What Issues Should I Consider if I Experience a Sudden Wealth Event?

Have you recently realized a sudden wealth event and are unsure of what to do with your new-found money?

Stepping into a large sum of wealth via inheritance, an insurance benefit payout, or the sale of a business can lead to large tax consequences if not carefully managed. Always consult your financial advisor if/when you experience a sudden wealth event. Consider the following:

CASH FLOW ISSUES

Do you need to set aside cash or make a plan to fund any income tax liability that may result from the wealth event?

Do you plan to make any large expenditures in the near term?

If so, consider holding adequate cash to fund the upcoming expenses.

Do you need to revisit your routine spending habits?

Are you able to save more?

Will the increase in wealth affect any regular expenses that are tied to your income (e.g. tax, financial aid, student loans, Medicare costs)?

ASSET & DEBT ISSUES

Did you receive illiquid assets (e.g. notes, real estate, or interests in a private company)?

If so, consider how to manage the assets and potential strategies for divestment and diversification.

Did you receive cash?

If so, consider how much you are willing to invest for long-term growth, and establish a sound investment strategy.

Are there any conditions that must be met to keep the new financial interests?

Do you have debts?

If so, consider the following:

·         If you have credit card debt, pay off balances, prioritizing cards with higher interest rates.

·         If you have student loans, analyze your repayment options and the effect of paying off your balances in a lump sum.

Did you receive a gift or inheritance of non-cash assets?

If so, understand the cost basis of the assets in your hands, and the future tax consequences.

TAX PLANNING ISSUES

Will the wealth event have ordinary income tax character and consequences (e.g. inherited traditional IRA RMDs, bonuses, severance pay, certain settlements)?

If so, consider the following:

·         If tax isn’t withheld, reserve adequate cash to pay income tax, and make estimated payments, if necessary.

·         If you are on Medicare and the income increases your MAGI above $87,000 ($174,000 if MFJ), you may become subject to Part B and Part D surcharges two years after the year of receipt.

·         If you have net investment income and the income increases your MAGI above $200,000 ($250,000 if MFJ), you may become subject to the NIIT.

Will the wealth event have capital gains tax character and consequences?

If so, understand what capital gains rate applies to you, and consider harvesting losses to offset gains.

Do you want to reduce your taxable income to minimize tax and stay below certain thresholds?

Check Out Our Flowchart

To see our easy-to-read flowchart that will help you determine the tax consequences of making savings or retirement plan contributions, click here. Always consult your advisor first before making any retirement plan contributions.

Schedule Your Free Consultation!

Are you taking advantage of all the retirement planning opportunities available to you? If you would like to schedule a call to talk about best tax strategies or other investment advice, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

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