My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, October 31, 2011

Dealing with Financial Windfalls & how to stave off the Money Leeches

I am always intrigued when I read an article about a lottery winner or superstar athlete who has filed for bankruptcy. Although it is almost akin to purchasing one of the movie star rags in the supermarket, I can’t stop myself from reading about the trials and tribulations of those that blow immense fortunes.

Why I am intrigued is somewhat puzzling. As an accountant, I have come across many people who have come into money suddenly and I have observed first-hand how that sudden fortune can be overwhelming for those without a financial background.

Against the above backdrop, I found an interesting article in Advisor.CA by Stanley Tepner, First Vice President and Investment advisor with CIBC Wood Gundy titled Dealing With Financial Windfalls.

Mr. Tepner describes a financial windfall as “any distribution of financial assets that leaves the recipient with dramatically greater liquid wealth than they had been accustomed to managing before the distribution. The windfall may be the result of a major inheritance, the sale of a business or property, or the proceeds of divorce or insurance settlements.”

In my CA practice, I have seen several individuals come into windfalls. Some by virtue of their business or professional situations are better prepared to handle their sudden increased wealth. In my experience, individuals who sell a business for millions of dollars have often built a strong professional network around themselves as their business grew and typically they will have less problems dealing with the windfall as they already have an advisory team in place. The biggest issue many of these people face is boredom, as they miss the excitement of the deal and the “buzz” of business activity. Many of these people often rejoin the workforce in some capacity.

On the other hand, people who have a financial windfall from an inheritance or divorce are often knocked off balance and they require a strong professional support group to be put in place as soon as possible. The loss of personal and financial equilibrium I have observed in these cases is why I find Mr. Tepner’s advice for these cases compelling. He suggests that “as enticing as it is for financial advisors to demonstrate investment acumen or planning smarts, the best piece of advice you can give to a new windfall recipient is to stop and do nothing. Clients should not make any consequential decisions until they have had time to absorb their new circumstances.”

Stanley goes on to say that his advice applies as much to spending and giving money away as it does to investing the new found wealth. I find this advice bang-on. People who have inherited money or received a large divorce settlement are often still grieving the deceased or the end of their marriage (I will ignore the cynical who say many are waiting for their inheritance at the death bed or the divorced person married for the money in the first place). In addition to dealing with the emotional issues attached to death and divorce, money attracts two different types of unwanted attention: relatives and friends looking for a hand-out and those looking to invest those funds.

If a windfall recipient follows Stanley’s advice and parks the money in a short-term savings vehicle such as a GIC, they not only provide themselves some breathing and thinking room, but they will have a built in “out” when approached by the various money leeches. This is an important second step to take not discussed in the article. By in essence freezing the funds (or telling a little white lie that you have frozen the funds; but actually locking in the funds is a better alternative to resist temptation) you cannot gift, loan or otherwise invest that money for say six months or longer. This is a bit of a twist on Stanley's advice, but a strategy I suggest someone coming into a windfall consider, since it stops the leeches dead in their tracks.

By the end of six months or whatever period is selected, the recipient will have had adequate time to consider whether they wish to gift, loan or otherwise invest their money. Hopefully they will have taken advantage of some outside counsel and thus, any decision to give money away will not be impetuous.

Dealing with a financial windfall can be stressful. I would suggest that if you or someone you know is in this position, or will be in the future, you do nothing and freeze all decisions relating to money for six months to one year.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

1 comment:

  1. I think that is is some very good advice!

    I've only spoken with one person that 'got lucky' and won a small lottery prize (~$24000).

    The thing that bothered her the most was the constant calls from her siblings to 'help them out' and 'give them what was due'. It's ridiculous that people expect such hand outs.

    The most I would expect from such a person would be a free lunch!