Preparing For “Sudden Wealth” Inheritances

Last July, someone in Illinois won the $1.3 billion Mega Millions prize—the third-largest lottery jackpot in US history—though no one has claimed it yet, despite a payment option deadline looming.^[i] This is the very Mega Millions jackpot your neighbors likely dreamt of. It is easy to imagine the benefits of a tremendous windfall, like paying off debt, erasing your family’s financial stress or purchasing a home. However, it is even easier to overlook the surprising possible downsides—which aren’t exclusive to lottery winners. Inheritors can also experience sudden wealth’s psychological effects. In my view, preparing to give or receive an inheritance can help mitigate these potential negatives.

Sudden wealth syndrome,” coined and described by the MMC Institute, can manifest in lottery winners and inheritors alike.^[ii] As the MMCI’s research documents, feelings of guilt and paranoia may arise—along with anxiety, sleeplessness and thoughts like, “I don’t deserve this,” or “will this money disappear equally fast?” Furthermore, per the MMCI, guilt associated with newfound wealth may lead to self-defeating behaviors—such as an individual attempting to reconcile their past and present financial realities by spending (i.e., getting rid of) this new money as quickly as possible, consciously or not. This can include spending sprees, gambling or giving impulsively.

Identity crises and social isolation can also crop up. A sudden influx of wealth can force individuals to reassess their life goals and daily purpose. For example, an individual might suddenly question the purpose of their job—even if they enjoy it—when money is seemingly no longer relevant. They may need to redefine entirely what success looks like in their new reality. This can dovetail with social isolation. Without a sense of purpose or identity, suddenly wealthy individuals may self-isolate from friends and family. Familial resentment and requests for money—real or imagined—can drive isolation further. Meanwhile, the reality of one’s peers being comparatively financially limited means life plans may diverge. Friends might not be able to join on that big vacation or relate to new life goals. Financial mismanagement is yet another potential issue. As I touched on above, guilt can drive overspending and impulsivity—as can overconfidence. Conversely, an individual may fear financial missteps—leading to decision paralysis.

Does this mean leaving an inheritance dooms your grandkids to “sudden wealth syndrome”? I think that is unlikely, but it suggests preparation is important. While it may be difficult, discussing inheritance plans with heirs can help prepare them psychologically for a financial influx. For adult beneficiaries, set expectations early—together or individually—about the amount and type of assets you intend to leave. This can reduce sudden wealth’s surprise impact. Use these discussions to explain your rationale and express hopes for how your heirs will use the money—encouraging financial responsibility later. Plus, share why you want to leave this money, so your heirs feel deserving, which can help alleviate guilt. Consider their financial circumstances, too. For a lower-earning heir, a small inheritance could induce “sudden wealth syndrome,” even if you think you aren’t leaving much. You can also involve beneficiaries in financial discussions with your adviser, if you feel comfortable, to help ensure everyone is on the same page.

For younger beneficiaries, consider discussing their inheritance in stages—providing more detail as they age. One approach? Share the story of how you earned your money. This can help younger people understand the effort that went into building it and thereby ascribe more value to their inheritance (this applies to adults, too!). If a discussion isn’t possible, or if you are concerned about heirs’ irresponsibility, consider using a trust. This can enable you to avoid leaving a lump sum inheritance and distribute funds per your wishes—for example, via regular monthly, quarterly or annual payments.

How can beneficiaries prepare? Deliberate planning and discussions can also help here. Consider how you will invest, save and budget large sums—including contingencies for larger or smaller probable amounts—and set goals to decide how your new money will work for you. Then, realistically assess your financial history and psychology. It may be beneficial to enlist an adviser’s help to identify and address problem areas like overconfidence, loss aversion or general anxiety around money. Moreover, don’t assume your inheritance is a given—minds and markets can change. It would be unwise to quit a job or accumulate massive debt, for example, on the presumption a windfall will fix everything.

It may be helpful for beneficiaries to initiate discussions with family members. Approach the topic by asking if they have inheritance plans and if they would be willing to discuss them with you. Prepare questions to help set expectations and avoid “sudden wealth” surprise power down the line. Be patient and willing to spread conversations out over time. Gratitude can go a long way—acknowledge the work they put into earning their money and express appreciation, not expectation.

The circumstances surrounding inheritance are innately challenging. Preparing for “sudden wealth” can limit the added strain a lottery-like influx may bring.