Sudden riches make rational thinking a must

Just over a week ago, many people were planning how to spend the $640 million lottery jackpot that they weren't going to win. While that brief respite from the day-to-day grind may have mental health benefits, it might not be the only way that a windfall of cash can find its way to you.

Every day, people run into sudden wealth - from inheritances, employment terminations, sales of businesses or sales of assets. There are two common themes for many of these people: Much of that wealth is gone within three years, and the windfall doesn't wind up increasing their overall happiness.

What should you do if a financial windfall lands on your doorstep? The first answer is to do nothing. Do not rush out to buy a boat, a car or some other material item that will depreciate right away. Use this event to look at the entire field of what you make and spend compared to the ideal life that you may have only dreamed of before.

There are two broad categories of sudden wealth that I'd like to address. The first deals with amounts large enough to change your life forever. If you have time to plan, get professional help in advance of the event. Attention should be given to the details of how to receive the assets and whether to keep them in their current form.

For example, if you are the outright beneficiary of a large retirement account, it may be in your best interest to receive this as a decedent IRA rollover, which may preserve the tax-deferred status. If there are business interests or rental real estate included in the windfall, think about how this asset may be protected from liability or lawsuit.

Determine if the amount is actually more than you may need to live your dream to the fullest. If the answer is yes, then perhaps you can think about the next generation, some other family member in need, or your favorite charity.

If the amount is not enough to change your life forever, then you need to evaluate your current circumstances. Is your priority beefing up your retirement accounts, paying down college loans or credit cards or establishing the rainy day fund that you need?

The choice is yours. You can spend it right away or you can make a wise money move, and at least partially solve what ails you financially.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

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