here are a few broad categories that trigger people to reach out to me.

Retirement planning is biggest. Major life changes (marriage, divorce, having kids) is a common reason, too.

Another one, albeit slightly more unique: “I have a good handle on our finances, but I want to get you involved because my spouse needs someone trustworthy. If I get hit by a bus, I want you already involved to fully take the reins.”

But somewhere in the Top 5 most common reasons is the rationale for today’s article:

“I received a BIG sum of money…and I have no idea what to do next!”

Let’s talk through the good ideas, bad ideas, and ugly pitfalls to avoid when it comes to receiving a windfall.

Where Does a Windfall Come From?

Your definition of a windfall will differ from mine. Some people consider $1000 to be a windfall. Others wouldn’t flinch at receiving $100,000. It’s in the eye of the beholder.

To me, a windfall fits one of these two loose definitions:

• Enough money to meaningfully change the timelines of your financial plan. The kind of sudden money that dictates, “Oh – I think we can retire years earlier than expected now,” or perhaps something like, “Can we actually buy our dream house now?” It’s that kind of money.
• Enough money to make you suddenly anxious. Usually, that means either 1) more money than you’ve ever been around and/or 2) enough money that you can’t stop thinking, “Don’t screw this up!”

A windfall usually comes from one of the following sources:

• Inheritances: often including the decedents retirement accounts and assets held in trust.
• Gifts: ranging from annual gift exclusions up to the lifetime estate tax credit limit.
• Sudden changes in income / company structure: bonus payments, various types of stock options, or cashing shares in an IPO.
• A big sale: real estate sales and business sales being two of the most common
• Divorce: while perhaps not “receiving new money,” a divorce frequently results in at least one of the divorcees needing to take a more leading role in their finances for the first time in their lives.
• Lottery winnings, insurance settlements, and other “one off” events: while less common, people do come into large sums of money in unique and unforeseen ways.

Should I Expect a Future Windfall?

Here’s a common thought I hear during the financial planning process:

“My grandmother is 81, and my mom says Grandma has a lot of money. So, whenever Grandma dies, I’m going to inherit a lot of it. Knowing that, I’m pretty comfortable with my financial situation.”Brittany, who counts her chickens early

This thinking begs the question: is Brittany right to include her future inheritance as part of her financial plan?

As with many financial planning topics, the best answer is, “It depends.” On one hand, overlooking a “sure thing” inheritance would be terribly conservative. But to include an inheritance that never materializes can torpedo your plan.

Going back to Brittany, here’s what I’d want to ensure to then confidently include an inheritance in her financial plan:

• There have been clear family discussions about how Grandma’s money will be distributed.
• Brittany (and her financial planner) have copies of Grandma’s estate plans
• Brittany (and her financial planner) have a recent copy of Grandma’s net worth statement, or other evidence to inform just how much Brittany will receive,

Too often, though, someone wants to include an inheritance in their financial plan despite them lacking any knowledge of what the inheritance will look like, or lacking the evidence as to whether they’ll receive anything in the first place. That’s a recipe for disaster.

In summary: if you know your future inheritance is a sure thing, go ahead and include it in your plan. Short of that “sure thing,” I wouldn’t count on it.

Important Stuff First

What should you do when your receive a windfall? The National Endowment for Financial Education covers the topic pretty well:

• It is usually not necessary to make many decisions immediately. So, allow yourself time to adjust to your new situation.
• You may find it beneficial to decide how much you will need to live for the next six to 12 months and keep that money separate from the rest of your windfall.
• You can put your money in a temporary and safe account—a certificate of deposit or money market mutual fund insured by the FDIC will provide a safe and relatively liquid place for your money.
• You may need to get tax advice so that you can determine if there are any immediate actions you must take because of tax repercussions.

Let’s talk about that last bullet: does a windfall create scary tax implications?