What would you do with a financial windfall?

March 15, 2022

If you were to receive a large, financial lump sum, what would you do with it?

Psychological studies conducted several years ago suggest that the propensity to spend money is influenced by whether or not it is expected, and participants are more inclined to spend or gamble away funds they did not anticipate receiving.* These findings imply that the way you view a windfall may depend upon whether you know it’s coming, such as an annual bonus or the proceeds from the sale of a business, versus an unexpected inheritance or lottery prize.

However, regardless of your expectations, you can make the most of a windfall by:

Taking the time to review your options.

It can be tempting to spend these new-found funds on a luxury vehicle or vacation home. Although this may be how you ultimately choose to allocate these funds, you can reduce the chance of regret (and a potentially costly mistake or oversight) by taking the time to consider if another option might fit better into your wealth plan, such as investing for the future, reducing debt, and/or supporting a philanthropic cause.

Understanding the tax implications.

The way you receive windfall assets may impact the taxes you pay, and understanding the tax implications can help you make the most of what you get. For example, an executive cashing in incentive stock options needs to pay attention to how and when they are exercised. The structure of the sale of a business can impact whether the proceeds are taxed as ordinary income or as capital gains, and if the income is taxed all at once or over time. And whether and when inheritors are taxed depends on several factors, including the type of accounts or assets inherited and the heir’s relationship to the account / asset owner.

Reviewing your asset allocation to remain aligned with your goals.

Any significant change to your investment portfolio, including a substantial inflow, should be shared with your Advisor. These additional funds can come in the form of cash and securities, so this is a great time to review your portfolio with your Advisor to ensure your investment objective and asset allocation remains aligned with your long-term goals.

Washington Trust Wealth Management takes the time to understand every client’s unique situation. Your advisor can help you make the most of a financial windfall by reviewing your options with you to properly integrate these new assets into your wealth plan.

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This material is presented for informational purposes, and nothing herein constitutes legal, accounting, or tax advice. Please consult with an attorney or tax professional regarding your specific financial, legal or tax situation.

The views expressed here are those of Washington Trust Wealth Management and are subject to change based on market and other conditions. Investment recommendations and opinions expressed in these reports may change without prior notice. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.