Receiving a large sum of money can change your financial life almost overnight.
A lawsuit settlement, inheritance, business sale, large bonus, or other financial windfall can create opportunities that may have taken decades to achieve through ordinary saving.
But suddenly having more money also creates new decisions—and new risks.
How much can you safely spend?
Should you pay off debt?
How should the money be invested?
Will you owe taxes?
What happens if you inherit an IRA?
Should you make large purchases immediately?
And perhaps most importantly:
How do you make sure the money improves your financial life for decades rather than disappearing within a few years?
In this educational webinar from Hendricks Wealth & Estate Management, we discuss how settlements, inheritances, and other financial windfalls can fit into a comprehensive financial plan—and why the decisions made shortly after receiving a large lump sum can be particularly important.
What Should You Do First After Receiving a Large Sum of Money?
One of the most important steps may be surprisingly simple:
Don't rush into major purchases or financial decisions.
A sudden influx of money can create a feeling that everything has changed overnight.
In some ways, it has.
But that doesn't mean you need to immediately:
- Buy a new house
- Replace your vehicles
- Make large gifts
- Invest in a friend's business
- Pay for everyone's expenses
- Change your lifestyle
- Put all of the money into investments
Instead, take time to understand what you received, what rules apply to it, what taxes may be involved, and what you want the money to accomplish.
A financial plan can help answer those questions before irreversible decisions are made.
What Is the Difference Between a Settlement, Inheritance, and Windfall?
The webinar divides sudden financial gains into three broad categories.
Settlement
A settlement generally refers to proceeds received as the result of litigation, whether through a negotiated settlement, judgment, or other resolution of a legal claim.
Inheritance
An inheritance consists of assets received from someone who has died.
Those assets may include:
- Cash
- Bank accounts
- Investments
- Real estate
- Traditional IRAs
- Roth IRAs
- Trust assets
- Personal property
Financial Windfall
A financial windfall is a broader term for a sudden and significant financial gain.
Examples can include:
- Selling a business
- Selling a vacation home or other property
- Receiving a large work bonus
- Receiving a significant stock payout
- Winning a lottery
- Receiving another unexpected lump sum
The source of the money matters because different types of assets can have very different tax, investment, and planning considerations.
Why Do People Lose Financial Windfalls So Quickly?
Receiving a large sum of money doesn't automatically create long-term financial security.
The webinar discusses several behaviors that can cause a windfall to disappear surprisingly quickly.
Mistake #1: Immediately Increasing Your Spending
A sudden financial gain can make expensive purchases feel affordable.
A larger house.
Luxury vehicles.
Vacations.
Boats.
Second homes.
Designer purchases.
Individually, each expenditure may seem manageable compared with the size of the original windfall.
The problem is that spending can quickly become permanent.
What Is Lifestyle Creep After a Financial Windfall?
Lifestyle creep occurs when temporary financial abundance turns into permanently higher expenses.
Buying an expensive home isn't merely a one-time purchase.
It may also mean:
- Higher property taxes
- Higher insurance premiums
- More maintenance
- More expensive furnishings
- Higher utility bills
- Landscaping expenses
- Larger repair bills
The same can happen with expensive vehicles, vacations, club memberships, and other lifestyle upgrades.
The question isn't simply:
"Can I afford to buy this?"
A more useful question is:
"Can my financial plan support the ongoing cost of this lifestyle for the rest of my life?"
Mistake #2: Becoming the Bank for Friends and Family
Once people know you've received money, your relationships can sometimes change.
Friends or family members may approach you with:
- Business opportunities
- Investment ideas
- Requests for loans
- Requests for financial assistance
- Partnerships
- Real-estate opportunities
- Other ways to "put your money to work"
Some of these requests may come from people who sincerely believe they're presenting a good opportunity.
That doesn't necessarily make the opportunity appropriate for you.
Before lending or investing significant money, consider how the decision affects your own financial plan—and whether you can afford the possibility that the money won't be repaid.
Should You Tell People You Received a Large Settlement or Inheritance?
Privacy can become an important form of financial protection.
The more people who know about a financial windfall, the more likely you may be to receive requests for:
- Loans
- Gifts
- Investments
- Business funding
- Financial assistance
You aren't obligated to publicize your financial circumstances.
In some situations, keeping the information within a small circle of trusted family members and professional advisors may help you make decisions without outside pressure.
Mistake #3: Spending the Principal Faster Than It Can Grow
A large lump sum can look almost unlimited.
It isn't.
If withdrawals consistently exceed what your assets can reasonably support, the account can enter a cycle of depletion.
That is particularly concerning when the money is intended to replace:
- Lost income
- Retirement income
- Future healthcare expenses
- Disability-related expenses
- Lifetime financial support
A financial plan can estimate how much money may reasonably be available for ongoing spending while still accounting for your longer-term needs.
How Can a Financial Advisor Help After a Financial Windfall?
A financial advisor can help convert a large amount of money into a long-term financial strategy.
Depending on your circumstances, that may include:
- Identifying immediate needs
- Calculating sustainable spending
- Paying down high-interest debt
- Creating an investment strategy
- Planning for taxes
- Establishing cash reserves
- Coordinating retirement accounts
- Planning future distributions
- Updating estate documents
- Reviewing beneficiary designations
- Creating a legacy strategy
The objective is not simply to invest the money.
It's to determine what the money needs to accomplish first.
What Should You Do After Receiving a Lawsuit Settlement?
A settlement may have a very specific purpose.
For example, someone receiving a settlement following a serious injury may need the money to support expenses for many years.
Those expenses could include:
- Replacing lost income
- Medical-related costs
- Accessible transportation
- Home modifications
- Ongoing assistance
- Future healthcare needs
- Everyday living expenses
That means settlement planning should generally begin with the person's lifetime needs, rather than investment returns alone.
Step 1: Identify Immediate Settlement Expenses
Some expenses can't wait.
The webinar discusses a client who received a significant settlement following a serious injury.
Immediate needs included improvements to make the home more accessible as well as an accessible vehicle.
Those costs needed to be addressed before determining how much of the settlement could be invested for the future.
That's why settlement planning should begin by separating:
Immediate needs
from:
Long-term assets.
Step 2: Determine Your Sustainable Standard of Living
After immediate expenses are identified, the next question is:
How much can this settlement reasonably support each year?
That requires looking at:
- Current expenses
- Future expenses
- Inflation
- Other sources of income
- Investment returns
- Healthcare needs
- Life expectancy
- Major future purchases
A large settlement can dramatically improve someone's financial situation.
But that improvement needs to be sustainable.
Step 3: Plan for Future Costs
Settlement recipients may face expenses that are different from those of a typical retiree.
For example, a serious injury could create ongoing costs involving:
- Mobility
- Transportation
- Personal care
- Home accessibility
- Medical equipment
- Lost earnings
These expenses need to be incorporated into the financial plan rather than treated as unexpected emergencies each time they occur.
Step 4: Invest According to When the Money Will Be Needed
Settlement assets needed within the next several years may require a different investment approach than money intended for use decades from now.
Investment decisions should consider:
- Time horizon
- Spending needs
- Risk tolerance
- Liquidity
- Future expenses
- Other income sources
Taking excessive risk with money needed soon can create unnecessary financial vulnerability.
At the same time, keeping an entire lifetime settlement in cash may create other challenges.
The investment strategy should be designed around the person's actual financial plan.
Is a Lawsuit Settlement Tax-Free?
The webinar emphasizes an important distinction:
Money that is received tax-free is not necessarily tax-free forever.
Depending on the nature of the settlement, some proceeds may receive different tax treatment.
But once settlement proceeds are invested, future earnings may potentially generate:
- Interest
- Dividends
- Capital gains
- Other taxable income
That's why investment planning and tax planning should work together.
Tax treatment varies by settlement and individual circumstances, so settlement recipients should review their specific situation with qualified tax and legal professionals.
What Should You Do After Receiving an Inheritance?
An inheritance can be more complicated than receiving a check.
You might inherit several different asset types, each governed by different rules.
For example, someone might inherit:
- A house
- Cash
- A brokerage account
- A traditional IRA
- A Roth IRA
- Trust assets
- Personal property
The financial plan should consider each asset individually before determining how everything fits together.
Why Does the Type of Asset You Inherit Matter?
Different inherited assets may receive different tax treatment.
A traditional IRA isn't the same as a Roth IRA.
And neither is the same as inheriting a taxable investment account or piece of real estate.
That's why the first question after an inheritance shouldn't simply be:
"How much did I inherit?"
It should also be:
"What exactly did I inherit?"
What Happens When You Inherit a Traditional IRA?
Inherited traditional IRAs can be subject to distribution rules under federal law, including rules affected by the SECURE Act.
Depending on the beneficiary's circumstances, distributions may be taxable as ordinary income.
That makes timing important.
Rather than automatically withdrawing the entire account, a financial plan may evaluate distributions in light of:
- Current taxable income
- Expected future income
- Retirement timing
- Tax brackets
- Other inherited assets
- Applicable distribution requirements
The goal may be to develop an intentional withdrawal strategy rather than allowing taxes to dictate decisions at the last minute.
What Happens When You Inherit a Roth IRA?
Inherited Roth IRAs can also be subject to distribution rules.
However, qualified Roth IRA assets can provide tax-free growth.
In the webinar example, beneficiaries who inherited Roth IRAs planned to allow those assets to remain invested for much of the available period so they could potentially continue benefiting from tax-free growth before the account ultimately had to be distributed.
The appropriate strategy depends on the applicable inherited-IRA rules and the beneficiary's circumstances.
What Is a Step-Up in Basis on an Inherited Asset?
Certain inherited assets may receive a step-up in cost basis when the owner dies.
Generally, this means the asset's tax basis may be adjusted based on its value at the date of death, subject to applicable tax rules.
This can significantly affect future capital-gains calculations.
Assets that may potentially receive basis adjustments can include certain:
- Brokerage investments
- Real estate
- Other capital assets
Because inherited asset taxation can be complex, beneficiaries should understand the basis of an inherited asset before selling it.
Should You Keep Inherited Investments Exactly as They Are?
Not necessarily.
An investment strategy that was appropriate for the person who originally owned the assets may not be appropriate for the person inheriting them.
The original owner may have had a different:
- Age
- Income
- Tax situation
- Risk tolerance
- Retirement timeline
- Spending need
- Investment objective
An inheritance should generally be incorporated into your financial plan, rather than simply preserving someone else's investment strategy.
Should You Pay Off Debt With an Inheritance?
Paying down high-interest debt may be one possible use of inherited assets.
The webinar discusses incorporating debt repayment into the overall inheritance plan before investing the remaining proceeds.
Whether paying off debt makes sense depends on factors including:
- Interest rate
- Type of debt
- Available emergency savings
- Taxes
- Investment opportunities
- Other financial goals
The decision should be evaluated as part of the full plan rather than automatically using all inherited assets to eliminate every liability.
Why Should You Update Your Estate Plan After Receiving an Inheritance?
An inheritance can significantly change your net worth.
That means your existing estate plan may no longer reflect your financial circumstances.
After receiving substantial assets, consider reviewing:
- Your will
- Trusts
- Financial power of attorney
- Healthcare power of attorney
- Beneficiary designations
- Account ownership
- Legacy goals
The webinar describes working with inheritance recipients who discovered during the process that they had little or no estate planning of their own.
Receiving assets because someone else planned carefully can serve as a useful reminder to do the same for the next generation.
What Should You Do After Selling a Business or Property?
A business sale, vacation-home sale, or similar transaction can create another type of financial windfall.
These events may require decisions involving:
- Capital-gains taxes
- Debt repayment
- Retirement savings
- Investment strategy
- Cash reserves
- Estate planning
One of the first steps should be understanding the net proceeds.
The amount deposited into your account may not represent the amount ultimately available to spend or invest after taxes and other obligations are considered.
Should You Set Aside Money for Taxes After a Windfall?
Possibly.
Some windfalls may create significant tax liabilities.
That could include proceeds involving:
- A business sale
- Sale of investment real estate
- Sale of a vacation home
- Certain investment gains
- Bonuses
- Other taxable compensation
Before investing or spending all of the proceeds, determine whether part of the money should remain available for taxes.
This can help avoid having to sell investments or find cash later when tax payments become due.
Can a Windfall Help You Save More for Retirement?
Potentially.
The webinar discusses a couple who sold a vacation home shortly before retirement.
After accounting for the transaction and paying off a small amount of high-interest debt, their financial plan included increasing contributions to employer retirement plans.
Because they were currently in a relatively high tax bracket, increasing eligible retirement-plan contributions helped coordinate the windfall with their broader tax and retirement strategy.
Remaining funds could then be invested according to their longer-term needs.
The important point is that a windfall can affect more than one account.
Sometimes the best strategy involves adjusting several pieces of the financial plan simultaneously.
Should You Create a Trust After Receiving a Large Windfall?
A significant increase in net worth can make estate and legacy planning more important.
Depending on your circumstances, that may include establishing or updating a trust.
In the webinar example involving proceeds from a vacation-home sale, the clients ultimately established a trust and coordinated ownership of their brokerage account with that estate plan.
Trust planning is a legal matter and should be completed with a qualified estate-planning attorney.
A Practical Checklist After Receiving a Large Lump Sum
Before making major decisions, consider working through the following areas.
1. Don't Rush
Avoid major purchases and commitments until you understand your financial situation.
2. Understand What You Received
Identify whether you're dealing with:
- Cash
- Retirement accounts
- Investments
- Real estate
- Settlement proceeds
- Business-sale proceeds
- Other assets
3. Identify Taxes
Determine whether taxes are due now or may arise later.
4. Address Immediate Needs
Set aside money for necessary purchases, healthcare costs, debt, taxes, or other urgent expenses.
5. Determine Sustainable Spending
Understand how much the assets can reasonably support without creating long-term depletion.
6. Create an Investment Strategy
Invest according to your goals, time horizon, cash needs, and risk tolerance.
7. Develop a Distribution Plan
If the money will help fund your lifestyle, determine how withdrawals will be managed.
8. Review Your Estate Plan
Make sure your will, trust, beneficiaries, and other estate-planning documents still reflect your wishes.
9. Protect Your Privacy
Be thoughtful about who needs to know about your new financial circumstances.
10. Think Beyond Today
Ask what you want this money to accomplish not only this year—but 10, 20, or 30 years from now.
What Should You Ask a Financial Advisor After Receiving a Windfall?
Useful questions may include:
How much can I safely spend?
How much should remain in cash?
Should I pay off my mortgage or other debt?
How should this money be invested?
What taxes should I expect?
What should I do with an inherited IRA?
How will this affect my retirement plan?
Should I make large gifts to family?
Do I need to update my estate plan?
How can I make this money last?
The goal should be to create a strategy that integrates the windfall with the rest of your financial life.
A Windfall Should Change Your Financial Plan—Not Necessarily Your Entire Lifestyle
A settlement, inheritance, or other financial windfall can create tremendous opportunity.
It may allow you to:
- Retire earlier
- Eliminate expensive debt
- Improve your home
- Fund important healthcare needs
- Strengthen retirement savings
- Help family
- Create a legacy
- Increase financial flexibility
But the amount of money you receive is only part of the equation.
What you do next may ultimately matter more.
A thoughtful financial plan can help turn a temporary financial event into a resource designed to support your goals for many years to come.
Watch the Full Webinar
Want to hear the complete discussion?
In "Settlements, Inheritance and Windfalls: Choosing the Right Financial Advisor Is Critical," Hendricks Wealth & Estate Management discusses how large lump sums can affect spending, investing, taxes, inherited retirement accounts, debt management, estate planning, and long-term financial security.
Frequently Asked Questions About Settlements, Inheritances, and Windfalls
What is the first thing I should do after receiving a large inheritance?
Avoid making immediate major purchases. First identify exactly what assets you inherited, understand their tax and distribution rules, evaluate immediate needs, and develop a financial plan for the assets.
What should I do after receiving a large settlement?
Identify immediate and future expenses, determine a sustainable standard of living, understand the tax treatment, establish an investment strategy, and create a long-term distribution plan before making significant discretionary purchases.
Should I pay off debt after receiving an inheritance or windfall?
High-interest debt may be an appropriate priority, but the decision should consider your interest rates, taxes, emergency reserves, retirement plan, and other financial goals.
Is inherited money taxable?
It depends on the asset. Cash, inherited retirement accounts, real estate, and taxable investments can all have different tax consequences. Inherited traditional IRA distributions, for example, may generally create taxable income, while other inherited assets may qualify for a step-up in basis.
Do I have to withdraw an inherited IRA within 10 years?
Many non-spouse beneficiaries are subject to a 10-year distribution period under the SECURE Act, but inherited IRA rules vary based on the beneficiary, relationship to the deceased owner, timing, and other circumstances. Beneficiaries should confirm the rules applying to their specific account.
Should I withdraw an inherited Roth IRA immediately?
Not necessarily. Depending on the applicable rules and your circumstances, keeping inherited Roth assets invested for part of the available distribution period may allow additional tax-free growth.
Should I sell investments that I inherited?
Not automatically. First determine the asset's tax basis, evaluate the current investment allocation, and decide whether the inherited investments are appropriate for your own goals, risk tolerance, and financial plan.
What is a financial windfall?
A financial windfall is a sudden and significant financial gain. Examples can include an inheritance, settlement, large bonus, business sale, property sale, stock payout, or lottery winnings.
How do I keep from spending an inheritance too quickly?
Create a financial plan before making major purchases. Establish short-term cash needs, long-term investments, a sustainable spending level, and clear boundaries around gifts and loans to family or friends.
Should I tell family and friends that I received a large inheritance?
You don't have to. Limiting who knows about a significant financial windfall may reduce requests for loans, gifts, and investment opportunities and give you more space to make thoughtful decisions.
Should I hire a financial advisor after receiving an inheritance?
Professional guidance can be particularly useful when an inheritance includes multiple asset types, inherited retirement accounts, taxes, substantial investments, debt decisions, or estate-planning considerations.
What should I do after selling my business?
Before spending the proceeds, determine the tax liability, identify how much is actually available after taxes and transaction costs, evaluate debt and retirement goals, establish an investment strategy, and review your estate plan.
How can I make a large windfall last for the rest of my life?
Start by estimating your long-term expenses and other income, then create an investment and withdrawal strategy designed around those needs. Avoid allowing permanent lifestyle expenses to increase faster than the assets can reasonably support.
About Hendricks Wealth & Estate Management
At Hendricks Wealth & Estate Management, financial planning goes beyond preparing for retirement.
Major life events—including settlements, inheritances, business sales, property sales, and other financial windfalls—can significantly change someone's financial situation.
We help individuals and families evaluate how those new assets fit with their investment strategy, retirement plan, tax considerations, estate planning, cash flow, and long-term family goals.
The objective isn't simply determining where to invest a lump sum.
It's developing a plan for what that money needs to accomplish throughout your life.
Illinois Office
2403 Harnish Drive, Suite 201
Algonquin, IL 60102
847-428-3997
Florida Office
5245 Office Park Blvd., Suite 103
Bradenton, FL 34203
941-308-9862
HendricksWealth.com