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January 18, 2022


How to preserve an unexpected windfall

There are many ways that we may come into an unexpected windfall: an elderly aunt may leave us millions to show that she really did appreciate our kindness over the decades. Or, we may win the lottery. In this market, we may have the good fortune to sell a piece of real estate that recently skyrocketed in value. Maybe we were involved in a personal injury lawsuit.

No matter how the fortune arrived, the last thing we want is to see it go, especially when what takes it is taxes. But how can we proactively protect this type of wealth?

3 top ways to protect your windfall

Every situation is of course unique. There are many ways to protect your financial assets. These are just three of the most common and, in most cases, reliable.

  1. Invest in commercial real estate. You may be able to depreciate up to 40 percent of the building’s value in the first five years.
  2. Create a charitable limited liability company or a charitable lead annuity trust (CLAT). Typically this provides an up-front deduction. However, the assets will come back to you over a decade or two.
  3. If the money is earned income you can create a pension. You can protect up to half a million dollars by putting your money in your pension over time. This won’t work for lottery winnings. Personal injury awards are typically not taxable. Punitive damages, however, are taxable.

Remember that you can inherit up to $12.06 million per individual (in 2022) and not have to pay any federal inheritance tax. However, the federal estate tax will come into play on assets worth over $12.06 million. Six states still impose an inheritance tax and 13 have an estate tax with varying monetary thresholds. Texas repealed its inheritance tax in 2015.

Here’s how to remember the difference: Inheritance taxes are paid by whoever inherits the money after they receive it. Estate taxes are paid by whoever owns the estate (after the owner’s death the estate pays these taxes).

IRS Tax Collection