Wealth Events: Inheritance, Divorce, Sale of Business, Stock Options

Have you experienced a wealth event? If so, you may feel confused and overwhelmed at what to do next. There’s so much to consider when coming into a large sum of money. You don’t want to make mistakes and jeopardize your lump sum payment. Making wise decisions is all about consulting the right experts such as Certified Financial Planners (CFP®), Tax Accountants, and Estate Planning Attorneys.

We've all heard the stories of people becoming rich overnight, from lottery winners to actors in Disney movies. 

But what are the chances you'll become a multi-millionaire by winning the lottery or getting an Oscar nomination? 

More likely, you will become wealthy by working hard and saving your money. This way, you can retire comfortably and enjoy life without financial worries. However, you want to be prepared to avoid any taxes or long-term repercussions when these financial windfalls come your way. 

Wealth events are life events that have a significant financial impact on your life. This can be either positive or negative. 

For example, if you get married, it's a wealth event because it will probably mean more money coming into the household and, therefore, more opportunities to save. 

There are also extreme wealth events when you are suddenly flush with cash. This can be both positive and negative. A lottery win could change your life forever—but at the same time, it could send you into debt if you don’t know how to manage your money. An inheritance might help pay off your mortgage sooner than expected, but only if the person who left it wanted you to do so. 

You need to have your life and finances set up, so if this happens to you, it benefits your family the most. Let’s dive into the different types of wealth events you can expect. 

Winning the lottery is a dream that many of us have. But it’s important to understand that winning the lottery is not a guaranteed event. If you win, you can expect your income to increase dramatically for one year due to tax-free earnings and interest payments on your new-found wealth.

But be careful: Winning the lottery will make you poorer in more ways than one!

• First, lottery winnings are taxed at ordinary income rates (up to 35%).
• Second, you will be contacted by everyone. Expect to get calls from long-lost family members and businesses looking to “invest your funds” now that you are more stable.
• Finally, many people who win massive sums tend to get into financial trouble due to overspending and a lack of tax knowledge. Protect yourself by hiring a lawyer and an expert financial planning team like ours.

An insurance settlement is a payment made to you by an insurance company because of an insurance claim. For example, if you were injured in a car accident and your insurance company pays out money to cover your medical bills, that money is considered an insurance settlement.

Insurance settlements may not be taxable because they are not earned income (income from working). They can be used for any purpose, but we recommend using them to pay off debt or buy something that will increase the value of your home so it can be sold for more than what was paid for it. 

Every state has laws concerning the taxes and intent of these funds, so be sure to work with a financial planner before spending your settlement. 

No matter which side of the coin you’re on, this wealth event could leave you with a lot of cash in your pocket. The divorce settlement is an event that can be either positive or negative and is generally considered a financial windfall for those who were left with assets after their marriage ended. 

However, if you are the one who had to pay out in these settlements, then it will come as no surprise that many divorcees end up losing more than they gained from their marriages. 

If you have children as part of your divorce, wait to pay for anything other than needs before you meet with an advisor. You do not want your spouse claiming you “wasted” your settlement even if it was on perfectly reasonable expenses. 

The process of receiving a pension lump sum can be complicated and confusing. First, let's talk about what it is. A pension lump sum is the amount of money you have accrued in your retirement account, and you can take out all at once. Usually, this happens when you leave or retire from your job.

The tax implications of this depend on how much money you are taking out and how long ago you started contributing to your 401k or 403b plans. It also depends on the type of account itself: Roth versus Traditional IRA accounts, for example. 

The best way to handle this situation would be to consult an accountant specializing in these matters before making any decisions about what to do with your funds. 

Inheritance is the transfer of property and other assets from one person to another at the time of death. In most cases, you can inherit from someone who has died if they were related to you. 

You may also be able to inherit money or property that was left in a will or trust. If the deceased person had no family and there wasn't a will or trust, state law determines who gets what's left behind. 

The best scenario is to have knowledge of what you are inheriting beforehand to prepare. Otherwise, you may have a massive payout or property transferred to your ownership without the financial infrastructure to handle the influx of cash. 

Becoming famous overnight can be a blessing or a curse. If you are not prepared financially, it can be a disaster for you and your family. 

Being famous also makes you more vulnerable to fraud. Here is an example: A young musician is offered an opportunity to record his first album by the producer he met on the street corner where he was performing for change during his spare time. The producer promises the musician that thousands of albums will be sold if they sign a contract. 

However, when they sign the contract, they discover they have only signed away their rights to future royalties (royalties are money paid by companies who use your music). The company uses all its resources to promote this new artist but only sells 2 CDs in total! This leaves our poor musician struggling with debt because he is unable to pay back credit cards due to purchasing fancy clothes and jewelry needed for performances during concerts.

Your fame can be a blessing if you take it slow and plan how your money will be leveraged over time. 

Stock options and employee benefits are a form of equity compensation that can be granted to employees, non-employees (such as directors), consultants, and other service providers. 

Stock options are transferable securities that give holders the right to buy stock at a fixed price in the future. Employee stock options may be granted during employment or retirement from an employer firm. 

You also find stock options as part of an acquisition. So if you inherited or were awarded ownership in a company, you may be offered a buyout via stock options. 

Financial gifts are a good thing that can be a welcome surprise when you need them the most. You need to be careful here, though. Ask yourself where the money is coming from, if there is anything expected in return, what the tax obligations will be, and a slew of other items to ensure you are protected from this newfound wealth. 

If you sell property, business, or equipment for a profit, you must pay tax on that amount. You need to find out how much your property was worth when you bought it compared to the sales price. If this is a significant amount of money, consult an accountant or financial planner to ensure you are getting the best return on investment possible.

This is one of the most common wealth events that can be easily accounted for, so you experience long-term benefits. 

Legal settlements are a form of one-time windfall that you can receive for any reason, including injuries sustained in an accident or employment dispute. These proceeds usually come from legal cases against another party and are taxable except for those related to personal injury (and sometimes as part of a divorce settlement). 

In some cases, such as tort claims against government agencies, the amount awarded may be tax-free or partially tax-free under certain circumstances. However, this information is specific to each case. 

Be sure to speak with your lawyer before spending this money to ensure its tax status, and then consult with a financial planner, so you maximize your pre-tax wealth. 

Marriage is a wealth event. You are combining financial resources with another person – usually doubling your livable income. In some cases, you may need to sign a prenuptial agreement that outlines how the wealth of one spouse may affect the other, but it is always beneficial when you get the peace of mind knowing there are more financial resources available for the family. 

If you expect a wealth event to come your way, it's best to prepare for it before it occurs.

If you're expecting an inheritance or a lottery win, think about how you will use the money and decide how much to set aside. Also, plan for the tax implications of the event and make a list of what you want to do with the money.

Watch out for fraudsters and “long-lost” family members expecting a handout. Stick to a thought-out financial plan, and you should be able to experience years of benefits from these wealth events. 

Our team at Meyers Financial Services knows how to help individuals, couples, and women just like you get the most value and growth from unexpected life-changing events. We can walk you through what to expect and how to leverage tax benefits and savings that stretch out the value of your sudden infusion of financial resources. Let’s set up a consultation today and discuss your wealth event together!

Need help Managing your wealth event? We are here for you!

Whatever your wealth event, Meyers Financial Services can help. Please contact us for a consultation.