Don't do anything at all

I saw something in the news last week about a $60 million lottery prize being claimed in Vancouver and it got

me thinking how quickly a big windfall can vanish if you don’t do proper planning.

For those fortunate enough to receive a large inheritance or even a lottery payday, a clearly defined plan can make all the difference in ensuring that the money goes to good use and lasts a lifetime.

Many individuals who receive inheritances or other windfalls squander the money away in the first one to three years with little left to show for it.

A good financial plan can go a long way to help you both enjoy this money now and also improve your financial well-being for the long term.

The first thing you should do when you unexpectedly come into a windfall is nothing at all.

Don’t immediately run out and buy a new car or house and don’t start passing out cash to family or charities just yet. The big winner in Vancouver did exactly that and waited before coming forward.

Instead, take some time to really think about what your priorities are and what you really need or want.

If the inheritance is due to the loss of a loved one, take the time to properly grieve and don’t make important financial decisions while your mind is understandably distracted.

After the shock of this windfall has settled in, it’s time to sit down with a certified financial planner professional and make a plan.

The first step of the plan is to cover off the basics. Make sure you’re on track for retirement, have adequate insurance and you have an “emergency fund” set aside.

From here, each plan will take a variety of paths. You should look to pay off high interest debt, contribute to a child’s RESP, further fund your retirement portfolio, etc.

The urge to go out and buy something new will be strong, so don’t forget to discuss this. Many plans will incorporate a set amount, maybe five per cent depending on the size, which will be earmarked for that new car or a big trip.

A proper financial plan is imperative to ensuring this windfall sets you up for a lifetime of less financial stress.

Without a plan, many treat an inheritance as inexhaustible and just keep “dipping into it” until it’s all gone. Often it’s the larger inheritance amounts that disappear the quickest as people don’t realize they will burn through it until it’s too late.

Immediate taxation is not an issue. The amount you receive from a lottery winning or inheritance is not taxable in Canada. But the ongoing tax must be carefully planned for.

If your financial plan incorporates investing a portion of this windfall and living off the investment returns, you need to structure these investments to be as tax efficient as possible.

This could include strategies such as a spousal loan, inter vivos trust or a family holding company. Once again, these options should all be carefully considered before making any rash decisions.

With a substantial windfall, people will come out of the woodwork to offer their “advice.”

You may get phone calls from family, friends and even complete strangers that are all eager to tell you what to do or sell you on their idea. Take the time to seek out professional advice and don’t feel rushed or pressured to make any decisions.

A little extra planning now can go a very long way to guaranteeing a comfortable financial future.                     

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.