Sudden wealth is an exciting prospect for anyone. Maybe you’ve received a large inheritance, sold your business after a lifetime of hard work or cashed in on a family property. Whatever the source, there’s a temptation to start making big plans when a financial windfall comes your way.
The future may suddenly be brighter, but taking time to stop and think is likely to benefit you in the long run. A strategic approach should be applied to managing a sudden large amount of wealth and an experienced wealth manager such as London & Capital is well-equipped to assist.
The Emotional and Psychological Impact of Sudden Wealth
When considering how to deal with sudden wealth, it is important to pay attention to the emotional and psychological impact that can come with this good fortune. It will be quite exciting with new opportunities opening up in terms of property, travel and your professional life. It may also be quite a scary or stressful time as sudden wealth could bring new responsibilities or prompt life-changing decisions. It is important to take time to adjust.
Key Steps to Managing Sudden Wealth
Step 1: Assemble a Team of Experts
Nobody should be expected to deal with sudden wealth alone. Assembling a team of experts to assist you in organising your newfound wealth and making the correct decisions for your financial future is essential. A good sudden wealth manager can oversee the process of assembling the right team by helping to connect you with experts. Anyone with a financial windfall will benefit from speaking with tax professionals and legal experts. You may also be interested in connecting with property agents, financial planners or investment advisers.
Step 2: Create a Comprehensive Financial Plan
Financial planning sits at the heart of every successful wealth management strategy. The more wealth someone accumulates, the more complicated their financial life becomes and the greater the need for robust financial planning.
Assessing your current financial situation is the obvious starting point in the financial planning process. Knowing exactly what you are worth is the important first step to getting your finances in order. Financial planning tools such as consolidated reporting can bring together all the disparate parts of someone’s financial picture and simplify them into a set of understandable figures. Consolidated reporting provides a full picture of someone’s wealth by creating a financial statement that brings everything together.
Once you have assessed your financial situation, you can move onto setting your financial goals. This involves a shift in focus from the present day to the future. A useful tool for this step is cash flow modelling. Cash flow models examine your assets and debt along with income and expenditure. Projections can then be created on your future finances.
Step 3: Consider Tax Implications
Tax planning is always best left to the experts. It can be extremely complex, particularly when it involves cross-border considerations. The feeling of elation brought about by sudden wealth can be quickly dampened when someone starts talking with you about your potential tax liabilities, so it is best to have expert assistance on hand. The source of your sudden wealth will have to be assessed by your tax adviser. There would be different tax implications if you received a financial windfall through inheritance, dividends or the sale of a property, for example. The full picture would need to be considered and an appropriate strategy put in place.
Step 4: Implement Risk Management Strategies
Those that acquire sudden wealth should make sure they protect it. A robust risk management strategy could include: diversifying your investments; taking out suitable insurance policies; taking advantage of trusts and ensuring responsible estate planning.
A diversified investment portfolio spreads risk and ensures that a wealthy individual does not put all their eggs in one basket. Diversification means ensuring you have a strong mixture of asset classes for your financial investments, but could also mean spreading your assets into multiple geographies and branching out into alternative investments beyond cash, equities and bonds.
There are a wide array of insurance policies that can help someone with sudden wealth manage their risk. Day-to-day insurance policies covering things like health can be complimented by cover for areas such as life, income and high-value items. Trusts and estate planning should both be considered if you plan on passing on your wealth in an orderly and tax efficient manner. A trust is an arrangement where you give property, investments or cash to someone so they can manage them for the benefit of a third person. Estate planning involves managing a person’s estate to that it is passed to others in an orderly fashion after their death.
Step 5: Plan for Philanthropy
Charity has the potential to be a very complex affair when you are dealing with large amounts of money. Wealthy individuals often choose to share their wealth through charitable donations, but simply signing up to a direct debit or handing over cash are less than suitable options. Charitable foundations are a well-known and effective method of passing your wealth to others, but the effort required to administer one can be significant.
In the UK, Donor Advised Funds (DAFs) can provide charitably minded high-net-worth individuals with a useful middle ground. The funds are established under an umbrella charity that administers them on behalf of the donor. The main advantages of this type of fund are that they are tax-efficient, flexible and less costly than running a foundation. Making charitable donations while you are still alive means you get to see your money make a difference, influence how it is distributed and take advantage of the tax efficiencies on offer.
Common Pitfalls in Managing Sudden Wealth
Overspending and Lifestyle Inflation
The best decision someone can make when they come into sudden wealth is to take time to stop and think. The temptation to spend impulsively when you first come into money is strong. This needs to be resisted. Discuss your new financial situation with trusted friends and family. Also discuss it with a wealth manager, who will have a neutral viewpoint on the best course of action. Despite your improved finances, you will benefit from knowing your true financial position and engaging in financial planning.
Poor Investment Choices
The future may suddenly be brighter, but taking time to stop and think, particularly about investing, is likely to benefit you in the long run. Choosing to invest your windfall rather than spend could be the smartest move you ever make. Investing may not be the glamourous option, but it is definitely one you should seriously consider.
Investing can seem like a simple thing these days. The proliferation of DIY options that raise the prospect of substantial gains from a few taps of a button gives the impression that no expert insight is needed. This couldn’t be further from the truth. Anyone looking to invest a significant amount should seek out a competent wealth manager to make sure their funds are in good hands.
Neglecting Long-Term Planning
It may not be the first thought that flashes across your mind when you acquire sudden wealth, but planning for the long term means you and your family can protect your financial position. Speaking to a wealth manager about tools such as cash flow modelling can give you a clearer picture of how you can make sure you have a comfortable retirement. And thorough estate planning means you can look after future generations. Looking into the various types of trusts and the inheritance tax laws that exist will ensure your wealth is utilised as you would like it to be.
The Role of a Sudden Wealth Manager
A sudden wealth manager can help you navigate the complexities of new wealth. A personalised wealth strategy will help to protect and grow your wealth. London & Capital’s wealth managers can guide you in handling this windfall. Our firm can assist in areas such as financial planning, tax planning, investment management and global reporting. We can also connect you with experts for a variety of other products and services.
