Dubai: Getting an unexpected sum of money comes with its joys, but also with a tremendous amount of fiscal responsibility. If not prudently managed, it can run out as quickly as it came in. So what should be done and what factors should be weighed?
It’s a proven fact that the greater the amount you receive, the greater your stress. There is even a stress-related disorder called 'Sudden Wealth Syndrome'. That stress can lead the recipients to do things that ultimately threaten their good fortune and may leave them worse off than before they received the money.
While there have been countless lottery winners up until this point, there have also been numerous instances of raffle champs who went broke or the former professional athletes or entertainers who struggle to pay rent.
Whether you've just signed a multimillion contract or won the lottery, here are some factors to weigh or questions to ask yourself that will help you keep and grow your wealth responsibly.
If you are receiving stocks, bonds or mutual fund shares, you may need to open a brokerage account if you do not already have one.
If you anticipate a large cash payment, consider a separate cash management account to hold it in reserve until you can formulate an investment strategy.
New money may open up new possibilities
Think about how any new priorities might fit with your current plans and goals. It's quite likely that you'll still need your existing savings plans, and you may find ways to benefit from reducing your debt.
Consider putting as much as you can into any employer-sponsored retirement savings program and evaluate opportunities for a retirement fund. You may find that an annuity (contract with an insurance company that promises to pay you a steady stream of income in the future) might be beneficial.
Today's interest rates may be low, but you may find that the cost of carrying some debt is now much higher. Weigh the potential return you could earn from new wealth against the cost of carrying that debt, and you may find it's time to speed up some repayments. Prime candidates may be credit cards and other consumer debt, student loans and home equity lines of credit (financing or loans against your home as a collateral).
New money may let you do more in the future
Consider how you can use your estate plan to extend the reach of your wealth. Think about the amounts of your bequests to the people in your life you care about. You may want to increase some of them.
Has it been important for you to leave a legacy through good works? You may be able to help do even more good by increasing your charitable efforts.
Any trusts you might have created were probably built to make the most of the resources that you had at the time. You may find that your new wealth has changed your circumstances enough to justify rethinking your existing arrangements.
You may be required to do something or avoid doing something in order to qualify. Some bequests may depend on specific market events or other outside conditions.
Time to involve a lawyer or an accountant?
Your lawyer takes on the responsibility of safeguarding your best interests and can deal objectively and unemotionally with the many complex matters that typically arise with sudden influx of wealth.
Plus, an experienced lawyer can create or update your estate plan and set up charitable intentions, such as a family foundation or a donor-advised fund. Your lawyer can also offer valuable perspective on any tough decisions you may have to make, which can ultimately save you time and money.
Dependant on the income-tax status of the country you acquire said wealth in, it’s crucial to note that your tax filing status can change significantly when you acquire a large sum of money, if it applies to you or if you are obligated to file and pay taxes in your home country.
An accountant can advise you on matters such as income and capital gains tax, as well as provide guidance on tax projections and how to record any gifts to make to loved ones and charities. This can help make sure you don’t have an unanticipated large tax bill the next fiscal year-end.
Is the amount large enough that you may need to briefly protect your identity?
If your newly acquired wealth receives undue attention, US-based investment banking major Morgan Stanley notes that you should take immediate steps to protect yourself and your family from unwanted contacts and requests.
The lender suggests actions like adjusting privacy settings and remove personal contact information from LinkedIn, Facebook and other social sites, and also to review measures to ensure account security and safety.
Morgan Stanley recommends hiring a credit monitoring service and routinely review credit reports and set up alerts on credit cards to inform you about unusual activity.
This is in addition to scrutinising activity on bank statements and requesting that all of your advisors sign a non-disclosure agreement (NDA) to protect your privacy, which is a fairly routine process.
Is it time to invest? If yes, should I invest it all?
There is a common adage that says “invest your time before you invest your money”. Bankers note that more often than not, clients who receive a large lump sum want to immediately put that money to work through a variety of investments.
While clearly a smart strategy for the long term, before the first dirham is invested, wealth managers advise spending time identifying your values and asking yourself important questions, such as:
• What type of lifestyle do I want to enjoy?
• What do I want my money to accomplish?
• How long does my money need to last?
• What are my long-term goals for myself and my family?
• What causes or charities do I want to support?
The answers to these questions will help you and your advisors (professional or otherwise) begin to map out an investment strategy that is customised to your personal needs, goals and circumstances.
What all do I consider when I set goals?
When establishing goals, Morgan Stanley advises breaking them into two categories: short-term goals and long-term goals. Here are some key decisions for each:
Determine how to spend your time and money whether to pay off debt, purchase a new home and/or a new car, relocate to an income tax-free country, if not already in countries like the UAE, invest in new technologies, make small-sized monetary gifts to family members, establish or update wills and trusts, work with your team of advisors to assess and coordinate all lines of insurance.
When it comes to long-term goals, personal finance analysts suggest planning them based on your values and aspirations (e.g., travel, education, start a business, etc.).
Also, determine appropriate strategies to help minimise taxes, identify charitable giving objectives and set policies about giving and understand the responsibilities that come with creating a family foundation or a donor-advised fund.
Here are a few tips from wealth planners at Morgan Stanley to build an effective plan. However, know that spending patterns are challenging to curtail.
Firstly, as you create a plan that is based on your goals, so you know how much you can spend, save and invest, also tie your spending plan to your personal investment policy.
Secondly, devise a sustainable withdrawal rate strategy, while also ensuring to stick with the plan. Also, put your plan in writing and review it regularly to keep you focused and on track.
