I'M Rich! - Now What?

Kiplinger's Personal Finance Magazine, Nov, 2000 by Kristin Davis

Details, details

IN ADDITION TO letting you think big for the future, a windfall also requires you to take care of a lot of financial details today:

Minimize income taxes. Sudden money is likely to put you into a new tax bracket, at least temporarily, so you want to avoid paying any more in taxes than is necessary. In 2000, for example, every $1,000 you earn over $128,950 costs you $30 in deductions, until 80% of your deductions are eliminated. That means the Chisholms will have enough income this year to wipe out a majority of their itemized deductions. Because their income will be nearly back to normal next year, they'll postpone some deductible expenses, such as charitable contributions and property taxes that are due at the end of the year, until 2001 so they can take full advantage of them.

If your new wealth begins producing regular income or capital gains, you may also have to make quarterly estimated tax payments rather than settle up with the IRS each spring.

Invest to match your goals. Because they plan to leave it untouched for about 20 years, the Chisholms' retirement stash could be invested up to 100% in stocks and stock mutual funds, although they chose a more conservative mix of 60% in stocks and 40% in bonds.

But if you intend to use any portion of a windfall for income or short-term goals, you want it in bonds, CDs or a money-market account. Carpenter, for instance, took about one-sixth of his winnings and purchased laddered CDs, timed to mature each month, to supplement the family income.

The Pearsons could have chosen to preserve the entire $14 million rather than take a risk in the stock market. Instead, they gave a portion to a bond specialist to invest for income, and invested the rest in stocks for long-term financial security. The larger the windfall, the more sense it makes to ease money into stocks and mutual funds over a few months to a year rather than plunging in all at once.

Beef up insurance. Lest someone hear of your good fortune and decide to slip and fall on your new pool deck, umbrella liability insurance is a good idea. An extra $1 million of liability coverage to protect you in the event of a lawsuit typically costs a mere $250, usually as an add-on to your existing auto or homeowners policy.

It's also important to make sure your homeowners policy keeps up with any major purchases you make.

While it may seem counterintuitive, the Chisholms decided they need extra life insurance on Dean, at least for a few years. That way, if Dean were to die, Nancy wouldn't have to tap their retirement nest egg early to replace his income

Face up to estate taxes. You may not have worried about estate taxes before, but the tax kicks in when you leave behind more than $675,000 in assets, including your home and life insurance proceeds from policies you own (that figure will rise to $1 million by 2006). And the estate-tax bite starts at 37% and rises to 55%.

Using a common estate-planning maneuver, the Chisholms set up a bypass (or credit-shelter) trust to maximize the amount of money they can leave to their children free of estate tax. The trust effectively doubles the amount they can pass along--up to $1.35 million now, or $2 million after 2005.