What is sudden wealth? How to deal with an overnight windfall

Sudden wealth is a growing issue as older generations begin to pass on significant estates to their loved ones.

The phrase “sudden wealth” is likely to conjure images of winning the lottery or inheriting a large sum from a mysterious great aunt.

However, more likely than not, it pertains to people whose parents have quietly squirreled away a nest egg through property, pensions and other assets over a lifetime.

The crux is when these people pass away – they may have failed to put in place an inheritance plan, or even to properly explain to beneficiaries what the contents of a portfolio are and how much they’re worth.

This can create huge issues for their beneficiaries as unmitigated tax liabilities can force people to sell assets they may not be prepared to deal with.

It can create other issues such as people becoming “accidental landlords” without really knowing what they’re taking on.

There can also be issues where someone suddenly finds themselves with large sums in their bank accounts but has little idea of what the most responsible thing is to do with that money.

This is what makes intergenerational financial planning absolutely critical to protect those beneficiaries from a surprise inheritance.

Intergenerational financial planning

With older generations accruing larger amounts of wealth the potential for this wealth to pass on to their children – or even grandchildren – increases the risks associated with that wealth.

It is therefore critical for a family to plan together for the outcomes of inheritance. A child is going to struggle if they inherit a substantial portfolio of assets from their parent with little clue of what those assets are, how they work and how to manage them.

Dealing with an overnight windfall such as this can be emotionally extremely difficult and can lead to major mistakes that unravel years of sensible management.

While basic practices such as having a will in place are key, involving children in the decision-making process of how that estate planning is managed is really important, as is ensuring they understand what the assets are and how much they’re worth.

How that wealth trickles down to younger generations will impact the tax that they pay, and how to structure that wealth over the long term. It can also colour decisions you make early in retirement in regard to which assets you draw upon to fund your retirement.

For instance – gifting is an effective way to mitigate inheritance tax (IHT), but if your wealth is largely bound up in property this might not be the most effective way to pass on money – particularly if it leaves you cash poor.

Ensuring your loved ones fully understand your wealth portfolio will also prevent them from making mistakes once it passes to them. An adviser can help structure the process and talk to everyone involved in order to prepare them for what is to come.

Intergenerational wealth planning takes care of the wider picture and how it can affect multiple generations, their future plans and their own wealth. It is an essential process for anyone with assets to pass on.

How to deal with sudden wealth

For those who have found themselves with a sudden windfall, be it through parents who didn’t communicate their plans, a lottery win, or a mysterious wealthy relative, the most important first step is to speak to a financial adviser.

An adviser will help you to understand the potential tax implications, the best way to structure what you have received in order to set it up successfully for life and mitigate any issues with your own wealth, and how to deal with the emotional implications of such a large windfall.

The temptation might be to go on a spending splurge. While buying that car you always wanted or taking the trip of a life time isn’t necessarily bad, it is essential to ensure that you can enjoy the fruits of some of that wealth while also making it work for you and last in the long term.