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Windfall or inheritance, the cash needs to be managed

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Droves of new millionaires are created in Canada every year. Dozens of them emerge simply by winning the lottery, while others inherit money from a wealthy relative, or cash in by selling a business they've spent a lifetime building.

But for the hundreds of suddenly wealthy people who emerge across the country, some of them don't remain rich for long.

Just as quickly as the new-found wealth materializes, it can be innocently squandered – the casualty of what money planners call "sudden wealth" and the inability of some to properly cope with all of the changes it brings.

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It is a phenomenon that provides important lessons for investors of all tax brackets – that is, if you should suddenly come into money, how do you make sure you don't blow it? Dealing with a windfall is not as easy as most people think.

"For every problem that wealth solves, it creates new and different ones," said Anthony Maiorino, vice-president and head, RBC Wealth Management, who has counselled numerous clients over the years on how to make sure they stay wealthy and don't end up a statistic.

Regardless of the size of the windfall – from a $25,000 inheritance to a life-altering $25-million bonanza – the key to holding onto wealth long term is planning, Mr. Maiorino said. Otherwise seemingly vast amounts of money can erode faster than people realize.

"There are far too many people who believe money can do more than what it can actually do," Mr. Maiorino said, referring to the belief that some people have when they come into money – that all their problems are solved.

"It's not necessarily that you inherited $1-million, it's that you inherited a sum of money that you weren't quite prepared for when you got it."

The issue of sudden wealth has become a serious issue for financial planners as baby boomers age and pass on large amounts of wealth to children and grandchildren, sometimes with insufficient planning for tax sheltering or to prevent overspending and loss.

"If I won $25-million tomorrow, I no longer have to worry about retirement, I no longer have to worry about my kids being able to go to school, those kinds of things," Mr. Maiorino said. "But now I have to worry about people taking advantage of them, and taking advantage of me."

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Financial advisers urge people to pause and take time to figure out exactly what they want to get out of the money – not necessarily what they want to do with the wealth, but what they want the wealth to do for them.

A family trust can shelter money from taxes, or prevent liquidation by a family member too eager to spend. And a good investment plan will prevent people from burning through their capital faster than they realize.

It may start innocently with a luxury vacation – an acceptable reward for years of hard work – and move on to buying a fine car, or a posh second property, which could also be justified as an investment. But each of these decisions comes at a cost that can eat into monthly cash flow, and later into the base capital itself.

Sloan Levett, president of Fuller Landau Family Office Services Inc. in Toronto, which manages money for high-net-worth clients, has seen fortunes squandered by people dipping too quickly or liberally into their windfall, not realizing that they are changing their lifestyle dramatically.

"It's not hard for it to get out of hand and for you to blow a significant amount of capital in not a very long period of time," Mr. Levett said. "We've seen it a number of times."

Some people who walk through his door are there to repair the damage.

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"What we've come into often enough is situations where people already had some sort of windfall and they are two or three or four years later, and they are eroding that capital at a very rapid pace," Mr. Levett said. "And they look to us to sort of help them put the brakes on and fix it, and put them on some sort of plan."

His advice is to spend a bit on yourself if you want, but preserve as much capital as you can – and then put that money to work.

The lifestyle changes brought by a windfall can be costly, including the instinct many people have to suddenly stop working. That, too, must also be carefully thought out in advance, since the decision should be underpinned by good financial planning, which means setting a budget.

"You need to create goalposts or budgets to live within," Mr. Levett said.

Plotting out how to invest money so that it exists for the long term is particularly important these days as low interest rates sap the ability to make a higher return. People who squander too much of their sudden wealth sometimes end up taking investment risks with the cash trying to earn higher returns to get it back.

Glancing around his office at RBC's wealth management headquarters in downtown Toronto, Mr. Maiorino admits he's got a lottery ticket tucked away in his briefcase. He's well aware that the odds of winning are remote, but he knows what he'll do if his numbers come up: prepare.

"Money changes a lot of things," Mr. Maiorino said. "In situations where you're getting a windfall, you want to avoid the pitfalls: You need to spend a little bit of time up front to do the planning to make sure that you avoid them."

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Senior Writer

Grant Robertson is an award-winning journalist who has been recognized for investigative journalism, sports writing and business reporting. More

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