Instant Wealth: It’s Not As Easy As You Think

When a client becomes instantly wealthy cash management, risk management, accumulation goals and estate planning must all be considered

~ By David Levitt and Susan Lieberum

Reprinted with permission from the November 20, 2000 New Jersey Law Journal. Copyright 2000 NLP IP Company

Many of us have clients who have achieved instant wealth. This may have been the result of an inheritance, a divorce settlement, a lawsuit, life insurance proceeds, the sale of a business, an athletic contract or even lottery winnings. The acquisition of this large sum of money may seem like the key to lifelong happiness, however, it also brings with it a unique set of problems and challenges that must be addressed.

Because this newly found wealth does not exactly seem like a problem, it is very easy to dismiss potential issues and to fail to properly plan for the future.

Besides dealing with the emotional stress of the situation, a client may be overwhelmed with proposals and offers from people that he does not know. A client in such a situation must come to understand that achieving instant wealth does not guarantee financial independence. A client will need assistance planning for his future as well as protection from those who will be vying for his newly found dollars.

The first step should be to assemble a professional advisory team. Depending on the complexity of the situation, the trained professionals on the team may consist of an attorney, certified public accountant, financial planner, life insurance agent and securities broker.

The financial issues that will be faced by an instantly wealthy client include cash management, risk management, achieving accumulation goals and estate planning. The advisory team can help handle all of these obstacles faced, now and in the future. Furthermore, the team approach will ensure that there are comprehensive considerations in all aspects of the planning process.

One of the biggest issues faced by clients who have achieved instant wealth is cash management. Clients need to understand that cash management consists of more than just writing checks and paying bills. It includes the formulation of a balance sheet and a cash-flow statement. The balance sheet will serve as a snapshot of current assets and liabilities and will show the client’s current net worth. The cash-flow statement will show income and expense estimates, which can be used to create a budget. Tax planning should also be integrated into the income and expense analysis to maximize cash-flow efficiencies.

In order for the client to preserve this newly found wealth, a risk-management strategy should be implemented. Part of this process is to identify the potential exposure to loss if certain events should occur. For example, if the client were to become seriously ill and require medical treatment, health insurance would be required to help pay the medical bills. If the client’s home should become damaged or destroyed, liability insurance would help cover the loss.

An often-overlooked risk exposure is elder care. Nursing home or home health-care assistance can cost upwards of $100,000 per year and can quickly erode assets. Long-term care insurance is available to address the needs that could arise if an individual or immediate family member should need nursing home care or home health-care assistance.

Another component of risk management that is often overlooked is creditor protection. There are various techniques designed to shield assets from creditors, including the drafting of trusts as well as the formation of family limited partnerships.

Establishing personal goals is a critical step toward achieving and maintaining financial independence. These goals may reflect short-term cash needs, saving for large purchases such as a vacation home, funding a child’s education or providing adequate retirement income. Once the goals are established, the financial professionals can determine if the current invested assets and the cash flow will be sufficient. This analysis should be relatively conservative in nature and should account for the erosion of purchasing power due to inflation.

Most important, the pre-set goals must be monitored on a regular basis and revised as needed. If the financial professional’s analysis shows that some goals may not be achieved, then the client must make adjustments. These adjustments may include reorganizing goals, revising the time in which the goals will be achieved or changing the asset allocation of investments.

A client who has developed a plan to preserve the instant wealth sufficiently throughout his lifetime will also need to develop a plan that will enable him to transfer his wealth. Whether the client chooses to transfer wealth to future generations or civic organizations, the client needs to develop and implement an estate plan. Without proper planning, the client could end up in a situation where there is significant income tax and estate tax exposure without adequate liquidity to cover these obligations.

There are a number of estate planning techniques that should be considered including gifting strategies to remove assets from the estate, the formation of trusts and family limited partnerships and the purchase of life insurance to provide immediate liquidity.

Achieving instant wealth may be a client’s dream come true; however, achieving financial independence is not as easy as one might think. Without proper planning, your client’s good fortune can quickly dissipate. As an important part of your client's professional advisory team, you can assist him in achieving his goals, now and in the future.