How to manage new wealth?

April 28, 2011 3:54 AM

Let's say that I am about to come into life changing amount of cash. What is the best way to manage this new wealth?

What I am looking for is more practical advice about keeping such a sum safe in bank/brokerage accounts than advice about how to invest. Do people even keep large sums in single accounts, due to FDIC insurance limits? Is there a smarter way to hold on to it than just a savings account? Any common tax gotchas that should be addressed early on? Thanks.

posted by anonymous to Work & Money (22 answers total)

These are all questions suitable to ask a fee-based independent financial advisor licensed/registered/whatever in your country/state of residence. It also depends to some extent on how much money you consider to be life-changing.
posted by Lebannen at 4:14 AM on April 28, 2011 [3 favorites]

1. Find a good tax attorney and a good accountant

2. In the meantime, as you note, FDIC only provides insurance up to (per single acct owner, with other modifications too situation-specific to get into here) $250k; so, it is sometimes recommended to park your money in government bonds rather than traditional bank accounts, so that your money is more "insured" until you have a solid plan from your financial advisors.
posted by melissasaurus at 4:27 AM on April 28, 2011

Since many people do not have the luxury of having money to spare they often don't consider matters such as investment, charity donations and tax planning. Nor do they pay much real attention to the question of how they might change what they do or where they live if they were to have a lot more money. Finding out about all these areas takes time - several months at least. Not everybody who runs into money takes time to learn about it and about how they feel about it. You should. Only at that point - when you are already becoming certain about what you want to do - would I walk to a financial advisor to help you through the details.

The best way to get hold of a good financial advisor is probably through personal recommendation. Broadly there are two types of people who ask for the help of financial advisors: those who pretty much bury their head in the sand about financial affairs and want to just hand over responsibility (not like you, right?) - and those who are quite financially astute but who recognise that it takes an expert to help them with issues such as taxation. Those in the second group often include people who are running their own business. If you have friends in this category then they would be the ones I would ask for help. You are looking for a report which lays down the architecture of what you should be doing - you should pay fees rather than commission for this. Getting competing quotes for such a report is a good idea.

If possible, on your first meeting with your advisor, you should be accompanied by a dog. Ensure that the dog does not try to bite them before proceeding any further.
posted by rongorongo at 4:43 AM on April 28, 2011 [3 favorites]

If you still believe in your government, treasury bonds and savings bonds are a fairly safe place to park some of your money if you're not planning to go on a wild spree in the near future. With internet access it's fairly easy to get at it if you need it. The rates are low but at least it's still as safe as the U.S.

Some real estate would be good, but it depends on where you buy right now. In general, prices are falling in most places but prime properties are not losing as much.

Figure out what you ultimately want out of your life with money. Are you still planning to work at something? Or move to Key West for hurricane season?
posted by AuntieRuth at 4:52 AM on April 28, 2011

Absolutely get professional help here. Not only are you going to want to know how to best use this money, but you're also going to want to know how to handle your tax liability without getting fined for doing it wrong.

I guarantee you, a good financial advisor and CPA will be some of the best money you ever spend.
posted by valkyryn at 4:56 AM on April 28, 2011

If you're getting enough money to worry about hitting FDIC limits (which are $250k, I believe), then you're getting enough money to shell out for a complete financial plan from a fee-only Certified Financial Planner (CFP). It'll cost a few thousand dollars, but it will be worth it. They'll be able to help you figure out what types of accounts to stick your money in, how to minimize the taxes, etc.

Ideally, you'd visit with them before you get the money, if you can work out the payment.
posted by griseus at 5:40 AM on April 28, 2011 [1 favorite]

If this is really a life-changing amount of cash, you really should get a financial advisor ASAP.
posted by J. Wilson at 5:46 AM on April 28, 2011

This is not tax, legal or investing advice, and I am not your lawyer, accountant or financial planner. Suffice it to say, if your life changing amount of cash is above the FDIC limit, break up your cash among different financial institutions so that you get the benefit of insurance for the full amount. Obviously, you'll want to fund each account with something LESS than the limit so that you are covered for your interest once it's funded to your account (my understanding is that accrued but unpaid interest is not covered by the FDIC program, but I'm not a banking lawyer).

I've parked a good amount of cash with Ally bank in their 5-year CDs, even though I don't expect to hold the CDs for that long. Why use those CDs? Because they offer the highest rate, and also a very generous breakage penalty. If you exit the CD early, you lose only 60 days' interest--compared to many institutions that charge you 6 months' interest or more. Depending on how soon you expect to take the money out and do something else with it, you may find that it is more economical to get the higher rate and suffer the penalty than to take a lower rate on a shorter CD. Again, do your own math, because the economics to you may be totally different.

Certainly you can get a better return than having the money in a savings accounts. Savings accounts and MMAs are paying very little in interest, and you might as well put the money in cash under your mattress.

Also, something to keep in mind is that any interest you earn by parking this money somewhere is going to be ordinary income, taxed at your regular marginal tax rate. Depending on what your tax rate is, this could be a material amount of tax. You'll be able to drill down on this when you speak to a financial advisor.

Again, I am not your advisor in any capacity, and this is not legal, tax, or investing advice.
posted by Admiral Haddock at 6:08 AM on April 28, 2011 [9 favorites]

I use the same CDs as Admiral Haddock.

You always want to have your money earning. When your assets are a $1k checking account, it's acceptable that the interest rate is 0.1% vs 1%: it's only $9 a year. When your assets are $250k, that little difference is worth thousands of dollars.
posted by smackfu at 6:34 AM on April 28, 2011

It is a wonderful problem to have, but it is undoubtedly a problem, and one about which you are to be commended for acting appropriately by thinking about. The advice about financial advisors is extremely sound. I have had clients with similar problems, and I would be happy to give you a referral if you like. Memail me if you want.

The reason that others are telling you to investigate fee-only advisors is based on this timeless wisdom: "never ask the barber if you need a haircut." It is very easy in your situation to run into people who have all sorts of advice to give you about what you should do. The problem is that many of them have conflicts of interest -- they are at risk of advising you to do something that benefits them, and too often people are careless about their moral responsibilities towards others. To give an example that is perhaps simplistic, any realtor you deal with is always going to have an incentive to upsell you the most expensive house possible, because it will upsize the realtor's commission. If you think that is a conflict of interest, you will be in danger of running into a lot of people with such conflicts whenever they know you have deep pockets.

I don't know how much you have advertised your changing financial status. It is better not to. If your friends figure it out, some of your friendships may change markedly. M.C. Hammer's life provides a great cautionary tale of what can happen given the combination of new money, needy friends, and bad financial advice.
posted by Mr. Justice at 6:41 AM on April 28, 2011 [1 favorite]

FWIW, I've found that using a big investment company like Fidelity or Vanguard is cheaper than a fee-only adviser, and at least as reliable. Instead of depending on a single adviser's brain, or a small firm's, you've got a vast herd of researchers at your service. Whatever you choose, you'll never be able relinquish your own duty of due diligence, but relying on an outfit with a deep bench and a lot (of reputation) to lose has given me extra confidence. Even so, I examine their suggestions with a gimlet eye. Good luck. Suddenly having more money than before is a real interesting psychological shock.
posted by fivesavagepalms at 6:42 AM on April 28, 2011

If you are going to receive a life changing amount of money it's probably worthwhile paying a little bit of money to an accountant to help you figure out what to do with it.
posted by chunking express at 6:45 AM on April 28, 2011

The tax adviser recommendation above isn't just tax avoidance. Ask anyone who has underpaid the IRS more than $5000; you want professional help pronto. Taxes are really simple for most people in the US who have only wages and small amounts of investment income, so it's easy to trip up when you're suddenly thrust into the version of taxes which requires knowing lots of details and reading tomes of instructions.
posted by a robot made out of meat at 7:09 AM on April 28, 2011

But I thougth the FDIC limits were on amounts per bank. So if you had $250k in bank A and then another $250k in bank B, each bank amount was insured and you're fine. Or is this per individual?
posted by stormpooper at 7:23 AM on April 28, 2011

You'll want a trusted person to act as triage for all the different services you'll need. An attorney is a good choice for this. Aside from the fact that estate planning is absolutely critical when confronted with sudden wealth, an attorney has additional professional and ethical responsibilities that the generic "financial advisor" might not.
posted by moammargaret at 7:33 AM on April 28, 2011

The $250k limit is per institution, so divide into various accounts at different FDIC insured institutions so that no institution is holding more than $250k. You may put the money in savings accounts or CDs; given current interest rates you won't be losing much by being in savings.

For the tax question, as everyone has said, ask a tax professional. It will depend on a lot of things, not least of which is how you came into the money (lottery? inheritance? business transaction?)
posted by justkevin at 7:45 AM on April 28, 2011

Just here to echo finding a financial advisor who is "fee only". In other words not commission based.

This is a good place to start: Garrett Planning Network. I'm not affiliated with them in any way, shape, or form.
posted by dave*p at 7:59 AM on April 28, 2011 [1 favorite]

What I am looking for is more practical advice about keeping such a sum safe in bank/brokerage accounts than advice about how to invest.

If by keeping it safe you mean protecting yourself from losing the money from something like a bank run or your brokerage going under, that is what FDIC insurance and SIPC insurance are for. A relatively large number of banks and brokerages went bust during the recent financial crisis, and those customers recovered their funds and experienced minimal disruptions in service.

Do people even keep large sums in single accounts, due to FDIC insurance limits?

The FDIC limit is currently $250,000 per depositor, per insured bank. So as a single depositor, if you want to hold more than $250,000 in a normal savings account, you need to split it between multiple banks. This is extremely easy to do and doesn't have any major negatives over a single account other than convenience.

Is there a smarter way to hold on to it than just a savings account?

A savings account is one of the safest possible investments. If you want your funds to hold their current value with effectively no risk, that is your best option. Different savings accounts and CDs will have different rates, and often those rates are tiered to pay more with higher amounts of money. But at the moment rates are low in general because the Fed is trying to stimulate the economy. Note that almost nobody needs a huge sum of money to hold its value with no risk, though. Depending on your investment objectives (such as when you want to retire) you will almost certainly want to put a substantial amount into a riskier investment with a higher return such as a stock market index fund.

Any common tax gotchas that should be addressed early on?

Talk to an accountant and fee-based financial adviser as others have said, this will be very specific to your exact financial situation. One tax consideration is that if you put the lump sum into investments in a normal account, you will have to pay taxes on it, whereas if you put money into a retirement account, it will grow tax-free. So you should generally but funneling as much income as possible into retirement accounts (there are limits, again, talk to an accountant) so that over time you can transfer your lump sum from taxable investments to tax-free/tax-deferred ones.
posted by burnmp3s at 7:59 AM on April 28, 2011 [1 favorite]

Before lawyers and accountants and even fee-based advisors (who aren't necessarily that great either) -- For nine bucks you should read the 2011 revised edition of Andrew Tobias's book, The Only Investment Guide You'll Ever Need. He briefly addresses new-found wealth. (One chapter is, "What to Do If You Inherit a Million Dollars; What to Do Otherwise.") And though he talks about some technical gotchas, he rightly emphasizes that your general approach will likely be more important than the details: "... tax laws change, prices soar and crash, Wall Street invents new scams -- I've updated the book periodically. But the basics never change. Live beneath your means, get off the debt treadmill, minimize your transaction costs, trust no one -- this book attempts to take you through it all, from buying tuna in bulk to avoiding variable annuities."
posted by Dave 9 at 9:57 AM on April 28, 2011 [1 favorite]

Adding my nth vote to the advice to see a for-fee financial advisor. (I.e. this is someone independent of banks & brokerages who you pay by the hour to meet with you; listen to your situation; ask you questions about your goals for lifestyle, retirement age, etc.; discuss tax implications; write a plan for a diversified way to 'park' your money.) You may not be looking for investment advice, but even with money market accounts and bonds there are tax implications and strategies to hedge against changing interest rates, etc.
posted by mvd at 11:31 AM on April 28, 2011

Let's say that I am about to come into life changing amount of cash

You really have to define "life changing amount". A hundred thousand might change one person's life, but that might not be enough to justify and financial planner. A million....
posted by IndigoJones at 2:12 PM on April 28, 2011

If you want to keep it as safe as possible while you figure out what to do, put the money in a bank chartered in Massachusetts. Then you're covered by the Massachusetts Depositors Insurance Fund for the full amount of your deposit. (The FDIC insures the first $250K, the Mass DIF insures the rest.)

If this is lottery winnings, then be sure to keep your name out of the public eye by any means necessary to avoid both con artists and relatives seeking handouts. The typical advice is to create a blind trust with you as the beneficiary, then have the trust claim the winnings. See a lawyer immediately.
posted by kindall at 2:27 PM on April 28, 2011