Found Money Can Be a Blessing or a Curse

As I write this, there is a lottery jackpot in excess of $200 million that has people lined up to buy tickets.  Someone (or maybe a few people) will walk away with way more money than they ever dreamed of having. Sometimes, that can be great. Sometimes, not so much. 

We have all heard stories of people who have won the lottery only to be broke a few years later.  How about the professional athletes, child TV stars and once-famous singers, all of whom earned more in a short few years than most people earn in their entire lifetimes?  I shake my head in disbelief every time I see a famous person filing bankruptcy.

One of the issues that confronts the “suddenly wealthy” is taxation. Check out this article about a couple in California who literally found a pot of gold.  They were out walking their dog and found a bucket filled with gold coins.  After getting appraisals done, it is valued at roughly $10,000,000.

And YES, the IRS wants their “fair share.” After the IRS and the state of California get their hands on this money, along with the fees and commissions that they will pay a collectibles dealer, they will have less than half of what they found.  Hey, don’t get me wrong. I’d take it. But…10 million bucks ain’t what it used to be!

I have no idea what this couple will do with their money, and I hope that we aren’t reading about them filing bankruptcy in a few years.  Sudden wealth causes people to react in interesting ways.  I have seen people who clamp down on their spending and get almost miserly because they are afraid of losing the money that just came into their lives.  That’s fairly rare, but I’ve seen it happen.

Far more common is the scenario where newly found wealth is gone as quickly as it came. Increased spending. A lack of awareness of tax laws.  Friends, family, people who once knew you all come out of the woodwork asking for just a little bit of help.  It’s so easy for money to just slip away.  There is a very fascinating psychology behind how people react when they achieve wealth without a long period of earning their way to it. (I love human behavior and as an observer of this time and time again, it’s almost predictable.)

This is why I was able to recently talk with a couple who became suddenly “rich.” They had lived paycheck to paycheck for their entire lives.  They were accustomed to that.  Her parents had recently passed away and unbeknownst to them, her parents were worth millions of dollars and she was an only child inheriting it all. Her parents had gone through the depression and would almost never spend money.  They drove cars for 15+ years, lived in the same modest house for their entire adult life, never took extravagant vacations, and ate at restaurants only for special occasions and she thought they struggled just to pay the bills.

This couple knew of the stories of celebrities and athletes who blow their money rapidly, read about Bernie Madoff and other investment scams and were terrified about what to do with their new wealth.  They didn’t know who they could trust to invest their money and not be a Madoff-style rip-off.  They were paralyzed by their wealth so they were living in denial.

With a couple of conversations, we outlined a very conservative game plan that carved out a relatively safe approach and some rules to follow regarding “big purchases.” They had a plan for how to cover any tax burden and the type of income that they could expect from their new portfolio, and they no longer feel like they are completely at risk. What did we do?  They ended up purchasing long term care insurance policies to guard against erosion of wealth due to an extended illness. They are fully funding health savings accounts to the maximum.  They paid off all debt.  They are writing out a list of things they want to “splurge” on and for anything over a mutually agreed upon amount, they both have to agree to the expenditure.  And, they are building a balanced portfolio with low cost index funds/ETFs and high-quality municipal bonds to generate tax free income.  I have a lot of confidence that we won’t be reading about this couple filing bankruptcy after losing their fortune.

 

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