| BUSINESSWEEK ONLINE : MARCH 1, 1999 ISSUE | ||||||||
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| PERSONAL BUSINESS
Don't Let Your Windfall Blow Away Warren, a married entrepreneur who owns a successful promotions business, doesn't yet have kids. But is he ever ready. Last December the New Yorker received an unexpectedly large inheritance of $1.4 million, after taxes, from his late grandfather. Instead of buying a Porsche or new home, he did the right thing by his family-to-be and invested it all. ''Warren is extremely fastidious,'' says Lesley Sommers, his New City (N.Y.) financial planner. Warren--he prefers not to disclose his full name--did what smart people do with sudden wealth: They don't blow it. ''Letting your head rule your emotions lets you keep your money, not lose it,'' says Barbara Levin, director of the Forum for Investor Advice in Bethesda, Md., a research group for investment pros. A 1997 Forum survey found that 59% of 1,000 respondents who received cash payouts of $20,000 or more had sought professional advice. An equal number invested every dime. SHOPPING SPREE. Their windfalls came from retirement plans (44%), inheritances (22%), insurance settlements (7%), stock options or bonuses (4%), and legal judgments (2%). An additional 21% didn't identify the source. There's also the rare lottery win. But whatever the source, the first question is always: ''Now what?'' If taxes are a concern, as they are with stock options but not most insurance and legal settlements, you'll have to develop a plan long before the money is in hand. For example, you should exercise incentive stock options in years you won't be subject to the alternative minimum tax (BW--Feb. 1). This tax system aimed at the rich imposes a heavier than ordinary tax burden, by targeting items normally out of Uncle Sam's reach. So, good planning may let you exercise your option tax-free in a year when the AMT doesn't apply. If you are newly rich, you might need to get that shopping spree out of your system. But use no more than 5% of the windfall. Pay off high-interest credit card and other debts that offer no tax deductions. Then find a financial adviser. (A good source: the Certified Financial Planner Board of Standards at 888 237-6275 or www.cfp-board.org.) This professional can help you find a competent estate planner and create an investment plan. Planning helps you avoid assets you can't support, like that Swiss chateau. The financial strategies you choose will depend on the size of the windfall. Emily Card and Adam Miller, authors of Managing Your Inheritance (Times Business, $15), say that even a moderate sum of $50,000 demands an asset allocation plan that includes your home and retirement account, plus mutual funds, tax-free bonds, and real estate. But when you're talking about $250,000 to $1 million or more, things get complex. Here, planners advise clients to preserve their $650,000 federal estate tax exemption by setting up a marital trust or credit shelter trust. Both set assets aside for the surviving partner, to minimize eventual estate taxes. Of course, diversified investments are important, too. When Warren got his windfall, Sommers invested all but $100,000. Warren's grandfather had left him 10,000 shares of Philip Morris, 1,000 of IBM, and 1,000 of AT&T. To diversify, Sommers held onto shares worth $341,000 and sold the rest for $424,000. She then bought muni bonds, which Warren could sell once he was ready to buy a house. A less-liquid $150,000 investment went to variable annuities, and $25,000 wound up in an Internet trust that holds 30 securities for two years. Sommers also advised Warren to buy a ''second-to-die'' life insurance policy--to relieve any children of estate taxes should the couple die together. One surprise, says Warren, who hopes to retire at 50, was Sommers' projection that four years of Harvard tuition would cost $405,000 in 18 years. She advised setting aside $97,300 now, assuming an 8% annual growth. Otherwise, Warren says, ''She taught me that this [windfall] should not change where I eat or go on vacation. ''If my main goal was to retire early, this might just have accelerated the process,'' Warren adds. And that's just the point. Considering the work it takes to deal with a windfall, who doesn't want to see it grow for years rather than dissipate in a flash? By Joan Oleck _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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