confident that the people you give it to will use it responsibly.”
Katz ultimately decided to buy her daughter a studio apartment in New York, right across the street from her own place. Thanks to New York’s rising housing market, the two sold the studio last year, then bought a nearby one-bedroom to renovate. The new apartment has risen in value by 25 percent in the last year.