5 Moves to Secure Your Financial Windfall and Build Wealth

A financial windfall can be overwhelming. A large influx of cash presents opportunities- and responsibilities- whether it’s an inheritance, proceeds from a business sale, stock option or restricted stock (RSU) gains, or real estate profits. You need a plan to preserve your wealth and set you up for long-term financial security.  

Here’s a guide to help you navigate your windfall strategically and build a foundation for sustained growth. 

1. Prioritize tax planning 

A significant portion of your windfall could risk going straight to taxes if you don’t have a proactive plan. Each type of windfall — inheritance, stock options or RSUs, business sale proceeds, or real estate gains — has tax implications. Understanding these can help you keep more of your money. 

For example, if you received a large bonus or a payout from vested RSUs in your executive role, these are taxed as income. So, set aside part of your windfall to cover your taxes and pay in quarterly estimates if needed to avoid underpayment penalties. Selling a business may qualify for Qualified Small Business Stock (QSBS) treatment, which can provide massive tax savings. Consulting a tax advisor can help you identify both pitfalls and opportunities, including: 

• Inheritance: Cash, stocks, or assets may be subject to estate or inheritance taxes, depending on your location, and will also potentially have basis adjustments.  
• Business or stock sales: Capital gains taxes apply and can be substantial. Strategies like tax-loss harvesting can help offset gains, and investing in Qualified Opportunity Zones can delay taxes and provide tax-advantaged growth opportunities. 
• Real Estate Gains: If your windfall came from property sales, you might benefit from primary residence exemptions or a 1031 exchange to defer taxes by reinvesting in similar assets. 

2. Set Up an Emergency Fund 

While your windfall might tempt you to focus on growth, setting aside funds for emergencies is essential. A solid emergency fund prevents you from tapping into long-term investments if unexpected expenses arise. 

Keep 6 to 12 months’ expenses in a liquid account like savings or money markets. Given your windfall, you may expand this to cover broader contingencies, ensuring unplanned expenses don’t disrupt your financial strategy. 

3. Pay Down High-Interest Debt 

If you have high-interest debt, such as credit cards or personal loans, using part of your windfall to pay it down is wise. High-interest debt drains finances over time, eroding gains from investments. Focus on debt with interest rates above what you might reasonably expect to achieve investing. 

Prioritizing debt repayment to: 

• Reduce financial pressure: Paying off debt frees up cash flow and lowers monthly expenses, giving you more freedom to save or invest. 
• Boost your credit score: Lowering your debt balance can improve your credit score, reducing the cost of future borrowing. 
• Yield an ROI: Paying high-interest debt yields a guaranteed return equal to the rate you’re no longer paying. For example, paying off a 15% credit card debt is like earning a 15% return. 

4. Diversify Your Investments to Reduce Risk 

Windfalls may expose you to unnecessary risk. Diversifying your investments ensures you’re not overly reliant on one asset, giving you resilience if markets fluctuate. 

While confidence in your company’s performance is understandable (and often well-placed), relying heavily on company stock is risky if the market or industry hits a downturn. Diversifying some of your stock options or RSUs and reinvesting in other areas helps mitigate risk, including: 

• Cash or Cash Equivalents: Keep a portion of your windfall in liquid assets, like cash or money markets, for emergencies or other short-term needs. 
• Stocks and Bonds: A well-rounded portfolio includes a mix of equities and bonds, providing both upside and protection. 
• Real Estate: Invest directly or through real estate investment trusts (REITs). 
• Private Investments: Depending on your risk tolerance, time horizon, and need for liquidity, you might explore investments into private equity or real estate, offering strong growth potential but often requiring longer-term commitments. 

A financial advisor can help you balance your portfolio to align with your risk tolerance, time horizon, and future goals. 

5. Align your windfall with long-term goals and update your estate plan 

Windfalls offer a chance to reassess your goals and build the future you envision. Whether it’s financial independence, early retirement, or philanthropy, ensure your windfall supports your long-term aspirations. 

Aligning your windfall with financial independence or earlier retirement can simplify your life. Structure these to fit into a retirement or succession plan, including:  

• Financial Independence and Retirement Goals: Allocating a portion of your windfall toward a retirement portfolio, including retirement accounts like IRAs or 401(k)s as well as brokerage accounts, supports early retirement goals and is tax-efficient. 
• Philanthropy: If giving back is essential to you, a windfall allows you to make a meaningful impact. Consider setting up a donor-advised fund (DAF) to get an immediate tax deduction and retain the flexibility to grant funds over time. 
• Estate Planning: Updating your estate plan after a windfall protects your assets and ensures they’re distributed as you wish. Consider setting up trusts, updating beneficiaries on retirement accounts, or adding charitable distributions to your plan. 

A financial windfall can secure and grow your wealth but requires careful planning. By focusing on tax strategy, establishing a cash reserve, paying down debt, diversifying investments, and aligning your windfall with long-term goals, you’re setting yourself up for long-term financial success. 

The information contained in this document is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.