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Money March 2013

Dollar Sense

Did You Get a Large Sum of Money? Avoid Going from Rags to Riches and Back to Rags

By Teresa Ambord

If you don’t establish boundaries from the start, the emotional tax could be worse than the actual tax the IRS takes. Generosity is a good thing, but don’t allow pressure and manipulation to make your decisions for you. You don’t want to resent your own generosity.

Whatever type of windfall you get – an inheritance, a large monetary gift, a settlement, lottery winnings, you name it – the financial issues will be complex. In addition to income tax there could be estate questions and gift tax to sort out. Plus the way you choose to receive the funds could make a real impact on the amount you get.

You may be a wizard with your personal finances, but without the right guidance you could easily end up a story on one of those reality TV shows, rags to riches and back to rags. That’s why it’s critical to seek professional advice before you make major decisions, and perhaps before you let anyone know you have come into money. If you hope to preserve your new wealth you need to know how to properly account for it, manage it, and build it so that it lasts.

Among other things, you may want to set up a trust, get specific life insurance, and create a will to ensure your beneficiaries are provided for. Whatever you do, do not make the common blunder of trying to do it yourself or relying on non-professionals. Protecting your newfound wealth is no job for your unemployed brother-in-law who has a flare for numbers, your daughter who is studying to be an accountant, or even your cousin Freda, the bookkeeper extraordinaire. You need the real deal.

Assemble a small team of advisors. If that seems like a waste of money, think again. Failing to get the right advisors could cost you dearly. In addition to a trusted financial planner you may need an asset protection attorney and a specialist in estate planning, and possibly others.

Also, before you write your shopping list – matching red Corvettes, beachfront mansion, eye-popping diamonds – keep in mind from day one, whatever large sum of money you expect to receive, the difference between the gross and the net will be wider than you think. So don’t enter into any transactions until you know what you will actually receive.


Hold Back the Flood

Most anyone who has come into money will tell you, as soon as the word gets out -- and it will – the line of people wanting your money will make your head spin. Some will try to be your new best friends.

Others may be shirttail relatives you haven’t heard from in decades who “just want to congratulate you,” and many will be legitimate charitable organizations seeking donation, plus a few bogus charities with their hands out. If you don’t establish boundaries from the start, the emotional tax could be worse than the actual tax the IRS takes. Generosity is a good thing, but don’t allow pressure and manipulation to make your decisions for you. You don’t want to resent your own generosity.

How can you stop this? Bring in a trusted third party to serve as an intermediary between you and money requests. That way when you are approached by yet another request, you can honestly tell that new best friend that all requests must go through your representative.


Won the Lottery?

If your windfall comes from winning a lottery jackpot, one attorney advises that the first call you should make is to the lottery commission. Don’t give your name, but ask if you are allowed to pre-sign your winning lottery ticket. If so, sign the ticket right away. An unsigned ticket can be cashed by anyone who gets their hands on it.

Also ask the lottery commission how long you have to claim your winnings. Assuming there is a window of time (probably several months), photocopy the signed ticket, front and back. Then get a safety deposit box, and take a trusted friend with you to place the ticket in the box. The attorney advises that you should not give the friend access to the safety deposit box. He or she is there only to serve as a witness that the ticket did go into the box, in the unlikely event you’ll need to prove it.

Just as with other windfalls, assemble your team of advisors and listen to them — all of them. It could be a huge mistake to rely on one advisor. Even professionals can make errors in judgment.

If your state permits it, you may be able to claim your winnings through a trust. Again, that creates a buffer between you and those who want a piece of your new money. Your attorney can help you with this.

You are probably eager for a bit of a shopping spree, if not a major one. Whatever you do, don’t go crazy and draw attention to yourself. People will notice and soon, your secret will be out. Then as surely as the sun will rise tomorrow, the line will begin to form and you won’t be able to see the end until your money is eaten away. Don’t let that happen.


SIDEBAR: Tips from a Law Firm with a Lottery Winner Representation Practice

  1. Secure the ticket in a fireproof safe or safety deposit box.
  2. Make multiple copies, and put them in different secure places.
  3. Resist the urge to talk about your win. Instead maintain as much privacy about your winning ticket as possible.
  4. Consider claiming your winnings through a “blind trust” to protect your identity. Many states permit winners to use a blind trust to claim the prize to protect your identity and privacy. This has been very successful at times, so much so that lottery winners can sometimes prevent even people close to them from knowing that they won money at all.
  5. Before you claim your prize, sit down with an attorney and an accountant, to understand the legal, tax, and accounting ramifications of winning and claiming the prize. Depending on the options available, it is possible at times to increase your winnings.
  6. Put into place a temporary estate plan.
    (From the Loeffler Law Firm, LLC, an Ohio asset protection and estate planning law firm.)


Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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