Sudden Wealth - Abbot Downing

12 Pages·2015·0.19 MB·English

S U D D E N W E A LT H
Managing the Transition

TABLE OF CONTENTS
In this white paper:
The Golden Touch 4
The Immigrant Experience 4
The Inheritor’s Experience 6
A Chute of Emotions 8
Common Responses to Sudden Wealth 9
Implementing Your Plan 10
Additional Resources 10
Sudden Wealth: Managing the Transition 3
SUDDEN WEALTH
Managing the Transition
The Golden Touch money it takes to stimulate strong reactions is
specific to the individual. For some it could be the
Many people think of sudden wealth as a recent
sale of a business for $100 million. For others it
phenomenon, something that comes from
could be living with student loans and more debt
internet company IPOs. But an ancient Greek
than assets, then marrying into a family with
myth describes the first case. King Midas of
$10 million and the ability to erase your debts.
Phrygia lived well, but he loved gold and couldn’t
get enough. When the gods granted him a wish, As the story of Midas shows, receiving sudden
he answered immediately, “Let anything I touch money, a term adopted by Susan Bradley in her
turn to gold.” Midas reveled in his new power for 2000 book, Sudden Money: Managing a Financial
a while, turning everyday flowers, fruit, and bowls Windfall,1 is not always positive. Research has
into priceless works of gold. highlighted that many business owners who
sold their businesses reported in the years after
But before long he realized his gift was a curse.
the sale that they experienced more emotional
He couldn’t eat; his food broke his teeth as he bit
losses than they anticipated, sometimes
into it. His favorite wine was no tastier than a rock.
regretting the sale.
He couldn’t sleep in his now golden bed. His dog
turned to gold when he petted it. And, worst of Lottery winners commonly report running out of
all, his darling daughter ran to embrace him and money, feeling alienated from family and friends,
became a golden statue in his arms. He felt cut off and becoming depressed relatively soon after
from everything he valued in life. receiving their winnings. And experience shows
that inheritors and new trust beneficiaries often
Sudden money can have a profound effect on
go through a painful and sometimes destructive
the lives of business owners, the children of
period of adjustment to their wealth.
successful parents, and spouses who marry into
wealthy families. Then there are those who win
The Immigrant Experience
the lottery or, more painfully, receive a large
insurance settlement. In all these cases, we find The psychologist Jim Grubman has written
elements of the Midas myth: for many years about what he describes as
the experience of immigration to the “Land of
• W ealth can bring both joy and pain.
Wealth.”2 In Dr. Grubman’s experience, clients
• I t can enrich us yet cut us off from what is find it helpful to think about great wealth as a
precious. cultural experience, as if one is now living in a new
Land of Wealth. Within that land we find both
• I t is often not what we expect.
newcomers—the “immigrants”—and the citizens
• I t can “turn up the volume” on underlying issues. born and raised there—the “natives.”
In the midst of the late 1990s dot.com boom, Sudden wealth affects immigrants and natives
psychologists coined the term “Sudden Wealth in similar ways and in vastly different ways.
Syndrome” to describe the set of symptoms and Immigrants to the Land of Wealth face an economic
behaviors often experienced by people adjusting transition and all its associated challenges, just
to greatly increased wealth. Sudden wealth can as geographic immigrants do. Do they try to
be experienced in a variety of ways. How much learn fast and blend into the native culture?
4 Sudden Wealth: Managing the Transition
Or do they cling to the ways of their former Sometimes the growth of a company to these
country? If they assimilate, how much do points takes a long time. Sometimes it
they assimilate? Do they try to blend cultures or happens quickly. People may experience
do they compartmentalize—keeping the old and multiple liquidity events along the path to
new separate in their lives? All these questions great wealth, but the first one or two may be
are more pressing when children are involved. the most disorienting.
In that case, these “immigrants” must somehow
Liquidity events and the impact of sudden
raise their children as “natives” in a culture that is
wealth commonly affect older wealth-creators
new to the whole family.
who are planning for succession in their business.
Immigrants come to sudden money in a variety This is often the first time that a family draws
of ways, sometimes connected directly to the money out of the business, in the course of a
wealth holders’ own efforts, and sometimes not. change of ownership and management, and
These efforts may take place in the arena of it can prove unsettling for the wealth-creator.
business, sports, or entertainment. Sports and Someone who has spent his or her life building
entertainment figures sometimes show most a business must now grapple with two large
publicly the double-edged nature of sudden wealth. changes: the real gain of investable wealth (as
Whether for a famous golf player or a successful opposed to illiquid wealth), and the real or
movie star, the money often comes in a series of perceived loss of authority, identity, and purpose.
large hits. Each can prove deeply exhilarating as
This loss may be particularly difficult for
well as disorienting. And, importantly, each might
entrepreneurs who find motivation in a highly
be the last. These wealth holders experience a
personal dream. When you achieve the dream,
combination of repeated disorientation and
what’s left? For example, one set of siblings who
anxiety about the future, an experience that
worked in a family business together and then
is connected to the fact that few sports or
sold it, now describe themselves as, “retired, in
entertainment figures turn their wealth into a multi-
their 30s, and our mom says she’s on permanent
generational enterprise. And they are not alone.
vacation.” These labels are tongue-in-cheek, but
We’ll focus here primarily on business success, the humor hides a serious concern. It may not
since it is the most common cause of significant feel quite right to be retired at 35, or on
sudden wealth. One advantage of the money permanent vacation. This sense of confusion
coming through your own effort is that becomes even more pressing when the
adjustment to the rewards is often easier and less entrepreneur has young children: “Am I to tell my
foreign—the wealth-holder feels more deserving kids that I’m retired at 35, and how will that affect
of the funds. Successful business people may also their motivation toward work?”
believe they can make more money in the future.
Often, the skills needed to build or run a business
This sense of capability can help people explore
over decades—such as taking charge, directing
new business opportunities or spend time on
and controlling activities, and entrepreneurial
philanthropic projects.
risk taking—can be at odds with the skills it takes
Sudden wealth in business comes in a variety of to wisely steward wealth in the capital markets.
ways, usually in the form of liquidity events: A common misperception is that those who are
skilled at creating a windfall will also be skilled at
• T he sale of the entire business to a competitor
investing it. This is often not the case.
or larger corporation
Sudden wealth is different for another class of
• T aking a company public
immigrants—those who make the transition not
• A recapitalization or refinancing through business and work but through marriage.
• L arge stock dividends
• A partial sale or spin-off
Sudden Wealth: Managing the Transition 5
A spouse may marry into a high-net-worth freedom to take trips, freedom to spend on
family before the wealth completely arrives. family and friends as they wish, freedom from
In this case, the spouse will experience the the anxiety about bills or debts that most people
eventual liquidity events differently than the feel, freedom from a stressful job. What is rarely
wealth-creator. He or she may feel less control anticipated is that this freedom often brings
over the experience and more confused about with it something else. Like all journeys to new
what it all means. The liquidity event may places, there are things you must leave behind.
look like a great blessing, but it can also raise With new wealth there often comes a sense of
anxieties about how all this new money may loss: loss of familiar connections and relationships,
change the marriage. loss of longstanding motivations and purpose,
loss of identity and meaning, loss of life’s anchors.
Each spouse may also need to go through a
These losses do not need to be permanent.
period of adjusting to the experience of having
But they are real. Arrival at a place in life of luxury
more money to spend, particularly if he or she
and privilege can be wonderful, but sometimes we
has not come from a family with wealth or wasn’t
discover how much we miss our lives left behind.
involved in the business. Many people suddenly
released from financial limits experience what’s
The Inheritor’s Experience
sometimes referred to as the “rampart spending”
of the newly wealthy. Their spending goes One might think that the experience of sudden
up suddenly, then continues for a while, then wealth can’t happen to those born and raised with
gradually ratchets down again closer to the wealth—the “natives” to wealth. But while some
prior level of personal spending, like the people may be born into families worth millions
ramparts on a castle. Later there may be another of dollars, no one is born thinking of owning
burst of spending. This is normal in the initial millions of dollars. Overlooking the power of
period of adjustment to new money. The larger sudden wealth on wealth’s native citizens is a
house, the expensive car, the home entertainment mistake many ultra-high-net-worth families make.

system, luxury goods for family a nd f riends— Inheritors raised with wealth usually experience
these are some typical purchases. The key is to
sudden money in a variety of forms, akin to the

pay attention to the process and find your way
liquidity events of a business-owning family:
back to what feels comfortable to you personally
and within your marriage. More serious things to • B eing suddenly informed at age 21 of ownership
watch for are whether spending was a problem of the contents of a custodial account containing
before the money arrived, or whether one or both hundreds of thousands of dollars
spouses lack basic skills related to keeping track
• A trust you didn’t know about is starting to
of, saving, and spending money.
make required income distributions at ages
Another group of immigrants to the Land of Wealth 21, 25, or later
may experience sudden wealth through other
• R eceiving a large outright gift from a parent
means not based on their own talents or
or grandparent
business efforts. Some are positive experiences,
• R eceiving large principal distributions from a
like winning a lottery or sweepstakes. Others, such
trust, say, at ages 25, 30, and 35
as receiving a large windfall from an insurance
settlement, may be associated with a painful loss. • R eceiving a large inheritance, outright or in trust,
In each of these cases, it is important to realize that from the death of a relative
your emotional responses and reactions require
Transferring ownership of an UTMA3 custodial
just as much attention as the financial matters.
account or introducing a child to a trust is
As with geographic immigrants to the United usually, for parents, a time of nervous excitement
States, economic immigrants to the Land of Wealth and concern. Though they may feel generous
often talk about anticipating release from the about the transfer, they may feel anxious
stresses of their lives, a great sense of freedom: about what the child will do with the money.
6 Sudden Wealth: Managing the Transition
Their assumption is that the child will be ecstatic trust distribution and the criticisms start to fly.
at receiving the money and will start to spend Immediately labeling a young inheritor as
it with abandon. Parents are often surprised, spoiled during this adjustment period can lead
then, when children respond with disorientation, to heavy-handed treatment and can harm not
confusion, avoidance, and even anger. In reality, only relationships but also the child’s own growth
many young inheritors suddenly faced with a and identity for years to come.
deluge of cash, experience the event with great
A young person’s receipt of sudden wealth also
shock, since they are emotionally unprepared for
depends on what the relationship is like between
the responsibility and the potential for change in
the beneficiary and the family, and the extent to
their relationships.
which the young inheritor knows about the
This is ironically an unrecognized point of money prior to receiving it. Receiving an
similarity between parents and children of wealth. inheritance from a parent with whom you have
A young person’s coming into an inheritance been in constant conflict, who you felt used
or a trust is, by itself, not uniformly positive money mostly for control, or who seemed to
or negative. Just as with the sale of a business, substitute money for love, may bring feelings of
everything depends on personal preparation and anger, sadness, guilt, and resentment along with
a process for adjusting to the change. Parents or the cash. These feelings can taint the money and
grandparents need to recognize that the children lead to a variety of unhappy reactions as well as
may be going through many of the same things unhealthy behaviors, including spending it all or
they themselves went through when acquiring the giving it away to alleviate the pain.
wealth in the first place. This is a chance for the
The most common problem, though, is that
generations to come together—to understand
receiving an inheritance unprepared can leave one
and communicate—rather than to be at odds.
feeling shocked, wondering “What do I do now?”
For example, when a child first begins to receive and wishing for answers where none are available.
trust income distributions, or receives a large This is especially true for trust distributions.
principal distribution, it is normal for him or Many families set up trusts for minors and then,
her to feel confused and to begin to question out of fear, refuse to inform beneficiaries about
existing relationships. Should I still live where the trust until they absolutely have to, for
I’ve been living, if I don’t have to? What should instance, when the beneficiary turns a certain age
I do, if I don’t have to work? Are my friends upon which the trust distributions must begin.
interested in me or my money? Who am I, apart These ages can be as late as 35 or 40 years of age.
from the money? These questions are most
Sadly, in such cases, parental fears can turn out to
painful when the young inheritor has had little
be self-fulfilling. Receiving large distributions with
advance notice that the money is coming and
no emotional or financial preparation may upset
little guidance on how to prepare emotionally.
a beneficiary’s work habits, sense of purpose, and
Young adults who come into an inheritance can connections with friends and close relationships.
go through the same experience of rampart It may also leave the beneficiary justifiably
spending as their parents, as they get used to asking, “Why didn’t I know about this before?
having more money under their own control. Why didn’t you trust me enough to talk to me
This is a place where parents and advisors will about this? How am I supposed to handle this
want to be particularly careful. Often a child going out of the blue?”
through the initial burst of spending may quickly
be labeled as spoiled or irresponsible, when in
truth he or she was just trying something out and
adjusting to their circumstances. Sometimes there
is a double standard—it’s acceptable for parents
to splurge after the sale of their business, but
let their 25-year-old do the same with the first
Sudden Wealth: Managing the Transition 7
One young beneficiary described the experience It is one of the ironies of great fortune that it
this way: “It feels like you thought you were a can cause us to waste our resources and to cut
citizen of one country, and then you wake up one ourselves off from help. Many new wealth holders
day and they tell you that everything you thought pull back from their former friends, advisors,
you knew is wrong and you’re actually a citizen and family members. It is certainly true that
of this other country. And you’re supposed to be new wealth (or newly visible wealth) can attract
happy that you’ve been in the dark all this time.” hangers-on, and there is often a deluge of advice,
Not preparing beneficiaries can add a level of recommendations, new business opportunities,
anger to the natural disorientation and confusion and requests for loans and gifts. A healthy
that sudden wealth brings young inheritors. skepticism at this stage can be appropriately
At Abbot Downing, our partnership with clients protective. But these feelings can also keep one
includes introducing inheritors to their future from listening to good advice when it comes from
wealth in ways that are proactive, incremental, capable advisors or truly understanding friends.
and age-appropriate. Someone experiencing sudden wealth needs to
watch out for withdrawing from the wisdom, care,
A Chute of Emotions and compassion of trusted associates.
Whether an immigrant or native in the It may seem odd that people with sudden wealth
Land of Wealth, there are certain common may feel unworthy, guilty, and even resentful of
emotional aspects of sudden wealth. The first their fortune. Sometimes these feelings resemble
step in responding to these involves identifying survivors’ guilt: “Why did I profit so greatly
them accurately. when others with just as much talent have not?”
Other times, wealth holders focus on the losses
Susan Bradley describes the inner experience
that have accompanied the gain: “Yes, I’ve got
of sudden money as resembling a “chute of
the cash, but I no longer have my company
emotions.” The image conjures up a long, twisting,
(or my career, or my dad).” These are powerful
dark tube, sliding downwards. You’re hurtling along.
emotions that need exploration and resolution
You get bounced one way and then another.
before wealth holders can really make their good
Who knows where you’ll fly out? Thankfully, we
fortune their own.
do know, generally, where this chute goes.
The experience will differ in some ways for The exuberance of new wealth may be wonderful,
each individual, but we can predict the overall but when combined with poor money skills it
range of emotions. Some of the most likely can lead to disastrous overspending. The same
feelings that accompany sudden money include: is the case for those who are so angered by how
they received the money that they struggle to
• N umbness, fear, isolation
accept it as good fortune, such as an inheritance
• I nsecurity, distrust of others from a person with whom there was much
unresolved conflict. One young client received
• U nworthiness, resentment
a $5 million trust distribution not only with
• E xuberance
no advance notice, but from a father who had
• G uilt, grief, revulsion abandoned the family. It made her feel
completely out of place, driving a wedge
Perhaps the most immediate reaction is the
between her and her friends and her spouse.
numbness that accompanies any shock, as the
She felt so out of her own skin that she did
body and mind get overwhelmed in adjusting to
everything she could to spend, give away,
the change. That numbness, however, can soon
and, basically, burn through the cash. In about
turn to fear: “Am I going to lose the money?
two years she was back to where she started.
What’s going to happen now? Will I change?
Only then did she realize that her feelings of
Will others change?” For many, that fear can
anger had robbed her and her young children
damage relationships by leading to isolation,
of a financial cushion for the future.
shutting oneself off from those who may be
closest or most familiar.
8 Sudden Wealth: Managing the Transition
The idea of a chute of emotions underscores the More positively, a decision-free zone offers a place
fact that strong reactions to sudden wealth are for reflection and learning. Even for sophisticated
not just about the money; there are powerful wealth holders, there’s a lot to reflect upon and
feelings that people undergo related to wealth. a lot to learn. While in this zone it’s ok to
Many people receiving sudden wealth find it tell people looking for money or offering
helpful to have someone with whom to talk about inexperienced advice: “I care about you and I want
their thoughts and feelings. Finding someone who to hear your proposal, but right now I’m working
listens, cares, and can stand by you through this through my priorities, and I need to do that before
process can make a significant difference. I can consider other people’s ideas.”
At Abbot Downing, we recommend that people
Common Responses to Sudden Wealth
facing sudden wealth also take a number of
The danger while in a chute of emotions is not additional steps:
the feeling but the doing. This is a hard point
• P ark your assets. Consider strategies for
for most people to grasp. Once the money is in
protecting the bulk of your new wealth for
hand, they feel they should do something with it,
at least a year. By doing so you will gain
maybe many things at once. The key is to stop
breathing space to think about what to do next.
and reflect—not about what to do, but about
There is no prize for putting new funds to work
what to think about. To begin with, recipients of
the fastest. Take time to consider your options
sudden wealth may find it most helpful to enter
in relationship to your goals.
what Susan Bradley calls a “decision-free zone.”
This zone is not just for decisions about investing, • S pend on memories more than material
planning, or spending. It is for thinking through possessions. Your first inclination may be to buy
what needs to be considered—both now and later. a new house or car. It can be valuable to hold off
Bradley recommends doing several things while in on big purchases for six months to a year while
your decision-free zone: you consider your priorities. But do enjoy your
money. Try taking a family vacation, if that
• S tay in control
works for your family. Use your funds to
• S eek help and learning enjoy some time together, take a break, and
start your reflection process. Get used to
• D etermine what’s immediately needed and what
living differently gradually.
can be delayed
• B uild your team. Take some time to assemble
• M ake understanding tax consequences a priority
a team of advisors who will be right for you
• D elay gifts and your family. You do need to connect with
financial, tax, estate, and risk management
• T rack cash flow
professionals, and with people who can help
• W ork through emotions
you with the emotional and familial aspects of
Creation of a decision-free zone gives the sudden wealth. It’s important to select advisors
recipient of sudden money breathing space. with whom you can discuss your experience,
It is partly protective. Far too often, people and who will respect your need for time to think
with new access to funds feel that they must through your new circumstances.
do something with the money. That feeling leads
• T alk and learn. You’re moving to, or taking full
to their giving up control, giving away too much
citizenship in, a new country. If you were moving
money, or ramping up spending and losing
geographically, you’d take the time to read
touch with their cash flow. All these can come
guidebooks and talk with people who’ve been
back to haunt you.
to the place. Talk with other wealth-holders.
Read white papers or other resources, such as
those listed at the end of this white paper.
Share what you learn with your family and
think through how you would like to integrate
your values with new opportunities now
available to you.
Sudden Wealth: Managing the Transition 9
How long should you stay in this process of Additional Resources
reflection? It depends. It will vary with the
• B rill, Marla. Windfall: Managing Unexpected
magnitude of the change in your life, on the range
Money So It Doesn’t Manage You.
of emotions you’re feeling, and on your own
Alpha Books, 2001.
knowledge, skills, and inclinations. Maybe it lasts
six months, maybe a year. During this time you • D omini, Amy L., Pearne, Dennis, and Rich,
will need to make some decisions relating to tax Sharon Lee. The Challenges of Wealth.
planning. But remember the basics—don’t give New York: Dow Jones, 1988.
up control, don’t give up the money, focus on
• N ational Endowment for Financial Education:
your priorities, and learn, both about the money
www.nefe.org
and yourself. In this way, sudden wealth can
open a path not just to luxuries, but to self- • M eaning, Meaning, & Choices Institute:
understanding and fulfillment. www.mmcinstitute.com
• S udden Money Institute:
Implementing Your Plan
www.suddenmoney.com
This paper has described ways in which sudden
wealth affects a wide variety of people. It’s not
something that happens only to lottery winners.
It can happen to couples who have spent their
lives building a business, a chief executive
receiving multi-million dollar dividends or vested
options, a middle-class young man newly married
into a family of wealth, a newly divorced woman,
a 25-year-old who is receiving her first trust
distribution, or a middle-aged inheritor who now
has more money than he ever dreamed about.
We have reviewed a number of strategies to use
when faced with sudden wealth. They include:
• L ocate your own experience within the
continuum from immigration to being a
native of wealth.
• R ecognize the challenges you will face as you
adapt to wealth.
• R espect the chute of emotion, knowing that it
will contain twists and turns. Let it teach you
about yourself.
• S tay in a decision-free zone as long as needed
to develop confidence in your decision making.
Strong reactions to sudden wealth will gradually
dissipate. Trust yourself and the process. You’ll
soon be able to make confident decisions that
reflect your priorities in collaboration with trusted
advisors.
10 Sudden Wealth: Managing the Transition