Whether it’s from an inheritance, the sale of a business, or a lottery win, a sudden infusion of cash can cause many challenges for clients. For advisors, the particular needs of these clients may be unique.

“This is when financial advisors, tax advisors, and career coaches come in handy,” said Steve Parrish, professor of practice at the American College of Financial Services. “Otherwise this seeming windfall can end up costing [the client] dearly.”

Susan Bradley, founder of the Sudden Money Institute in Palm Beach Gardens, Fla., has spent the past 25 years working with clients who have received an unexpected bonanza. It is “both a personal life event and a financial event,” she said. “We’ve found the personal side drives decisions, not just in the beginning, but for the years of adjustments to new financial circumstances.”

Therefore, she suggests employing a combination of personal and financial handholding and guidance, using “skills, tools, and expertise to establish a relationship based on communication, respect, and trust."

One primary consideration is not to do anything rash, stressed Brian Bogard of Edward Jones in Addison, Texas. “There is no need to rush into any decisions,” he said. “Think about your financial strategy.”

A financial windfall can be a great opportunity for clients to pay off high-interest debt, he said. First they should make sure their monthly expenses are covered and their rainy day savings fund is in good shape. They might also want to contribute more to their retirement accounts. In other words, don’t forget the basics.

“Then, once their retirement portfolio is on track, they can focus on more short-term goals such as a down payment for a house or a car or taking that dream vacation,” he said.

On the other hand, advisors need not be draconian with these clients, said Jasmine Ball, a financial planner at Bamboo Financial Partners in Tulsa, Okla. “The goal is balance,” she said. “This balance can be achieved by setting goals and reviewing the pros and cons of each purchase, taking into account both short-term and long-term potential consequences.” It’s OK, she added, to leave “room for splurges.”

Brian Hungarter at Girard, a Univest Wealth division in King of Prussia, Pa., agreed. “It is important to celebrate success,” he said. “The key is treating yourself within reason and within the context of your larger wealth plan.”

He recommended having clients start with a deep breath, zooming out to look at the complete and new financial reality, and then discussing next steps. “Rarely, if ever, does a financial windfall necessitate urgent financial action,” he said

Hungarter wasn’t the only advisor who suggested urging suddenly wealthy clients to take a breather. Tom Rippberger of Affiliated Advisors in Minneapolis said clients should “take time to evaluate what's happened, where they'd like to go, and how they can best use this money."

This cooldown period may run as long as six months, he said, just to decide what to do.

Emotions Run High
Naturally, it’s difficult and inappropriate to generalize about client situations. “Every circumstance is different, and the financial planning needs to be customized,” said Jamie Battmer, chief investment officer at Creative Planning in Overland Park, Kan.

Emotions may run high after a big windfall, he said, so he warned against letting clients make careless, headstrong choices. “Fear and greed are the twin evil pillars of all poor decision-making” he said. “Avoid greed-driven decisions that eventually lead to fearful decisions when the windfall evaporates.”

Clients might not like hearing the truth, he noted, but that shouldn’t dissuade advisors. “If an adviser is scared about sharing the truth with their clients, they shouldn't be advising them anyway,” he said.

Donn Froshiesar, head of consumer insights at New York Life in New York City, said that his firm did a study last July that showed some 15% of respondents expected to receive an inheritance in the next decade, but only 71% of them thought it would be from a parent or guardian. The rest expected to inherit from a spouse.

The majority of those who anticipated an inheritance already had a vague idea about what they wanted to do with it. “Our survey found that paying off debt, supplementing retirement savings, and preserving the inheritance with the intention of passing it down are the top three ways adults expecting to receive an inheritance plan to use it,” he said.

He added that women are projected to be the largest beneficiaries of these inheritances, which can be important for how advisors help them with planning. “Women live longer on average than men and are more likely to experience disruptions in their income due to caregiving responsibilities,” he said.

They also tend to invest differently from men, he said. “Women are more likely to stay the course with their investments when markets are volatile, but they are more risk averse on average than men,” he said.

Still, some recipients of a financial windfall have never had a financial plan before, said Chelsea Ransom-Cooper, chief financial planning officer at Zenith Wealth Partners in New York City. She has worked with crypto millionaires, entrepreneurial clients who gained sudden wealth when their companies went public, and those who gained wealth through social media and e-commerce.

“I’m seeing trends in which sudden wealth isn't coming from a traditional inheritance,” she said. “As advisors, it’s important that we help our clients preserve their sudden wealth so that when their income goes down, they’re not caught off-guard.” Therefore, she emphasizes having clients set aside funds for “future goals [and/or] to create another stream of income."

Encourage Privacy
Jamie Cox, a managing partner at Harris Financial Group in Richmond, Va., tells newly wealthy clients not to boast about their windfalls. “They are already engulfed in a ton of uncertainly about what to do, and they need some time to process and to digest the situation before introducing a plethora of unsolicited opinions,” he said.

Andrew Gardener, founder and president of Tanglewood Legacy Advisors in Houston, put it this way: ”if your sudden wealth is public, you should be prepared to be suddenly popular. Not only will friends and family reach out to you, but also business brokers, realtors, and salespeople will come out of the woodwork with wonderful ideas on how to help you spend that money.”

He suggests clients refer all such inquiries to their attorney or other trusted advisor.

“Protect your children as well,” he added, saying newly rich clients shouldn’t give in to every request for financial assistance just because they can now afford to be generous. “As Warren Buffett said, give [your] children enough money so that they can do anything, but not so much that they can do nothing.”

Having more money means paying more taxes, of course. “Oftentimes taxes are the last thing clients think of when receiving a windfall, but they should absolutely be the first,” said Bamboo Financial’s Ball. “Clients should consult a tax professional as soon as possible.”

Newfound wealth might be taxed as ordinary income or capital gains, she said, and there may also be inheritance taxes.

“Different planning opportunities are available depending on the type of windfall,” said Megan Slatter of Crewe Advisors in Salt Lake City. She advises clients to “start as early as possible so that you have the time to be thoughtful and strategic with your planning to mitigate the tax burden effectively.

Strategies to reduce the taxes on a windfall might include “a donor advised fund or other charitable vehicle that provides for annual payments to charity while providing an upfront deduction,” said Lisa Featherngill, national director of wealth planning at Comerica in Winston-Salem, N.C.

Some advisors even suggest consulting a tax expert before accepting the money, if possible. “You want to make sure that you’re not going to lose a large chunk—perhaps even more than half—paying taxes to the government,” said Kelly LaVigne, vice president of consumer insights at Allianz Life Insurance Co. of North America in Minneapolis.

Sudden wealth may be on the rise as the younger generations inherit from baby boomers, a phenomenon known as the Great Wealth Transfer.

“I encourage baby boomers who will be leaving behind assets to use this time to have conversations with their beneficiaries to prepare them for the assets they will receive and express their hope for how the beneficiary should use the money,” said Nicole Caron, senior financial planner at Gratus Capital in Atlanta. “Having these intentional conversations about legacy can help make sure your wealth is preserved for future generations.”