Financial Planning Insights November 2017
Set For Life? What To Do When You Win The Lottery
Director, Private Clients
Well, you’ve done the hard part. The odds of winning the Irish national lottery are somewhere north of 10 million to one – more than 100 million to one for the Euro Millions draw – so if that unlikely ship has come in for you, then congratulations.Welcome to your new life!
As you contemplate the view from cloud nine, however, there’s something you should know: even lottery winners run out of money. In fact, according to Fortune magazine, almost one-third of all lottery winners go on to declare bankruptcy. That’s right – they end up worse off than they were before they hit the jackpot. This sobering statistic is not designed to burst your bubble. Rather, it should be read as motivation. Call it page one in the plan to make sure such a fate never befalls you.
Whether you have won an actual lottery or come into a significant windfall by some other means – an inheritance, say, or the sale of a business – then some basic principles of wealth management can help ensure you have the life you want, for the rest of your life.
Step 1: Keep calm and carry on
Once you have absorbed the initial shock and euphoria that accompanies a lottery win, you have some decisions to make. In the first instance, do you share your good news with the world? That may depend on the scale of your prize – a massive jackpot can ramp up the media attention, making it virtually impossible to stay anonymous.
You will also have an enviable decision to make regarding whether or not to continue working. There are plenty of Monday mornings to consider that one. In the short term, it is probably advisable to take some time off work anyway, perhaps go away for a few days, while you process things.In the ‘do not’ column are major financial decisions and investments. You must not be hurried or pressured into deciding what to do with your money at this stage, nor should you succumb to any temptation to rush out and buy yourself that vintage Ferrari just yet.
Place your winning ticket somewhere secure and take time to cool off.
Step 2: Get professional financial advice
Every successful financial strategy is based on a robust, well thought-out plan. This is no different for lottery winners. To develop a plan that is tailored towards your individual circumstances, you will need professional advice (not only to manage your finances but your tax and legal affairs as well).
Once you have selected your financial advisers, the conversation will likely start with a simple question: what do you want to do with your wealth? Once you begin jotting down and working through your objectives, the outline of a financial plan will quickly appear – estate planning, income projections, tax structuring, protection planning and investment management.
During this process, you’ll aim to meet your shorter-term goals in conjunction with your longer-term objectives. Depending on your situation, that might mean deciding on a new house or an extension – a holiday home in the west of Ireland versus one in France or Spain – a new car or a new boat, and so on.
Step 3: Include the next generation in your plan
By its very nature, winning the lottery is a once-off event. Lightning will not strike twice, so you need to manage your new-found wealth not just for your own life, but for the people who are close to you and for future generations as well. Once you have established your own financial plan, ensuring you have enough funds to meet your lifestyle needs and objectives, you can incorporate succession planning to manage the transition of your wealth to the next generation. Succession planning is a rather complex business and must be carefully approached. You will need to manage the expectations of those involved while structuring your plan in a way that ensures equality – no falling out over money. If children are involved, they will also need to be educated on financial matters and values. Tax is a key element of succession planning, particularly as Ireland’s taxation regime has changed considerably in the past decade or so. There have been increases across most heads of tax while many reliefs have been restricted or abolished: Tax-free thresholds for gifts and inheritances have more than halved in recent years, for instance, while rates have risen sharply.
Your financial advisers will work with you to create a Will and Enduring Power of Attorney, ensuring that all family assets and wealth are passed to the next generation in the most tax-efficient way possible.
Finally, you may wish to use your new-found wealth to become involved in a philanthropic cause. Structured correctly, a charitable donation or foundation can also be subject to tax relief. The plan starts here We all dream of striking it lucky somehow. Whether it’s by selling a business, inheriting a family estate, or yes, winning the lottery. Any large windfall can turn those dreams into glorious reality.
If you have found the proverbial pot of gold then this is a joyful time as you start preparing for the life you’ve always wanted. However, this is also a time for serious reflection. Too many fortunes have gone up in smoke through hasty decisions, wrong choices and lack of planning. By seeking professional advice and implementing a comprehensive financial plan, you can ensure that ‘set for life’ means just that.
Warning: This information is based on Davy’s understanding of current taxlegislation in Ireland and is subject to change without notice. It is intended as a guide only and not as a substitute for professional advice. You should consult yourtax adviser for the rules that apply in your individual circumstances.
Warning:The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own independent adviser.
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