Joshua Sherrard, President & CEO of Strategic Navigators Inc.
Becoming an instant millionaire is often viewed as the ultimate dream: the life-changing moment that promises freedom, security and an escape from financial stress. But overnight wealth is far more complicated than simply adding zeros to your bank account. Without careful planning, a windfall can quickly turn into a financial minefield—and the IRS is always first in line to collect its share.
For those who find themselves suddenly wealthy—whether through a business exit, lottery win, inheritance or other unexpected event—the stakes are high.
Let’s explore both the peaks and the pitfalls of sudden wealth, and the tax-smart moves that can transform a lucky break into lasting prosperity.
The Peaks: Why Sudden Wealth Can Be Life-Changing
1. A Chance To Restructure Your Life
Sudden wealth creates the rare opportunity to rewrite your financial story. Debt can be erased, dreams can be funded, and early retirement can be made possible. It’s a chance to design a life around passion and purpose rather than paychecks.
2. Access To Unique Advanced Strategic Tax Planning Tools
With big money comes big responsibility, and proactive tax planning can significantly protect and grow new wealth. Some of the most powerful tools include:
• Tax-free structures: While these are rare, they do exist. Find ways to get funds to live on tax-free.
• Tax-advantaged structures: Many wealthy families have used these types of structures for decades. By using the structures available to you through the tax code, you can ensure asset protection, more efficient tax rates and greater write-off options.
• Trusts and gifting: These can protect assets from creditors, reduce estate tax exposure and enable multigenerational wealth transfers.
• Rich Man’s Roth: Explore this tax-free option to build your wealth, protect it from creditors and be free from future income taxes. Inherent within the RMR is the ability to use loans tax-free throughout the life of your wealth, establishing tax-free income and access as needed.
• Roth conversions: In certain cases, converting retirement funds while income is temporarily lower can mean tax-free growth in the future.
• Tax-deferred investments: These strategies can help reduce the immediate bite from federal and state taxes, giving your capital more room to compound.
3. Philanthropy With A Tax Advantage
Charitable giving doesn’t just do good—it can also reduce your tax bill. Options include founding a 501(c)(3) that aligns with your philanthropic goals, donor-advised funds (DAFs), charitable remainder trusts or simply leveraging itemized deductions.
The Pitfalls: Tax Traps That Can Derail Your Windfall
1. Underestimating The Tax Bill
A common mistake is assuming the entire windfall is yours to spend. In reality, a large portion may be owed in taxes. For example:
• Lottery winnings: These are taxed as ordinary income, often bumping you into the top bracket (37% plus).
• Business sale proceeds: These can trigger significant capital gains taxes, or worse, ordinary income tax if structured incorrectly. Consult tax strategists before signing anything.
• Inheritances: While often free from income tax, large estates may still be subject to federal or state estate tax.
2. Not Withholding Enough
Some payouts withhold taxes up front, but not always sufficiently. Failing to set aside enough can result in a nasty surprise when tax season arrives.
3. Lifestyle Inflation And Ongoing Tax Exposure
Newfound wealth often leads to bigger houses, luxury cars and expensive hobbies. Each comes with its own ongoing tax consequences—property taxes, luxury taxes, business income taxes—that can eat away at your net worth if you’re not careful.
4. Ignoring Long-Term Planning
Delaying professional guidance can be costly. CPAs, estate attorneys and financial advisors can help design a plan that maximizes efficiency and reduces risk. Without them, you may miss opportunities, or worse, create avoidable tax liabilities.
Guidance For The Newly Wealthy: Smart First Steps
1. Pause before spending. Resist the urge to make major purchases or lifestyle changes immediately.
2. Assemble your team. At minimum, engage a tax strategist, tax attorney, CPA, estate attorney and a fiduciary financial advisor.
3. Create a tax-optimized plan. Include withholding strategies, tax-efficient investing, risk mitigation and charitable planning.
Wealth That Lasts Requires Wisdom
Sudden wealth is about more than luck—it’s about the smart decisions you make after the check clears. The IRS won’t be as excited about your windfall as you are, and without a strategy, your celebration can quickly turn into a scramble to cover unexpected tax bills.
By understanding both the peaks and the pitfalls, and by surrounding yourself with experienced tax and financial professionals, you can turn a fleeting windfall into a foundation for long-term financial security.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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