People often dream of winning the lottery, inventing the next million-dollar idea and stumbling into fame and fortune on reality TV competitions. But the truth is people don't have to do any of these things to have sudden wealth fall into their laps; they just need a wealthy relative.
If you plan to leave a significant sum of money to a loved one when you pass away, you could be putting that person in a much more difficult position than you expect thanks to something called "sudden wealth syndrome." This is a situation in which a person comes into a huge amount of money very quickly.
When this happens, people can be in a great position to make some terrible decisions. A sudden and significant influx of money can give people a sense of privilege and freedom they never had before. We often see them making extravagant purchases, giving money away to friends and family, investing in questionable ventures and picking up some expensive habits.
In order to help beneficiaries avoid these and other pitfalls of SWS, there are some estate planning steps you can take if you plan to leave a large sum of money to someone. For instance, you can:
- Delay payments until the recipient reaches a certain age or milestone
- Set up a trust that releases payments periodically instead of in one lump sum
- Design conditions that reward responsible behavior
- Prepare a loved one for the inheritance in advance and encourage or require that person to meet with a financial adviser
There are also steps recipients can take on their own to help them adjust to sudden wealth. This Wall Street Journal article has some of these suggestions.
While it can be incredibly generous to leave a large amount of money to someone close to you, that gift can come with some responsibilities and opportunities the recipient may be unprepared for. In order to protect your gift and your loved ones, you can work with an estate planning attorney to consider and design measures to avoid the downsides of SWS.