Financial planners weigh in on windfalls

What would you do with a million dollars?

That’s probably the question a local man is facing this week after he bought 10 Virginia Lottery Cash 5 tickets at a Woodbridge convenience store Monday and won $100,000 all 10 times.

And he’s not the only area person to recently find himself suddenly richer. Just last week, a $10,000-winning Decades of Dollars lottery ticket was purchased in Dale City.

While the idea of “winning big” leads many to think of making big purchases, taking lavish vacations or quitting jobs, area financial planners say it’s important to think more long-term.

“The first urge for the suddenly wealthy is to go shopping,” said Helen Modly, a financial planner for Focus Wealth Management Ltd. “They need to begin planning first.”

People who come into money quickly often don’t know what to do with it, said Bonnie Sewell, a financial planner with American Capital Planning LLC.

“Sudden money can be overwhelming for folks, whether it comes to them this way [through the] lottery, or through an inheritance, insurance, lawsuit settlement, etc.,” she said.
Modly agreed.

“The biggest issue with sudden money is the lack of experience with wealth,” she said.

Sewell said she tells people who have become suddenly wealthy to map out a “timeline of decisions that must be made, some that should be made and the rest that could be made” to help them decide what steps to take first.

“We know from research, people have a tough time keeping and growing inherited or sudden wealth. And so, with these steps, we get a much better chance of success,” she said.

Curt Sheldon, a financial planner in Fairfax County, said he gives people who’ve suddenly gotten a lot of money the same advice he gave fighter pilots when he was in the Air Force.

“When something exciting would happen, I’d tell them to sit back, relax and smoke a Lucky,” Sheldon said.

The same principal applies here, he said.

“When someone wins the lottery, a lot of things are going to happen very fast and they might make mistakes that could be irreparable,” he said. “So the first thing you want to do is to sit back, catch your breath and think about what to do with the money.”

After that, he said, regardless of how much money people are dealing with, they should make sure they have an emergency fund, with enough money to live for six to 12 months, he said. Next, Sheldon advises looking at your debt and paying off loans with high interest rates. Then, he said, think about retirement and other investments.

There are also decisions to be made before a lottery winner even picks up their winnings, the financial planners said.

In many  cases, a winner can choose to take their winnings in the form payments for life rather than one lump sum, which would allow them to pay taxes on the amount they get each year, rather than on the whole amount, Modly said.

People may also want to choose to set up trust funds for their winnings, the advisors said.

“Many people do set up irrevocable or living trusts to protect the funds from creditors/predators and to avoid probate at their death,” Modly said in an email.

Some people may also choose to create a “charitable remainder trust” which would allow them to “get a pre-determined regular income for life” and give the remaining money to a charity at their death, Modly said.

That would enable a person to get an income tax deduction each year on the present value of the amount going to charity in the future, but, at death, the money would go to the charity and not to the person’s family, Modly said.

The financial planners said that it’s natural for people to want to spend some of their sudden winnings, and that’s OK.

“Realistically, you’d probably want to blow a little of it,” Sheldon said.

He suggested putting aside about 5 percent of the money for that kind of spending.

“Spending that much might keep you from being tempted to go too far,” he said.

Staff writer Amanda Stewart can be reached at 703-530-3908.