Contents
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1. We Have A Winner!
What a big cash inflow could mean for you
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2. Optional Extras
Preparing your stock options ahead of a payday
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3. It Takes Money To Make Money
The costs to expect when a windfall whomps
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4. The Golden Goose
How to invest your newfound wealth
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5. Beyond The Grave
How to make your wealth outlast you
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6. The Windfall Washup
1. We Have A Winner!
1:46 min read
This guide contains a few specific tips for American Finimizers. But if youâre reading it elsewhere, never fear â thereâs something for everyone.
Pennies from heaven
Itâs the stuff dreams are made of: you log in to your bank account one day and your balance is suddenly an awful lot chunkier than it was. A big cash bonanza â whether that be a bonus, a bunch of shares vesting, or (less cause for celebration) an inheritance â often has the potential to be life-changing. But youâve got to be careful: mo’ money can mean moâ problems.
While your first instinct might be to splash out on some new toys (weâve always liked the look of the personal submarineâŚ), an influx of wealth can bring more headaches than a non-equalizing ear (seriously, we really want that submarine). Without careful planning, money can disappear as quickly as it came: if the Ghost Rider himself can have $150 million and still wind up broke, so can you đĽ
What kinds of problems are we talking?
Nothing is certain but death and taxes â and both of those could cause you issues. Most large financial gains will be subject to hefty taxes if youâre not careful, and death can also wipe out another chunk of your wealth. You need to start thinking about the things anyone with serious simoleons does: planning your finances to make sure youâre spending, saving, and preserving your money in a way thatâll keep it around for years to come.
But donât fret. If you want to maximize the benefits of your newfound wealth both during your lifetime and after youâre gone (your kids might enjoy the submarine too), there are steps you can take to make yourself better off.
In this guide weâll go through what you can do now to prepare for a windfall that might come later (focusing on inheritance, bonuses, and employee shares); and if youâre lucky enough to land a whopper, weâll talk through what you should do with it. Keep all pots oâ gold inside the vehicle â weâre headed down rainbow road⌠đ
2. Optional Extras
3:13 min read
If you think a windfall might be headed your way in the coming years, itâs smart to start laying the groundwork now: a bit of prep today can save you a ton of money later. Thatâs especially true for startup employees â you need to be prepared for how the value of any skin you have in the game will change as the company grows.
Early to bed, early to rise
If you work at a startup, chances are youâll get some kind of equity in the company in return for those long, long days (we feel you đ). Thatâs normally offered in the form of stock options. This isnât the same as being given shares in the company outright â instead, youâll get given the option to buy shares if you so choose. With any luck, your contract will allow you to pay well below market value to exercise those options, acquiring your small slice of the company at a relatively small price. If all goes well and your company eventually gets acquired or floats on the stock market at a higher share price than you paid, youâll suddenly have a pretty valuable bunch of stock on your hands.
But that doesnât mean you can just forget about your options until payday. For one thing, you may want to file an â83(b) electionâ with the taxman within 30 days â a piece of paperwork that means you pay income tax relative to the value of the company when your stock options were granted, rather than when they vested. If your options âvestâ over time (meaning you get a little more each year) and the companyâs value increases during that period, sending off an 83(b) form and paying your taxes up front could save you a significant chunk of change. But if the companyâs value goes down â or if you leave before your options vest â youâll lose out đ
Generally speaking you should also make sure to exercise those options as early as possible. Buying the shares will cost you, but it could be worth it. Even if you havenât filed an 83(b), exercising as soon your options vest will mean lower (and more spread-out) income tax payments if the company continues to grow over time. For another thing, if the taxman considers your startup a âQualified Small Businessâ, you may be able to avoid federal taxes on up to 100% of your gains when it comes to selling stock â upto the value of $10 million (or 10-times the cost of your stock) â as long as you exercised your options and bought it more than five years before. And if your stock is worth more, if youâve held it for over a year then your profits will be subject to a lower rate of capital gains tax overall. The founder of Pinterest may have had to pay a whopping $150 million extra in taxes when the company went public, and all because he didnât exercise some of his options earlier…
Look into the future
It doesnât matter whether you work at a startup or a big public company: if youâre offered share options, you should make sure you know when those options vest. You donât want to quit your job two days before you get access to a big tranche of options â thatâd be one miserable leaving party. And as weâll look at in later sections, you might also want to put in place a plan to start selling some of your stock as it vests. In any case, itâs important to make sure you juggle your broader financial landscape to take account of your big skew towards one equity investment đ¤šââď¸
Windfalls are a nice problem to have. But like Cassandra, you should always consider the hidden costs of a gift from the gods…
3. It Takes Money To Make Money
1:44 min read
Every silver liningâŚ
Be prepared for some big costs when a windfall comes your way. If youâve been #blessed with a bonus or vesting stock, your annual income could end up being much higher than normal â and that could bump you up a tax band, meaning you have to pay a bigger bill. And as we just discussed, selling any stock might mean you have capital gains taxes to deal with too. Make sure to keep track of the money coming in so you can file everything correctly at the end of the year: you donât want the taxman to take your submarine away⌠âď¸
If your newfound wealth comes from an inheritance, you might find yourself saddled with other costs. Estate tax is one concern, and in some states heirs have to pay inheritance tax too. Plus there are the legal, accounting, and miscellaneous fees involved in probate, or dealing with the dearly departedâs possessions: a phenomenon immortalized by Dickens. If the person youâre inheriting from is smart, this can be reduced (more on that in the final section); but harder to avoid are the costs of owning new things.
Owning ainât free
Though a new car might seem nice, youâll have to get it insured and, in some places, pay a tax for owning the vehicle. And if you inherit a house, expect loads of extra costs. If the home comes with a mortgage, you might have to pay that back immediately â which could mean you have to sell the house. Even mortgage-free homes come with a price: utility bills and maintenance costs can quickly hammer your new wealth đ¨
The best way to deal with these costs is to be prepared. If you know theyâre coming, putting in place a financial plan to make sure your windfall will go far enough to cover them is key. Once youâve set up a plan (and perhaps consulted an advisor), you can figure out what to do with the rest of your money â but donât go spending it all just yetâŚ
4. The Golden Goose
3 min read
The big dayâs here: youâve received your inheritance, your startup just rang the bell at the stock exchange â your net worth is more than you could ever have hoped for. Congratulations! But be careful: a big bank balance can be intoxicating, and you donât want to fritter your fortune away đ¸
Cashing out
Thatâs if you even have a fortune yet. If your newfound wealth has come by way of an initial public offering, youâre probably not allowed to sell your shares for around six months (whatâs known as the âlockup periodâ). If the stock has tanked when the lockup ends (as risks being the case with Lyft) you might end up with a significantly smaller amount than you hoped for â and risk being caught up in an unseemly rush to sell among your fellow employees. Remember that until the cash is in your bank account, thereâs no guarantee youâll ever see it.
As for how to get that cash â once any lockup period has ended, youâre free to sell your shares as you wish (as long as you comply with insider trading laws). If the share price is low, you might want to cross your fingers and wait for it to rise. But trying to time the market like that is risky: though prices tend to rise in the long run, the stock could also fall while you wait, leaving you with even less đŹ
Instead, you could slowly reduce your stock holdings over time, hopefully riding out any moves in the share price. That has the added benefit of slowly reducing your wealthâs concentration â itâs never a great idea to have all your eggs in one basket, even if that basket is your employer. But it may not always be the right approach: selling too much could mean you miss out on significant growth in the future. Factoring your selling into a carefully considered wider financial plan is crucial.
Spread your wings
Selling some stock doesnât mean you should keep your wealth in cash instead: inflation will reduce its value over time if you do. Instead, you should put your money to work, using it to generate a return so that you end up even better off as time goes on. If youâve got any debts, pay those off first â getting rid of these costs will set you up nicely for the future. And donât feel like you have to be too responsible: everyone has to treat themselves a little bit đđş
But once youâve had your fun, you need to think about what youâre going to do with your brand-new brass. A balanced portfolio is a good idea: something split between bonds, stocks, and cash, with the proportion allocated to each based on your risk tolerance: if youâre young, you can probably afford to take more gambles than someone closer to retirement. Speaking of retirement, itâs never too early to think ahead: putting in place a plan thatâll keep you and your family comfortable in later life will save any nasty shocks down the line. Rental property, bonds, and dividend-bearing stocks could help provide an income even when youâre past doing so.
With any luck, your financial plan will allow your cash to grow over time â and thanks to the law of compound interest (which means your returns themselves generate further returns), you could find yourself both richer and wiser in your old age. And as weâll explore in the final section, that money doesnât have to disappear when you do.
5. Beyond The Grave
1:55 min read
If you want to spread the wealth around â and make it to outlast you â there are several things you can do ahead of time to keep your money alive when youâre gone.
Trust them
For a start, if youâve got a bunch of money you want to leave to your loved ones after you die, you might be able to pass more wealth on by gifting them things during your lifetime. Each year youâre able to give up to $15,000 to as many individuals as you like completely tax free. That means a regular stream of gifts you can afford to part with while youâre alive could save your loved ones a bunch of estate taxes when you kick the can â°ď¸
Beyond that, youâll want a will to dictate where your money goes after you die. And if youâve got more than a bit of cash, you might want to set up a trust as well. These can exempt your loved ones from certain taxes, as well as put conditions on the wealth (for example, you could say your kids only get their portion after they graduate college). A charitable trust can also be a great way to put your wealth to good use, even before you start pushing up daisies.
Trusts can help you out while youâre still walking and talking, too: the assets in a trust no longer count towards your net worth, so you might move down a tax bracket; and charitable trusts offer tax deductions of their own. Youâll have to contact an attorney or estate planner to set all this up, but depending on how much cash youâve got, it could be worth taking the time. Be aware, though, that many trusts are âirrevocableâ, which means you canât remove beneficiaries once itâs established â even if your kids donât help with the washing up đ
All this post-death postulating might sound a bit morbid, but when you come into money you should definitely plan ahead, if only for your loved onesâ sake (future or otherwise). Itâs an inevitable occurrence, and if you die without instructions on how to handle your wealth, your estate might spend years getting dragged through the courts â not exactly a fun activity for grieving families.
6. The Windfall Washup
Less than 1 min read
So there you have it. An influx of cash can be a really exciting thing, whether itâs a big bonus, exercised stock options â or even an inheritance. And with a bit of advance knowledge, careful planning, and smart investing, you could make that money last for generations. Big windfalls can completely change your life, and the lives of others, if managed correctly â but itâs important that you do manage them. Given that youâve just come into a lot of money, spending a bit of it on expert help negotiating the finer points of tax, trusts, and financial fruition might not be the worst idea.
If youâre lucky enough to be expecting a windfall, then congratulations. And get ready â a whole new world might be right about to open up⌠đ§ââď¸
This guide was produced in partnership with Harness Wealth.
Harness Wealth’s platform helps people to identify ways to optimize their financial returns, tax efficiency, and family estate plan â and connects them with advisors to make those opportunities a reality.