There are several issues to consider before making any financial moves
Published in the Oct. 1-14, 2014 issue of Morgan Hill Life
By Dan Newquist
Dan Newquist
What would you do with an extra $10,000? Maybe you would pay off some debt, fix up the house a bit, or take that much needed dream vacation. What if you suddenly had an extra million or 10 million? Whether your lucky number was picked in the lottery or you inherited money from a relative, there are some decisions you need to make — beyond that dream vacation.
How wealthy are you?
Sudden wealth can turn even the most cautions person into an impulse buyer. Evaluating your new financial position is the critical first step in understanding how your sudden wealth will affect your financial goals. Just how wealthy are you? You need to figure this out before you make any sudden life changing decisions like quitting your job or purchasing that vacation home you’ve dreamed about in Hawaii. You want your new found wealth to last, so you’ll need to consider your future needs, not just your immediate desires.
Evaluate short and long term goal.
• Do you have outstanding debt that you’d like to pay off?
• Do you need more current income?
• Do you plan to pay for your children’s education?
• Do you need to bolster your retirement savings?
• Are you planning to buy a home?
• Are you considering giving to loved ones or a favorite charity?
• Are there ways to minimize any upcoming income and estate taxes?
What do you do with the money?
Remember, there’s no rush. You can put your funds in an accessible interest-bearing account such as a savings account, money market account, or short-term certificate of deposit until you have time to plan and think things through. You may wish to meet with an investment advisor for help.
Once you’ve taken care of these basics, set aside some money to treat yourself to something you wouldn’t have bought or done before — it’s OK to have fun with some of your new money!
Formulate a new investment plan.
• Do you have enough money to pay your bills and your taxes?
• How might investing increase or decrease your taxes?
• Do you have assets that you could quickly sell if you needed cash in an emergency?
• Are your investments growing quickly enough to keep up with or beat inflation?
• Will you have enough money to meet your retirement needs and other long-term goals?
• How much risk can you tolerate when investing?
• How diversified are your investments?
What about insurance?
Being wealthy may make you more vulnerable to lawsuits. You may want to re-evaluate your current insurance policies and consider purchasing an umbrella liability policy. If you plan on buying expensive items such as jewelry or artwork, you may need more property/casualty insurance in case of loss or theft. Finally, it may be the right time to re-examine your life insurance needs. More life insurance may be necessary to cover your estate tax bill so your beneficiaries receive more of your estate after taxes.
Your estate plan
Estate planning involves conserving your money and putting it to work so that it best fulfills your goals. It also means minimizing your taxes and creating financial security for your family.
Is your will up to date? You’ll want to make sure your current will accurately reflects your wishes. If your new-found wealth is significant, you should meet with your attorney as soon as possible. You may want to make a new will and destroy the old one instead of simply making changes by adding a codicil.
Carefully consider whether the beneficiaries of your estate are capable of managing the inheritance. For instance, if you have minor children, you should consider setting up a trust to protect their interests and control the age at which they receive their funds.
Consult a tax attorney or financial professional to look into the amount of taxes your estate may have to pay upon your death; if necessary, discuss ways to minimize them.
Giving all or some of it away
You may want to give gifts of cash or property to loved ones or to your favorite charities. It’s a good idea to wait until you’ve come up with a financial plan before giving or lending money to anyone, even family members. If you decide to give or lend any money, put everything in writing. This will protect your rights and avoid hurt feelings down the road. In particular, keep in mind that:
• If you forgive a debt owed by a family member, you may owe gift tax on the transaction
• You can make individual gifts of up to $14,000 (2014 limit) each calendar year without incurring any gift tax liability ($28,000 for 2014 if you are married, and you and your spouse can split the gift)
• If you pay the school directly, you can give an unlimited amount to pay for someone’s education without having to pay gift tax (you can do the same with medical bills)
• If you make a gift to charity during your lifetime, you may be able to deduct the amount of the gift on your income tax return, within certain limits, based on your adjusted gross income
Because the tax implications are complex, you should consult a tax professional for more information before making sizable gifts.
Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc., a registered investment advisor, in Morgan Hill. He can be reached at (408) 779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
