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Go bankrupt with $20 million

By Judy Martel · Bankrate.com
Sunday, October 21, 2012
Posted: 4 pm ET

If you were to ask people what they would do with a windfall of $20 million, I bet none of them would say they'd spend it all, plus another $600,000, within eight years and then declare bankruptcy.

But one couple did just that. In 2004, a jury awarded a Missouri couple, Eric and Cassandra Peoples, a total of $20 million for lung injuries Eric suffered as part of his job at a flavor and fragrance maker. Now they've not only declared bankruptcy, but list more than $611,000 in liabilities, according to ABC's "Good Morning America." Their assets include a home worth $700,000 and personal property worth $33,000. The couple isn't talking to media, so there's no indication of where the rest of the money went.

Regardless of the circumstances, this is a version of the same tragic story for so many of the people who come into "found money" after they've hit the lottery jackpot, received an unexpected inheritance or won a court settlement. In the end, they would have been better off having never received the money because they end up deeper in debt.

Plan first, spend later

"Way too often the first impulse is to spend" a windfall, says Leslie Corcoran, founder of Family First Financial Planning. Because the sudden wealth is unexpected, people often feel they deserve the opportunity to blow it, she adds. "Most people are used to spending what they bring in versus having a saving habit, so this is what they know how to do."

When families that have not had money suddenly do, they are often unprepared for all the issues that come with handling wealth and it's human nature to want things you can't have, explains Andrew Mehalko, president of AM Global Wealth Management, a firm that manages money for the wealthy. "A good analogy would be to ask someone who has never trained for a marathon to go run one tomorrow," he adds.

An amount as high as $20 million can seem like an unlimited bank account to those unaccustomed to having such a high net worth, so your first step toward preserving it for the long haul is to engage the services of a professional you can trust, who is not trying to sell you anything. Spending is not a sin, but you have to have the scope of what's going toward taxes, debts and other expenses and take the time to develop a solid financial plan before you whip out the credit cards.

Corcoran advises parking the money in safe accounts until you can make informed decisions about investments. "You need time to adjust to this windfall and time to determine what you really want to do with it," she adds.

OK, splurge just a little

The itch is too great for most people, so scratch it by blowing some money on that motorcycle you've always wanted or the vacation in the mountains; but keep it small. "I think people do need to plan for a portion to splurge," says Corcoran. "Otherwise, the splurge will occur but will be of a much larger amount. Just like a diet, one needs to have some allowances for a little treat."

One way to keep it small is to set a limit upfront. "Do NOT spend -- on trips, houses, cars, boats, etc. -- more than 2 percent of the after-tax proceeds of the award in the first year," Mehalko advises. Instead, he adds, remember that you're in this for the long term and "spend" the year training for the wealth marathon.

How would you handle a $20 million windfall?

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16 Comments
Kayley
October 23, 2012 at 11:45 am

Rather than pay off my bills in a lump sum, I'd take the time to make double payments to help get my credit rating back up where it belongs. After a well-deserved, but relatively short (2-3 weeks) vacation, I'd interview CPAs to find an honest one I felt comfortable with and discuss investing whatever is left over from taxes and those darned bills, hopefully creating enough wealth to take care of me the rest of my life, as well as set up something to help my aging parents out. Perhaps set something up for the son who's actually found work after pounding pavement for over a year to help him gain a little more experience with money. My other son can just deal with his lazy ways and limited income.

Carol
October 23, 2012 at 11:30 am

I would pay off my debts, add up what it will take to live on a $50,000. income per year until death, pull that amount out to gain interest, then set-up a legal fund for all the people that have been victims of race, so that they can fight back and win, give me my money back when they do and keep going until it's all gone or still helping.

NonExist
October 23, 2012 at 10:45 am

Pay off all debts.
Invest and make it into a trust thing my mom told me about and get all the taxes off my back up front.
Help out the few family members who have always been there for me with a little seed money and then enjoy the rest of my life relaxing and not having to work.

Being a recluse who grew up poor, my lifestyle would not change much except that I would move to a more secure and quiet area that is not the ghetto.

Mike
October 23, 2012 at 10:07 am

Pay my debts, fix up what needs fixing, sell the house and get a smaller one. Might be a trade in on the car, might not be. Pay a few debts for close loved ones. Put the rest in a high dividend, low overhead fund and live off the dividends every 3 months. Dividends off 20 million is a very nice living and the principle will keep well ahead of inflation too. The kids will get a nice blind trust.

Ed
October 23, 2012 at 9:42 am

Theres a lot of sadness in the world, that some poor SOB losses 20 million dollars. How is this relevent to the rest of us that are just trying to keep out of dept and maybe vacation once a year. They should have given half of it to the charities of thier choice and only payed taxes on the remainder. Now the only winner is the goverment. It just brings a tear to my eye. So sad.

Ann
October 23, 2012 at 8:44 am

Unfortunately I learned this lesson myself. My brother and I both received an inheritance in the amount of about $120,000 each. We paid the taxes that we were told we would need to pay. 20 percent. After that it was spend, spend, spend! I paid off debts and took 1 lavish vacation. I also had "friends" suddenly asking for money and I would "borrow" it to them. I was young and felt like I was on top of the world. Boy how ignorant I was back then. My brother blew through his too. He did put a large sum of money down on a house that he ultimately couldn't afford. He lost that house to foreclosure.Then we found out we still didn't pay enough in taxes. Finally just paid off my debt to the IRS last year. The only somewhat smart thing I did is start my own business, which is a decent income. I am now more careful with money. The feeling of blowing through that kind of money is sickening. I agree with what was said in article, all the things you ever wanted, you can have now. It can be quite overwhelming. If I ever came into $20 million , I would think long and hard before spending on anything. I sure got a financial life lesson out of my huge misstake!

Dawn
October 23, 2012 at 8:15 am

Pay off my debt first, which is a drop in the pan compared to what that money could make for me. Invest a lump sum that is enough to live off of for the rest of my immediate family's lives (something that transfers a certain amount into the family account each month and the rest is not so easilly accessible). Divide another lump sum equally between my children, put it into trust funds with certain contigenies that guarantee them a college education, with no access to the rest until they've had to live a little (say 30 years old). Figure out tax overhead and other expenses for the things we've already done and the things want and set it aside in another investment fund. Then spend, spend, spend the rest. Single Mom working two jobs for the last ten years. I've dreamed and imagined what winning the lottery would be like for many years.

Debi
October 23, 2012 at 6:03 am

Derek I was kind of shocked when you suggested that "the next 5-10 generations will have a security blanket' In this life we can only speak for ourselves. We all hope that the next 5-10 generations even exist considering the massive problems in today's world. As the article showed all it took was the foolish choices of just one couple to wipe out 20 million plus. In fact all it takes is the greed of one person in a family to reek havoc. It is often the kids who inherit money, that squander it. Sadly, I don't think any of us can guarantee that their future families are going to be financially savvy. Certainly we can only hope but realistically, I've seen even in my own family that when it comes to money/inheritances there are plenty of idiots. For you Sir, I still wish you abundance in every way.

Derek
October 23, 2012 at 1:05 am

I would pay off current debts first then go back to school to get my education. I would learn how to make my money work for me and my family and figure how to live off the interest alone. That way the next 5-10 generations will have a security blanket. Then it is on to teaching the children about good money stewardship so they do not live beyond their means. I would throw in some travel once in a while as well. That will give my children a perspective on how the rest of the world lives and to not take things for granted.

William B. Anthony
October 23, 2012 at 12:49 am

Isn't it safe to go to a reliable commericial bank, like the one you have had your checking account for twenty years, ask for their trust officer, show him the papers which tell him you are being truthful and create a living trust. Then determine tax liabilities and other expenses which have to be paid first and then if you agree on fees, trust him or her to handle investment income and put an agreed amount in the same old checking account ech month, which will should give you more than you have ever had in your life for fun and living. Any one who cannot wait that long to start spending is a fool anyway and there is no answer for fools.