A New Jersey lottery winner scored a $1.13 billion jackpot in March, and New York, Indiana, Missouri, and Louisiana have sold over 10 Powerball jackpot-winning tickets through the years.¹    

While a limited few win the game’s biggest prizes, there are much more common “windfall scenarios” that can have a major impact on your net worth:

• Receiving an inheritance
• Getting a life insurance payout
• Selling a valuable asset like a home or other real estate
• Cashing in on your employee equity                                                      

Even drawing lucky numbers – suddenly coming into cash – can have pitfalls. Following are a few general guidelines for how to deal with a large windfall.

Secure the funds and don’t do anything immediately

Upon receiving a large and unexpected sum of money, many people’s natural instinct is to act immediately – making exciting purchases, investing, paying off debt, or using the money just as suddenly as it’s received.

Before you decide what to do with your windfall, consider parking your money somewhere secure – like in a high-yield cash account – and speaking with your family members and a financial advisor. Taking your time and working closely with unbiased financial professionals will help you ensure that your money is being used most effectively – and that it supports your long-term financial goals. That said, sitting on cash for an extended period of time is inefficient, so work to put a strategy in place within a couple months of the windfall.

Read more: Saving money for long-term vs. short-term financial goals                                       

Get your estate plan is in order

It can be valuable to review your estate plan periodically, as well as any time a significant life event happens. If your windfall dramatically changes the size and nature of your estate, it’s important to reflect that in your plan. You may want to work with an estate planning attorney to ensure that your affairs are in order. If you don’t need the money from your windfall, you may consider disclaiming it so it can pass to your heirs without being subject to estate taxes.

Consult a tax professional to better understand the tax implications

You will likely need to pay taxes on your windfall — but how much depends on the source and amount of the money.

If your windfall came from certain sources like an inheritance, gift, or a life insurance payout, you may avoid federal income tax. Funds from sources like lottery winnings or a large bonus are generally taxed at your ordinary federal income tax rate. Income from the sale of real estate or a business, for example, will generally be taxed as long-term capital gains.

Keep in mind that you may owe additional state income taxes on your windfall as well, depending on your home state and the circumstance of your windfall.

How you are taxed greatly depends on how you came into the money; a tax professional can help you   tease out the taxes you owe and how much, as well as advise you on the best use of your newfound funds for optimal tax treatment. Coordinating with both a tax and estate specialist may help, as some estate objectives (like a charitable donation) may impact your tax picture.

Reevaluate your investment portfolio

Pre-windfall, your portfolio might have been mostly focused on growth to build wealth. However, if your windfall allows you to re-think this approach, you may want to explore an investment strategy that is focused on protecting your wealth. This may entail re-thinking your asset allocation to help optimize your portfolio for wealth preservation and minimizing the impact of future taxes.

Consider how you want to use your windfall

Once you’ve ticked these basic financial planning boxes, here are some additional possibilities you may consider when thinking about how to use your windfall money:                                               

• Pay off high-interest debt. If you have high-interest debt (like credit card debt), try taking care of that first, before splurging or making a big purchase. Talk to a financial professional about how to address other kinds of debt like your mortgage or student loans.
• Look into charitable giving. If you want share the wealth, donating to charitable organizations allows you to both make a difference with your windfall money and reap tax benefits. There are several different ways you can give — contact a financial advisor for guidance on your different options.
• Reconsider your insurance needs. You may no longer need life insurance money if your estate is large enough to support your family, but you may want to consider other types of insurance such as a personal extra liability or an umbrella policy.
• Set up an emergency fund. If you don’t already have one, stowing 3-6 months of basic living expenses in a high-yield cash account is generally advisable.

The bottom line

Once you’ve decided how to manage your windfall — enjoy yourself! Take that vacation you’ve always dreamed of, start the business you’ve always had in the back of your mind, or buy a new car.

Working with a team of unbiased financial professionals can help you deal with the big practicalities, so you can bask in the financial freedom that a large windfall may afford. Jackpot.