Handling money windfall requires careful planning


February 20, 2000|By EILEEN AMBROSE

IN THE END, it was a hippopotamus that trampled Jason Dettelbach's chances of becoming a millionaire last month.

The 24-year-old College Park resident, appearing on the television quiz show "Who Wants to Be a Millionaire" failed to pick out the hippo in a multiple choice lineup as the animal that kills the most people in Africa.

Still, Dettelbach walked off with $125,000 and another question: What do you do with a windfall?

It's not an unusual situation. Bonuses, inheritances, lotteries and stock options can all of a sudden dump a lump sum in your lap. Local, financial experts say those with newfound wealth may splurge on a new car or vacation, but often end up with the same goal: To not lose what they've gained.

"The worst thing is to have, that money and lose it because you didn't manage it.' said Oreg Belcher, head of the financial planning practice at KPMG Peat Marwick in Baltimore.

How you manage a windfall depends on the sum, your age, goals and tolerance for risk, financial experts say. If you're not financially savvy, you'll likely need professional help. Ask friends and family for the names of trusted financial advisers, accountants and estate lawyers.

For Dettelbach, the answer to what to do with his money was a no-brainer. He gave $2,000 to friends who were on call to help him answer the quiz show's questions, put $3,000 in the bank and took a week off work. The rest he turned over to the family's financial adviser to invest for the long-term and possibly MBA tuition. "I have never been the type who buys a lot of things," said Dettelbach, who drives a used 1995 Camaro and makes ends meet working as an $11-an-hour office temp at Legg Mason Wood Walker Inc. in College park. "If that money can sit and multiply itself, why do I need to spend it on something that for the moment seems interesting, when in five, 10, 15, 30 or 40 years that money will mean a lot more to me?"

Because of his age and goals, adviser Beth Rosenwald set up a growth portfolio of stocks and mutual funds, with an emphasis on technology. She funded a Roth Individual Retirement Account that will grow tax-free, and set aside a few thousand in cash. If all goes well, the portfolio will grow and next year help pay the income taxes due on his winnings, she said. "You cannot get around taxes," said Rosenwald of Legg Mason in Baltimore.

Maybe not, but you might be able to reduce them, experts said.

If possible, try to get your windfall spread out over a few years instead of all at once, said Thomas Grzymala, a financial planner with Alexandria Financial Associates in Virginia. That way, instead of being pushed into the highest tax bracket immediately, you might be able to keep your income within a lower tax- bracket level, he said.

If you're not doing so, maximize your contributions to your 401(k), thereby reducing your taxable income, some suggest. Self-employed individuals can reduce taxable income by setting up and fully funding a retirement plan.

Your higher income the year of the windfall also raises the amount of charitable tax deductions you're allowed, said Kevin Condon, a partner at Baltimore-Washington Financial Advisors in Ellicott City. Take advantage of this by making several years of future giving at one time, he said.

If you want to give to charity but might still need some income from the money, consider a charitable remainder trust, Condon said. It allows you to donate assets, get an immediate tax deduction but draw an income from the assets during your lifetime, he said. When you die, the assets go to the charity, he said.

Review your estate planning because your windfall might have pushed your holdings above the $675,000 limit that individuals can exclude from hefty estate taxes. To help with estate taxes, consider establishing an irrevocable life insurance trust, in which proceeds of life insurance pay estate taxes after you die, Belcher said.

Beyond efforts to lessen taxes, experts advise considering other financial maneuvers.

Pay off credit cards and other consumer debt. You might want to keep a low-rate mortgage so you can continue deducting the interest on the loan from your taxes.

Now that you have deep pockets, you become a more attractive target for lawsuits, said Grzymaia. Buy an umbrella policy, or if you have one, increase the coverage to protect against claims beyond what your homeowner and auto insurance covers, he said.

Investing plays a large role in assuring your windfall grows over the years to meet your goals.

Indeed, if you're given the choice of receiving the money in a lump sum or through an annuity over 20 years, choose the cash upfront, experts said. Even though a lump sum might mean less cash and a hefty tax bite immediately, you can still come out ahead if the money is invested wisely.

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