When it comes to lotteries, the odds of winning are vanishingly small. In fact, the odds of winning the Jackpot in the Mega Millions lottery is 1 in 302,575,350. It is often said that you are more likely to be struck by lightning, and although the odds for lightning strikes vary over the country, the national weather service compiled some data on the averages as well. It turns out that the odds of being struck by lightning in a given year are 1 in 1,222,000, and 1 in 15,300 in an 80-year lifespan. Most people are never going to be hit by lightning, and most people are never going to hit that jackpot.
Yet some people do get hit by lightning, some people do win the jackpot, and the dream of hitting that jackpot is still alluring. Especially when the jackpot grows to above $600 million and starts surpassing the odds in terms of the return given for a 2-dollar bet. Of course, to get to that payout level, you had to already have had at least 300 million losing bets building it up. Another consideration: Managing wealth is something that can be learned across a lifetime, but when wealth is suddenly thrust upon someone it often doesn’t last. Even though it seems like financial security should be assured when the lottery is won, some studies show that as many as 70% of lottery winners end up broke or filing for bankruptcy.
They may have had a sudden windfall, but the odds may not have been in their favor to turn it into a lasting legacy. Similarly, some people earn very high compensation for a very short period of time. Playing professional football is one example. According to a 2015 study, the median career earnings of an NFL player, expressed in inflation-adjusted dollars, was $3.2 million. That is far above the median lifetime career earnings of most Americans. Yet after 12 years of retirement, 15.7% of the players had filed for bankruptcy, a rate that is roughly three times greater than that of the rest of the male population of comparable age.
Even without lotteries, or very high paying jobs, the odds are pretty good that you will have a sudden wealth event. Most sudden wealth events are not lottery winners, they are lump sum distribution of retirement benefits, insurance settlements, inheritances, or the sale of a business or investment real estate.
In some cases, even when the money is earned directly, the recipient doesn’t have experience with money management. There are many considerations beyond spending to take into account, for example the tax implications. Taxes need to be assessed and addressed. In some situations, such as lottery winners, there isn’t much tax planning to do. On the other hand, planning a liquidity event such as the sale of a business, can be very complicated. A legal consultation is likely advisable.
Sharing good news is also worth consideration. It is not easy to talk with friends who may show up, looking for a loan or offering an “investment opportunity.” Most difficult of all is broaching the idea that one’s family might not act honorably. One way to put a barrier between requests for money and yourself is to place the money into a trust. You can still control distributions, but refer parties to the trust officer you have delegated instructions to.
Garden State Trust Company has experience with wealth management. We know all about financial transitions, and deal with estate planning and inheritances extensively. We help families turn what might have been only a short-term windfall into a lasting legacy. When you come into significant sums, call upon us for:
- personal investment accounts, with asset allocation planning, unbiased investment advice and fees linked to account value (not transactions);
- revocable living trusts trustee, for an added measure of financial flexibility, including protection in the case of disability and probate avoidance;
- rollover IRAs to extend the tax-deferral benefits for your retirement money.
If your estate plan includes a substantial legacy for a younger family member who lacks full financial maturity, consider using a trust for the bequest. By relying upon a corporate fiduciary for your trust, you gain the confidence that the trustee will always be available, unbiased, and can fulfill your instructions over time. Your trust will be a gift of more than financial resources. You will be including investment and financial management expertise as well. This is a way to put your beneficiaries’ odds in their favor for years to come.
We look forward to being of service.
