Return to Transcripts main page
CNN Live Saturday
Dollar Signs: Sudden Wealth
Aired July 12, 2003 - 16:29 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RHONDA SCHAFFLER, CNN ANCHOR: In DOLLAR SIGNS today, sudden wealth, it's a problem almost all of us would love to have. Like the Walkenbachs (ph) of Herman, Missouri, who won half of that $261 million Powerball lottery this week.
They're not alone. There are literally thousands of Americans who become suddenly wealthy. CNN financial correspondent Ali Velshi says getting all that money is not the same as keeping it.
(BEGIN VIDEOTAPE)
BERNADETTE GIETKA, MEGA MILLIONS LOTTERY WINNER: I'm just enjoying the telling everybody, really. Telling the story of it. And trying to figure out what to do with it.
ALI VELSHI, CNN FINANCIAL NEWS CORRESPONDENT (voice-over): Who wouldn't envy Bernadette Gietka's dilemma, what to do with the millions she won playing the lottery last month. Most people only dream of what they'd do if they won the jackpot or inherited a fortune. But for the lucky few who actually do, the initial euphoria can give way to confusion.
Barbara Stanny inherited hundreds of thousands of dollars from her father, a founder of the tax filing firm, H&R Block. But her trust fund remained just that, a matter of trust. Her father and her husband invested the money for her. Then, at age 28, a wife and mother, she learned her husband was mismanaging and gambling her inheritance away, and ironically she wound up owing the IRS $1 million.
Thousands of Americans inherit sudden wealth each year. Add to them the winners of billions in state lottery games and lawsuits and those who marry rich. The best move for the suddenly wealthy may be no more at all, at least in the beginning.
RICH APPLEGATE, FINANCIAL ADVISER: Do nothing. Do not allow someone to try to talk you into an investment until you've had time to let your life settle down. You've just gone through a lot of events, a lot of eventual events. You still don't know where you may direct your life.
VELSHI: One good reason not to rush into anything, the money may not all be yours. An inheritance is not taxable. The donor's estate pays that. But lotteries are subject to state taxes, as are most court awards. Next, consult professional financial advisers. Compare how and what they charge for their services. Listen to their plans and make sure they're trustworthy and remember depending on the size of your treasure chest you may need more than one.
Advisers fall into three categories. Some charge a small percentage of the money they manage for you, others get paid by the funds they sell you and some argue this makes them less objective. A growing number of financial advisers charge a fee, like lawyers and accountants do.
BARBARA STANNY, AUTHOR: I interviewed many financial advisers and I'm a big believer in financial advisers but finding one you trust and finding one that will explain things to you is a whole different challenge.
VELSHI: And, women face an additional challenge. Their longer life expectancy makes them more likely to inherit money and the wealth has to sustain them longer.
(END VIDEOTAPE)
VELSHI: Rhonda, one of the interesting things here is that, unlike Barbara Stanny, we have an impression of people who come into sudden wealth as going from rags to riches. That's not necessarily true. Barbara Stanny told me she grew up around wealth and for that reason alone she didn't ever take the time to learn about how to handle money. It was always handled for her.
So, the assumption shouldn't be that if you come up around wealth or you've been around money all your life you're going to be any better at handling it once you get more of it than if you never had money around you -- Rhonda.
SCHAFFLER: I guess, Al, if you marry well you shouldn't make any assumptions either.
VELSHI: Those are -- that's where I'm trying to get but you're right. I'm reading up on it first because I'm waiting for my windfall, and you're absolutely right. In Barbara Stanny's case, she just gave it to her husband because her father had handled her money first. She gave it to her husband to handle. She never paid attention to it.
SCHAFFLER: All right, well I hope you find a windfall, Ali. You'll have to split it with me if you do.
VELSHI: Deal.
SCHAFFLER: All right, see you later, Ali Velshi in New York.
So, of course, this very pressing question here what's the best way to hold on to all this sudden wealth? We want to bring in some guests.
Rebecca Paul is president of the Georgia Lottery. She has also handled lotteries in Florida and Illinois. And, Mike Kavanagh, host of the radio talk show "Money Matter." He's also a certified financial planner.
I just get the sense that people at home are thinking oh, please, let me have that problem. I mean this is what we all want to happen here. First of all, how often does it happen, I mean we hear these great lottery stories?
MIKE KAVANAGH, RADIO TALK SHOW HOST: It doesn't happen that often.
SCHAFFLER: Yes.
KAVANAGH: And, in fact, all this talk you hear of the great amount of inherited wealth that the baby boom generation is going to get remember is being split among many children, so someone may die and have a very sizable estate but it gets pared off amongst a number of children. It's not all that big.
SCHAFFLER: You know, Rebecca, you hear those stories about people who win the lottery and then suddenly they have no money. How common is that?
REBECCA PAUL, PRES. GEORGIA LOTTO: Well, because the lottery is random and people from all walks of life play our games, we find people who save before they won, save after they won. People who never saved before they won, don't save, but the lawyer who wins the lottery, wins $30 million, invests it well, isn't a story you all want to hear about, the person who piddles it all away is somebody that the media tells you about.
But one other thing in terms of how many lottery winners there are, it really does happen every day but it depends on whether you're talking about $1 million or $300 million. Certainly, $300 million is an exception not the rule. You know there are $10 million, $20 million, $30 million winners almost every day in this country.
SCHAFFLER: All right, Mike, I've got the winning ticket. What's the first thing I do, and let's go $300 million because we might as well dream if we're going to have a fantasy segment, right?
KAVANAGH: I like the fellow in your segment prior to all of this and that is you do nothing. You don't let anybody near it. You put it in a bank and you just make your plans from there. I have a bias. I'm a certified financial planner. I want someone, a (unintelligible) planner who's going to have a plan and that planner should be able to bring in other experts, lawyers, CPAs, estate planners, asset protection planners, and so forth, and get a plan together before you do anything.
And, with a plan, you're able to also avoid all those people who are going to come after you and say well, why don't you give me a little and give me something for this and something for that, and if you have a plan then you're going to be protected.
SCHAFFLER: You also hear stories, Rebecca, about people who go aggressively after these people who win the lottery. They're in the media. So how do you protect yourself from having people show up at your door or getting phone calls?
PAUL: Well, the first thing I'd do if I won the lottery, and I can't because I'm not allowed to play.
SCHAFFLER: Unfortunately for you.
PAUL: Yes, so I can't dream like you all. I'm going to have to go marry rich. The first thing I would suggest to anyone is change your phone number, get an unlisted phone number.
KAVANAGH: Right.
PAUL: Some folks come immediately the next day. I'd never do that. I'd get my financial planner before I claimed the ticket because there are tax consequences in how you claim, so before I even claimed the ticket I'd get the financial planner rather than after the time that you claimed your ticket and then you have your plan set in place and you have some of the protection set in place before the media hoopla happens.
SCHAFFLER: We actually have a phone call right now. Barbara, in Hawaii, she's already in paradise. You've got a question?
BARBARA: Hello, aloha. Is it best to invest your money in the market or put your money in the bank or other places?
PAUL: I think that's a "you" question.
KAVANAGH: OK.
SCHAFFLER: You made the point it goes in the bank but it doesn't all stay there.
KAVANAGH: Oh, no, no, and then you have to have the plan to where that's going to go and how that's going to be allocated, and a good financial planner, and I agree with the second prior to our interview here, you want to get a fee only financial planner, one who's not going to want to sell you investments and one who is going to lay out that plan.
I like the idea of having my money in a lot of things so I advise all of my clients, be they wealthy or not, that they asset allocate, have some in the stock market, have some in the bank, buy U.S. savings bonds, and have some real estate, even have some dividend and income investments. Spread it out all over the place. That's the key thing in my opinion.
SCHAFFLER: Ali is still with us in New York. Ali, I don't know about you but it seems to me the first thing I would like to do is take some of that money and have fun with it.
VELSHI: And that's the impulse. This is the interesting thing about us and money. You know we all worry about running out of money or not having enough money. If we didn't have that worry, I think spending patterns in the United States show us, Rhonda that we'd all be huge spenders.
What tends to happen is that adrenalin rush when you win the lottery or you get a court settlement or you cash in your options or something happens allows you to get rid of that one inhibition that you may have that worry that you'll one day run out of money. That causes people to spend it more quickly than they normally would.
Now, there are statistics on this but the National Endowment for Financial Education has done sort of a study and they think that 70 percent of people who come into wealth suddenly will lose that money within the few years and the net cause of that is impulse spending.
SCHAFFLER: Everyone sit tight for a minute. We have another call. We want to get that in. Dennis, in Wisconsin, go ahead.
DENNIS: Hi, years ago I read a newspaper article (unintelligible) things that happened to people to try and get money from the big winners. Do you know of anybody who has ever had regrets afterwards of hitting a big lottery?
PAUL: Well, I've talked to literally thousands of winners over my 20 years in the lottery business and I've never met one who wished they hadn't won. I've met lots that wish they'd done something different with the money but not one that wished that hadn't had won.
But what we found over the years with our big winners, much like Ali was saying in New York, is they'll do the one trip they've always wanted to do. They'd go visit Barbara in Hawaii.
SCHAFFLER: Yes, exactly.
PAUL: They'd buy the car they always wanted. They'd maybe buy the house they've always wanted and then tend to go to someone like you and invest the rest, but usually the lottery winner will do the one thing they've always wanted to do in their life.
SCHAFFLER: But that should be OK, right?
PAUL: I think so but I'm a little less conservative than my partner over here.
SCHAFFLER: Ali, go ahead.
VELSHI: Yes, here's an interesting thing. We're talking about lottery winners a lot because that's the one that gets the most media attention. One of the things that didn't get so much media attention as it happened in the late '90s were all those people who got their stock options and the stocks went up.
We're now seeing a market rally. Who knows how long that goes on for but there's the same situation. These are people who are day-to- day, 9:00 to 5:00 workers, used to budgeting on a basic salary and all of a sudden you may start to see your stock options become worth a lot more money. That's also another thing you have to be very careful about. It's the same sort of thing. With the lottery, you get this big check or you understand that it's a big sum of money. With stock options you can't change your lifestyle based on it and that's one of the reasons again why you need to seek that professional advice.
SCHAFFLER: Of course not everyone's options are going up but they might in the future, Ali, good point. We're going to take a break. What to do with all that money, we're going to take e-mails coming back. Send your question to Dollarsigns@cnn.com. You can call us as well. The number is 1-800-807-2620. We'll be right back.
(COMMERCIAL BREAK)
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: The first thing I looked at was my refrigerator and I went oh, my gosh. It was 30 years old. I said I'm getting a new refrigerator so that's what I did.
UNIDENTIFIED MALE: And I'm going to let her.
UNIDENTIFIED FEMALE: He's going to let me.
(END VIDEO CLIP)
SCHAFFLER: She deserves a new refrigerator, doesn't she? Welcome back to DOLLAR SIGNS. We're talking about everyone's dream problem, finding out you suddenly have a fortune on your hands.
Rebecca Paul of the Georgia Lottery and certified planner Mike Kavanagh giving us some advice here in Atlanta, Financial Correspondent Ali Velshi is in New York.
We actually have some e-mails we want to get to right away here. One person has e-mailed: "If a person wins a high dollar lottery and elects to have it paid in annuities, what happens if that person dies? Does the money revert back to the lottery or will it be paid to the deceased person's beneficiaries?"
PAUL: That's up to state law but all the state laws in the United States say it goes to your estate, so again one of the first things we say to a lottery winner is write a will because if you die it does go to your estate.
SCHAFFLER: Let's move on to another e-mail now. "I received a $20,000 CD from my mother. It matures June, '04. I want to use it to pay off my house mortgage (15 years into a 30-year mortgage.) I have very modest credit card debt. Is that a good idea?" Patty in Alabama wants to know.
KAVANAGH: Well, again, I'd have to look at the whole financial situation. I tend not to want to pay off my mortgage early because I lock that money behind four walls and I want to be sure that when I'm 70 and 80 years old I have dollars to spend. I don't want to be house rich and cash poor.
VELSHI: Mike, can I ask you a question?
KAVANAGH: Yes, sir.
VELSHI: About the mortgage question, this is one of the first things people think about because it's their biggest debt in most cases. It's also for most Americans their only tax deduction. We seem to have moved away from 30 years ago where it was our parents' aim to pay off the house as fast as possible to a place where it's not entirely a bad thing if you've got a low interest, long term mortgage.
KAVANAGH: Yes, again, in balance that's a fine thing. I am concerned about people who are in a rush to pay off the home because they view it as debt and they don't have enough cash to live on.
And then, what we have to end up doing as financial planners, we inherit those problems unfortunately and then we end up having to get them out of the house, having to sell the house, having to do a reverse mortgage. I'd rather have a financial plan that says OK, maybe we take a little bit of this money and pay off the mortgage, take a little bit of the money and invest it. Again, this is -- there's not one easy snap answer to this question.
SCHAFFLER: Let's take a specific dollar amount, $20,000, one of our viewers would like to know the best way to invest $20,000, more of a short term return her than for the long haul, some risk is OK, what would you say to that?
KAVANAGH: Some risk is OK. Today, we all had to come in here and thank goodness, Rebecca, the lights were on and the air- conditioning was on here because it's 95 degrees outside.
PAUL: Yes, hot in Atlanta.
KAVANAGH: Buy a utility stock. Buy a good old Con Ed in New York, southern company in Georgia.
PAUL: And, I'd take $10 and buy lottery tickets.
KAVANAGH: Well, OK, all right.
SCHAFFLER: She's got to get her plug in there.
KAVANAGH: That's right. I don't blame you, why not, but a utility is a fine stock and it's going to pay...
SCHAFFLER: Yes, stock is OK for this guy. He said he'd consider some stock.
KAVANAGH: And it's going to pay a nice dividend. If you're going to get a two percent CD, why not get a four or five percent utility stock? Yes, there is some risk but, boy, I'll tell you, utilities are going to be around and air-conditioning is going to be around. We're not going to be able to do without them.
SCHAFFLER: Especially here in Georgia.
KAVANAGH: That's right.
SCHAFFLER: We're going to stay in Georgia as we hit the phones once again. John, go ahead. Can you hear me John?
JOHN: Are you talking to me?
SCHAFFLER: Yes.
JOHN: How would you handle giving money to friends and family that are in need of money and what's the maximum you could give to them tax free and would you pay off all your bills?
SCHAFFLER: Boy, this is such a difficult issue too.
KAVANAGH: Lots of questions. Lots of questions. Rebecca, how do people deal with all the relatives that come out of the woodwork? It's a tough thing, especially if someone wins the lottery.
PAUL: Well, it depends on, again, who you were before you won. There are people who have helped their family even before they had a lot of money and probably still continue to help their family. People who never helped their family before probably aren't going to do that.
If you're 45 years old and you win the lottery you don't change who you are. You just have a whole lot more money to exacerbate the good or the bad of whoever you are.
KAVANAGH: And I think the thing I like to do is I like to get for people who have a lot of money, I always tell them make me the bad guy. I'm the person who is going to put the plan together. I'm going to get the lawyer. I'm going to get the accountant.
We're going to get a team of people that are going to surround you and people have to come through us to get anything. And, you say hey listen, you know, boy that Mike Kavanagh he's just, you know, he's just really not nice to me. He's tied up all my money. That's what we do.
SCHAFFLER: Yes, we're going to bring Ali in because he's a bit of a bad guy too -- Ali.
VELSHI: You know, Rhonda, just a second ago over on the sidebar on the right, there was a listing of some of the things you go through, some of the stresses you go through if you come into a lot of money suddenly and some of the ones that you go through are guilt, euphoria, excitement, and that guilt one is one that a lot of people play on.
It goes back to the idea that if you have your giving as part of a plan it could make a lot of sense because Bernadette Gietka, who won over $100 million a few weeks ago said she wants to give most of it to charity. Well, you can give to charity in ways that are very effective, that can allow you to take advantage of tax situations that you have.
You can give it to family in balanced ways, so once again even if it's just that you don't want to have all this money or you don't want to enjoy the rich life, having it is part of a complete plan apparently makes a lot more sense.
Mike, you'd know better than me but that sounds to me like the advice I've heard.
KAVANAGH: Absolutely. One of the things you can is set up a family foundation. The Rockefellers did it. Why don't you do it? You can do it.
SCHAFFLER: Might not have as much as the Rockefellers (unintelligible).
KAVANAGH: But it's very affordable.
PAUL: But I kind of like, you and I being the good guys, and Ali and Mike being the bad guys. I think this is appropriate.
SCHAFFLER: Gee, I'm sitting here thinking I'd feel guilty. I don't think I feel guilty so I don't know. Not everyone must feel guilty. I mean for some people this solves huge problems. Let's face it, there are people that have been out of work.
KAVANAGH: Right.
SCHAFFLER: They have health problems. There are people with very serious issues. Wouldn't that be nice to have those issues solved?
KAVANAGH: Yes, and I always tell my clients we're making money. It's a nice problem to have.
SCHAFFLER: You know, we have an interesting e-mail we want to put up too. This is a comment since we're on the subject of families. This is some advice. "Sit on that windfall for when you're in a conservative investment. Pay off any outstanding debts. Don't loan money to friends or relatives."
So, a different view there especially the friends. This is where you know who your true friends are, I guess.
KAVANAGH: Yes.
PAUL: One of the things we find with lottery winners is when they come to our office they very rarely come alone. They'll bring some part of their family with them when they come, a spouse, a son, a daughter, a daughter-in-law, a niece, a nephew. That's the nuclear group that they tend to give money to and the relatives who call from out of the woodwork, so to speak, they generally don't.
VELSHI: Hey, I want to ask you a question, Mike. One of the things that came up with the people we spoke to is how you choose a financial adviser.
KAVANAGH: Right.
VELSHI: And two things that come to mind, one is the advice you should interview that person.
KAVANAGH: Oh, yes.
VELSHI: First of all, you know, you'll get word of mouth referrals and things like that but you should interview him. And, the second one is, can I ask you if I want to use you as my financial adviser, can I ask you for references?
KAVANAGH: Boy, that's a tough one. I don't like to give out any referrals of any of my personal clients. I think what is proper is to ask for what about professional references? What do people in the accounting and legal professions think about you? I guess I could if you asked me to, I guess I could find a client or two.
I'm going to be a little uncomfortable about that because I don't want to invade my clients' privacy but there are questions you can ask. The Financial Planning Association of which I'm a member as a certified financial planner, gives you a brochure that you can get free at fpanet.org on the Internet, the ten, 15 questions that you need to ask a financial planner.
And, the other problem, of course, in asking for references of course a financial planner is going to give you the two or three best ones. I don't know if that works, but do they have great associations?
Are they held in great standing within their community? Those are the kinds of questions and, again, the approach is what you're looking for. Are they fee only? Do they sell any commission oriented products? These are the kinds of questions.
VELSHI: What's your view on that?
KAVANAGH: Oh, personally I'm a fee only adviser and I like to stay in the fee only area. I don't like to seek commission products.
SCHAFFLER: All right, we got to take a quick break. When we come back, we're going to get advice from an actual lottery winner. Stay with us.
(COMMERCIAL BREAK)
SCHAFFLER: Welcome back. You're watching DOLLAR SIGNS. We're talking about sudden wealth, a problem we all would like to have. We actually have advice from a guy who actually won the lottery. Mike in Toronto, are you with us, Mike?
MIKE: Yes, I'm here.
SCHAFFLER: All right, so what did you do when you won?
MIKE: Well, this is about a year and a half ago. I won about $2 million. Of course, being in Toronto, Canada it was tax free which is great. I invested the vast majority of it through an income fund but what I did, because you had a program on here a few years back about lottery winners, and you went through the last 400 winners in the last X number of years, and a few of them came up with the idea well, take $5,000 or $10,000, go out and go mad and I did, and it was the best thing I ever did.
I came with about $5 but it was great. So, you got it out of your system like it was burning a hole in your pocket but it didn't do any damage and it was a great time.
PAUL: See, I knew it.
VELSHI: It was a plan. It was a financial plan. You actually decided you were going to take a certain amount of your money and have some fun with it. If that's part of the plan, what's wrong with that?
MIKE: Exactly. I had a great time.
SCHAFFLER: Well, it's always good to have fun.
MIKE: (Unintelligible) but everybody had a great time for about two weeks.
PAUL: He just said something that astounds me dealing with the lottery every day. He won $2 million and is excited about it. Do you know how many times people say to me oh, I don't play the lottery until it's over $50 million, or I don't play the lottery until it's over $100 million, like $10 million wouldn't change your life.
SCHAFFLER: Right, right, excellent point. Mike thanks so much.
We actually have another e-mail that we're going to bring up here. It's an interesting story. This woman's husband died last fall at the age of 53 unexpectedly. We're sorry for that. He was the ninth employee of Microsoft. She's inheriting several million dollars worth of Microsoft stock.
KAVANAGH: Wow.
SCHAFFLER: The question here does she keep it all invested in Microsoft or does she diversify and the stock is his legacy so there might be an emotional attachment here.
KAVANAGH: There's an emotional attachment with that as well. And, again, this is where sitting down with both a financial planner and a certified public accountant, in my opinion, is a good thing. I don't think even people in my profession, CFPs, have all the answers and we like to sit down with tax people. I have tax people in my office, for example, and we take a look at exactly how to diversify, taking into account the tax situation.
We're also going to leave the legacy, though. There is an emotional component to investigating and so we won't get rid of it all. We won't get rid of it all overnight. One of the things we'll do to make sure that we make that stock work is write some covered calls so we provide some income while we're...
SCHAFFLER: Protection.
KAVANAGH: Yes, while we're diversifying and so that we make sure that we handle that very, very gently.
SCHAFFLER: I love this point that money can be very emotional, Rebecca.
PAUL: Oh, yes.
SCHAFFLER: When we talk about the lottery winners, the emotion, is it primarily euphoria of all the people you've seen? What's the end emotion?
PAUL: Pretty wide spectrum. Some people are very nervous. They're very scared. Some people are just euphoric and want to share that euphoria with everybody. Some people want to do the press conference. Some people don't want anybody to know. So, you get very different reactions from different people but, again as I said earlier, I've never met one who wished they hadn't won.
SCHAFFLER: That's right. Hey, Ali, what's going on up there?
VELSHI: The only thing I'm concerned about, Rhonda, is that you and I can make a deal that if we win really big then the other one will cover our TV shifts because I'm not one of these people (unintelligible).
SCHAFFLER: No, I'm retiring. Are you kidding? I'm going to retire if I win.
VELSHI: Oh, I'm going to work forever, are you kidding me? No way, Rhonda.
SCHAFFLER: That's the difference between us.
VELSHI: So, if I don't show up just understand (unintelligible).
PAUL: If you guys win in Georgia, Mike and I will cover your shift, how's that?
VELSHI: Deal.
SCHAFFLER: There you go, that works.
KAVANAGH: I'll come back here, right.
SCHAFFLER: That works. Well, you know, I mean that's an interesting point. How many people continue working after they're got a windfall because they love what they do?
PAUL: We find most winners if they're under 58 continue to work, but maybe not in the job that they were in.
KAVANAGH: Right.
PAUL: They may buy the business. We had a winner here in Atlanta who worked for the city of Atlanta who wanted to be an opera singer and went to New York to study opera.
SCHAFFLER: Oh, that's great.
PAUL: Or, they may buy the store that they've worked in but unless you're under 58, they tend to keep working. Over 58, they tend to retire a little earlier.
SCHAFFLER: We have to keep working here.
PAUL: Oh.
SCHAFFLER: Rebecca Paul, Mike Kavanagh, Ali Velshi, it's been great talking to everyone here as we wrap up DOLLAR SIGNS, thanks to everyone on this topic of sudden wealth, appreciate it.
And, stay with CNN this evening. Coming up at 5:00 Eastern, "PEOPLE IN THE NEWS" profiles Wimbledon women, the Williams sisters.
Then, on CNN LIVE SATURDAY at 6:00 Eastern the military legacy of Ronald Reagan with our guest historian Doug Brinkley.
And, at 7:00 mix it up with the "CAPITAL GANG" as they take on the State of the Union controversy.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com
Aired July 12, 2003 - 16:29 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RHONDA SCHAFFLER, CNN ANCHOR: In DOLLAR SIGNS today, sudden wealth, it's a problem almost all of us would love to have. Like the Walkenbachs (ph) of Herman, Missouri, who won half of that $261 million Powerball lottery this week.
They're not alone. There are literally thousands of Americans who become suddenly wealthy. CNN financial correspondent Ali Velshi says getting all that money is not the same as keeping it.
(BEGIN VIDEOTAPE)
BERNADETTE GIETKA, MEGA MILLIONS LOTTERY WINNER: I'm just enjoying the telling everybody, really. Telling the story of it. And trying to figure out what to do with it.
ALI VELSHI, CNN FINANCIAL NEWS CORRESPONDENT (voice-over): Who wouldn't envy Bernadette Gietka's dilemma, what to do with the millions she won playing the lottery last month. Most people only dream of what they'd do if they won the jackpot or inherited a fortune. But for the lucky few who actually do, the initial euphoria can give way to confusion.
Barbara Stanny inherited hundreds of thousands of dollars from her father, a founder of the tax filing firm, H&R Block. But her trust fund remained just that, a matter of trust. Her father and her husband invested the money for her. Then, at age 28, a wife and mother, she learned her husband was mismanaging and gambling her inheritance away, and ironically she wound up owing the IRS $1 million.
Thousands of Americans inherit sudden wealth each year. Add to them the winners of billions in state lottery games and lawsuits and those who marry rich. The best move for the suddenly wealthy may be no more at all, at least in the beginning.
RICH APPLEGATE, FINANCIAL ADVISER: Do nothing. Do not allow someone to try to talk you into an investment until you've had time to let your life settle down. You've just gone through a lot of events, a lot of eventual events. You still don't know where you may direct your life.
VELSHI: One good reason not to rush into anything, the money may not all be yours. An inheritance is not taxable. The donor's estate pays that. But lotteries are subject to state taxes, as are most court awards. Next, consult professional financial advisers. Compare how and what they charge for their services. Listen to their plans and make sure they're trustworthy and remember depending on the size of your treasure chest you may need more than one.
Advisers fall into three categories. Some charge a small percentage of the money they manage for you, others get paid by the funds they sell you and some argue this makes them less objective. A growing number of financial advisers charge a fee, like lawyers and accountants do.
BARBARA STANNY, AUTHOR: I interviewed many financial advisers and I'm a big believer in financial advisers but finding one you trust and finding one that will explain things to you is a whole different challenge.
VELSHI: And, women face an additional challenge. Their longer life expectancy makes them more likely to inherit money and the wealth has to sustain them longer.
(END VIDEOTAPE)
VELSHI: Rhonda, one of the interesting things here is that, unlike Barbara Stanny, we have an impression of people who come into sudden wealth as going from rags to riches. That's not necessarily true. Barbara Stanny told me she grew up around wealth and for that reason alone she didn't ever take the time to learn about how to handle money. It was always handled for her.
So, the assumption shouldn't be that if you come up around wealth or you've been around money all your life you're going to be any better at handling it once you get more of it than if you never had money around you -- Rhonda.
SCHAFFLER: I guess, Al, if you marry well you shouldn't make any assumptions either.
VELSHI: Those are -- that's where I'm trying to get but you're right. I'm reading up on it first because I'm waiting for my windfall, and you're absolutely right. In Barbara Stanny's case, she just gave it to her husband because her father had handled her money first. She gave it to her husband to handle. She never paid attention to it.
SCHAFFLER: All right, well I hope you find a windfall, Ali. You'll have to split it with me if you do.
VELSHI: Deal.
SCHAFFLER: All right, see you later, Ali Velshi in New York.
So, of course, this very pressing question here what's the best way to hold on to all this sudden wealth? We want to bring in some guests.
Rebecca Paul is president of the Georgia Lottery. She has also handled lotteries in Florida and Illinois. And, Mike Kavanagh, host of the radio talk show "Money Matter." He's also a certified financial planner.
I just get the sense that people at home are thinking oh, please, let me have that problem. I mean this is what we all want to happen here. First of all, how often does it happen, I mean we hear these great lottery stories?
MIKE KAVANAGH, RADIO TALK SHOW HOST: It doesn't happen that often.
SCHAFFLER: Yes.
KAVANAGH: And, in fact, all this talk you hear of the great amount of inherited wealth that the baby boom generation is going to get remember is being split among many children, so someone may die and have a very sizable estate but it gets pared off amongst a number of children. It's not all that big.
SCHAFFLER: You know, Rebecca, you hear those stories about people who win the lottery and then suddenly they have no money. How common is that?
REBECCA PAUL, PRES. GEORGIA LOTTO: Well, because the lottery is random and people from all walks of life play our games, we find people who save before they won, save after they won. People who never saved before they won, don't save, but the lawyer who wins the lottery, wins $30 million, invests it well, isn't a story you all want to hear about, the person who piddles it all away is somebody that the media tells you about.
But one other thing in terms of how many lottery winners there are, it really does happen every day but it depends on whether you're talking about $1 million or $300 million. Certainly, $300 million is an exception not the rule. You know there are $10 million, $20 million, $30 million winners almost every day in this country.
SCHAFFLER: All right, Mike, I've got the winning ticket. What's the first thing I do, and let's go $300 million because we might as well dream if we're going to have a fantasy segment, right?
KAVANAGH: I like the fellow in your segment prior to all of this and that is you do nothing. You don't let anybody near it. You put it in a bank and you just make your plans from there. I have a bias. I'm a certified financial planner. I want someone, a (unintelligible) planner who's going to have a plan and that planner should be able to bring in other experts, lawyers, CPAs, estate planners, asset protection planners, and so forth, and get a plan together before you do anything.
And, with a plan, you're able to also avoid all those people who are going to come after you and say well, why don't you give me a little and give me something for this and something for that, and if you have a plan then you're going to be protected.
SCHAFFLER: You also hear stories, Rebecca, about people who go aggressively after these people who win the lottery. They're in the media. So how do you protect yourself from having people show up at your door or getting phone calls?
PAUL: Well, the first thing I'd do if I won the lottery, and I can't because I'm not allowed to play.
SCHAFFLER: Unfortunately for you.
PAUL: Yes, so I can't dream like you all. I'm going to have to go marry rich. The first thing I would suggest to anyone is change your phone number, get an unlisted phone number.
KAVANAGH: Right.
PAUL: Some folks come immediately the next day. I'd never do that. I'd get my financial planner before I claimed the ticket because there are tax consequences in how you claim, so before I even claimed the ticket I'd get the financial planner rather than after the time that you claimed your ticket and then you have your plan set in place and you have some of the protection set in place before the media hoopla happens.
SCHAFFLER: We actually have a phone call right now. Barbara, in Hawaii, she's already in paradise. You've got a question?
BARBARA: Hello, aloha. Is it best to invest your money in the market or put your money in the bank or other places?
PAUL: I think that's a "you" question.
KAVANAGH: OK.
SCHAFFLER: You made the point it goes in the bank but it doesn't all stay there.
KAVANAGH: Oh, no, no, and then you have to have the plan to where that's going to go and how that's going to be allocated, and a good financial planner, and I agree with the second prior to our interview here, you want to get a fee only financial planner, one who's not going to want to sell you investments and one who is going to lay out that plan.
I like the idea of having my money in a lot of things so I advise all of my clients, be they wealthy or not, that they asset allocate, have some in the stock market, have some in the bank, buy U.S. savings bonds, and have some real estate, even have some dividend and income investments. Spread it out all over the place. That's the key thing in my opinion.
SCHAFFLER: Ali is still with us in New York. Ali, I don't know about you but it seems to me the first thing I would like to do is take some of that money and have fun with it.
VELSHI: And that's the impulse. This is the interesting thing about us and money. You know we all worry about running out of money or not having enough money. If we didn't have that worry, I think spending patterns in the United States show us, Rhonda that we'd all be huge spenders.
What tends to happen is that adrenalin rush when you win the lottery or you get a court settlement or you cash in your options or something happens allows you to get rid of that one inhibition that you may have that worry that you'll one day run out of money. That causes people to spend it more quickly than they normally would.
Now, there are statistics on this but the National Endowment for Financial Education has done sort of a study and they think that 70 percent of people who come into wealth suddenly will lose that money within the few years and the net cause of that is impulse spending.
SCHAFFLER: Everyone sit tight for a minute. We have another call. We want to get that in. Dennis, in Wisconsin, go ahead.
DENNIS: Hi, years ago I read a newspaper article (unintelligible) things that happened to people to try and get money from the big winners. Do you know of anybody who has ever had regrets afterwards of hitting a big lottery?
PAUL: Well, I've talked to literally thousands of winners over my 20 years in the lottery business and I've never met one who wished they hadn't won. I've met lots that wish they'd done something different with the money but not one that wished that hadn't had won.
But what we found over the years with our big winners, much like Ali was saying in New York, is they'll do the one trip they've always wanted to do. They'd go visit Barbara in Hawaii.
SCHAFFLER: Yes, exactly.
PAUL: They'd buy the car they always wanted. They'd maybe buy the house they've always wanted and then tend to go to someone like you and invest the rest, but usually the lottery winner will do the one thing they've always wanted to do in their life.
SCHAFFLER: But that should be OK, right?
PAUL: I think so but I'm a little less conservative than my partner over here.
SCHAFFLER: Ali, go ahead.
VELSHI: Yes, here's an interesting thing. We're talking about lottery winners a lot because that's the one that gets the most media attention. One of the things that didn't get so much media attention as it happened in the late '90s were all those people who got their stock options and the stocks went up.
We're now seeing a market rally. Who knows how long that goes on for but there's the same situation. These are people who are day-to- day, 9:00 to 5:00 workers, used to budgeting on a basic salary and all of a sudden you may start to see your stock options become worth a lot more money. That's also another thing you have to be very careful about. It's the same sort of thing. With the lottery, you get this big check or you understand that it's a big sum of money. With stock options you can't change your lifestyle based on it and that's one of the reasons again why you need to seek that professional advice.
SCHAFFLER: Of course not everyone's options are going up but they might in the future, Ali, good point. We're going to take a break. What to do with all that money, we're going to take e-mails coming back. Send your question to Dollarsigns@cnn.com. You can call us as well. The number is 1-800-807-2620. We'll be right back.
(COMMERCIAL BREAK)
(BEGIN VIDEO CLIP)
UNIDENTIFIED FEMALE: The first thing I looked at was my refrigerator and I went oh, my gosh. It was 30 years old. I said I'm getting a new refrigerator so that's what I did.
UNIDENTIFIED MALE: And I'm going to let her.
UNIDENTIFIED FEMALE: He's going to let me.
(END VIDEO CLIP)
SCHAFFLER: She deserves a new refrigerator, doesn't she? Welcome back to DOLLAR SIGNS. We're talking about everyone's dream problem, finding out you suddenly have a fortune on your hands.
Rebecca Paul of the Georgia Lottery and certified planner Mike Kavanagh giving us some advice here in Atlanta, Financial Correspondent Ali Velshi is in New York.
We actually have some e-mails we want to get to right away here. One person has e-mailed: "If a person wins a high dollar lottery and elects to have it paid in annuities, what happens if that person dies? Does the money revert back to the lottery or will it be paid to the deceased person's beneficiaries?"
PAUL: That's up to state law but all the state laws in the United States say it goes to your estate, so again one of the first things we say to a lottery winner is write a will because if you die it does go to your estate.
SCHAFFLER: Let's move on to another e-mail now. "I received a $20,000 CD from my mother. It matures June, '04. I want to use it to pay off my house mortgage (15 years into a 30-year mortgage.) I have very modest credit card debt. Is that a good idea?" Patty in Alabama wants to know.
KAVANAGH: Well, again, I'd have to look at the whole financial situation. I tend not to want to pay off my mortgage early because I lock that money behind four walls and I want to be sure that when I'm 70 and 80 years old I have dollars to spend. I don't want to be house rich and cash poor.
VELSHI: Mike, can I ask you a question?
KAVANAGH: Yes, sir.
VELSHI: About the mortgage question, this is one of the first things people think about because it's their biggest debt in most cases. It's also for most Americans their only tax deduction. We seem to have moved away from 30 years ago where it was our parents' aim to pay off the house as fast as possible to a place where it's not entirely a bad thing if you've got a low interest, long term mortgage.
KAVANAGH: Yes, again, in balance that's a fine thing. I am concerned about people who are in a rush to pay off the home because they view it as debt and they don't have enough cash to live on.
And then, what we have to end up doing as financial planners, we inherit those problems unfortunately and then we end up having to get them out of the house, having to sell the house, having to do a reverse mortgage. I'd rather have a financial plan that says OK, maybe we take a little bit of this money and pay off the mortgage, take a little bit of the money and invest it. Again, this is -- there's not one easy snap answer to this question.
SCHAFFLER: Let's take a specific dollar amount, $20,000, one of our viewers would like to know the best way to invest $20,000, more of a short term return her than for the long haul, some risk is OK, what would you say to that?
KAVANAGH: Some risk is OK. Today, we all had to come in here and thank goodness, Rebecca, the lights were on and the air- conditioning was on here because it's 95 degrees outside.
PAUL: Yes, hot in Atlanta.
KAVANAGH: Buy a utility stock. Buy a good old Con Ed in New York, southern company in Georgia.
PAUL: And, I'd take $10 and buy lottery tickets.
KAVANAGH: Well, OK, all right.
SCHAFFLER: She's got to get her plug in there.
KAVANAGH: That's right. I don't blame you, why not, but a utility is a fine stock and it's going to pay...
SCHAFFLER: Yes, stock is OK for this guy. He said he'd consider some stock.
KAVANAGH: And it's going to pay a nice dividend. If you're going to get a two percent CD, why not get a four or five percent utility stock? Yes, there is some risk but, boy, I'll tell you, utilities are going to be around and air-conditioning is going to be around. We're not going to be able to do without them.
SCHAFFLER: Especially here in Georgia.
KAVANAGH: That's right.
SCHAFFLER: We're going to stay in Georgia as we hit the phones once again. John, go ahead. Can you hear me John?
JOHN: Are you talking to me?
SCHAFFLER: Yes.
JOHN: How would you handle giving money to friends and family that are in need of money and what's the maximum you could give to them tax free and would you pay off all your bills?
SCHAFFLER: Boy, this is such a difficult issue too.
KAVANAGH: Lots of questions. Lots of questions. Rebecca, how do people deal with all the relatives that come out of the woodwork? It's a tough thing, especially if someone wins the lottery.
PAUL: Well, it depends on, again, who you were before you won. There are people who have helped their family even before they had a lot of money and probably still continue to help their family. People who never helped their family before probably aren't going to do that.
If you're 45 years old and you win the lottery you don't change who you are. You just have a whole lot more money to exacerbate the good or the bad of whoever you are.
KAVANAGH: And I think the thing I like to do is I like to get for people who have a lot of money, I always tell them make me the bad guy. I'm the person who is going to put the plan together. I'm going to get the lawyer. I'm going to get the accountant.
We're going to get a team of people that are going to surround you and people have to come through us to get anything. And, you say hey listen, you know, boy that Mike Kavanagh he's just, you know, he's just really not nice to me. He's tied up all my money. That's what we do.
SCHAFFLER: Yes, we're going to bring Ali in because he's a bit of a bad guy too -- Ali.
VELSHI: You know, Rhonda, just a second ago over on the sidebar on the right, there was a listing of some of the things you go through, some of the stresses you go through if you come into a lot of money suddenly and some of the ones that you go through are guilt, euphoria, excitement, and that guilt one is one that a lot of people play on.
It goes back to the idea that if you have your giving as part of a plan it could make a lot of sense because Bernadette Gietka, who won over $100 million a few weeks ago said she wants to give most of it to charity. Well, you can give to charity in ways that are very effective, that can allow you to take advantage of tax situations that you have.
You can give it to family in balanced ways, so once again even if it's just that you don't want to have all this money or you don't want to enjoy the rich life, having it is part of a complete plan apparently makes a lot more sense.
Mike, you'd know better than me but that sounds to me like the advice I've heard.
KAVANAGH: Absolutely. One of the things you can is set up a family foundation. The Rockefellers did it. Why don't you do it? You can do it.
SCHAFFLER: Might not have as much as the Rockefellers (unintelligible).
KAVANAGH: But it's very affordable.
PAUL: But I kind of like, you and I being the good guys, and Ali and Mike being the bad guys. I think this is appropriate.
SCHAFFLER: Gee, I'm sitting here thinking I'd feel guilty. I don't think I feel guilty so I don't know. Not everyone must feel guilty. I mean for some people this solves huge problems. Let's face it, there are people that have been out of work.
KAVANAGH: Right.
SCHAFFLER: They have health problems. There are people with very serious issues. Wouldn't that be nice to have those issues solved?
KAVANAGH: Yes, and I always tell my clients we're making money. It's a nice problem to have.
SCHAFFLER: You know, we have an interesting e-mail we want to put up too. This is a comment since we're on the subject of families. This is some advice. "Sit on that windfall for when you're in a conservative investment. Pay off any outstanding debts. Don't loan money to friends or relatives."
So, a different view there especially the friends. This is where you know who your true friends are, I guess.
KAVANAGH: Yes.
PAUL: One of the things we find with lottery winners is when they come to our office they very rarely come alone. They'll bring some part of their family with them when they come, a spouse, a son, a daughter, a daughter-in-law, a niece, a nephew. That's the nuclear group that they tend to give money to and the relatives who call from out of the woodwork, so to speak, they generally don't.
VELSHI: Hey, I want to ask you a question, Mike. One of the things that came up with the people we spoke to is how you choose a financial adviser.
KAVANAGH: Right.
VELSHI: And two things that come to mind, one is the advice you should interview that person.
KAVANAGH: Oh, yes.
VELSHI: First of all, you know, you'll get word of mouth referrals and things like that but you should interview him. And, the second one is, can I ask you if I want to use you as my financial adviser, can I ask you for references?
KAVANAGH: Boy, that's a tough one. I don't like to give out any referrals of any of my personal clients. I think what is proper is to ask for what about professional references? What do people in the accounting and legal professions think about you? I guess I could if you asked me to, I guess I could find a client or two.
I'm going to be a little uncomfortable about that because I don't want to invade my clients' privacy but there are questions you can ask. The Financial Planning Association of which I'm a member as a certified financial planner, gives you a brochure that you can get free at fpanet.org on the Internet, the ten, 15 questions that you need to ask a financial planner.
And, the other problem, of course, in asking for references of course a financial planner is going to give you the two or three best ones. I don't know if that works, but do they have great associations?
Are they held in great standing within their community? Those are the kinds of questions and, again, the approach is what you're looking for. Are they fee only? Do they sell any commission oriented products? These are the kinds of questions.
VELSHI: What's your view on that?
KAVANAGH: Oh, personally I'm a fee only adviser and I like to stay in the fee only area. I don't like to seek commission products.
SCHAFFLER: All right, we got to take a quick break. When we come back, we're going to get advice from an actual lottery winner. Stay with us.
(COMMERCIAL BREAK)
SCHAFFLER: Welcome back. You're watching DOLLAR SIGNS. We're talking about sudden wealth, a problem we all would like to have. We actually have advice from a guy who actually won the lottery. Mike in Toronto, are you with us, Mike?
MIKE: Yes, I'm here.
SCHAFFLER: All right, so what did you do when you won?
MIKE: Well, this is about a year and a half ago. I won about $2 million. Of course, being in Toronto, Canada it was tax free which is great. I invested the vast majority of it through an income fund but what I did, because you had a program on here a few years back about lottery winners, and you went through the last 400 winners in the last X number of years, and a few of them came up with the idea well, take $5,000 or $10,000, go out and go mad and I did, and it was the best thing I ever did.
I came with about $5 but it was great. So, you got it out of your system like it was burning a hole in your pocket but it didn't do any damage and it was a great time.
PAUL: See, I knew it.
VELSHI: It was a plan. It was a financial plan. You actually decided you were going to take a certain amount of your money and have some fun with it. If that's part of the plan, what's wrong with that?
MIKE: Exactly. I had a great time.
SCHAFFLER: Well, it's always good to have fun.
MIKE: (Unintelligible) but everybody had a great time for about two weeks.
PAUL: He just said something that astounds me dealing with the lottery every day. He won $2 million and is excited about it. Do you know how many times people say to me oh, I don't play the lottery until it's over $50 million, or I don't play the lottery until it's over $100 million, like $10 million wouldn't change your life.
SCHAFFLER: Right, right, excellent point. Mike thanks so much.
We actually have another e-mail that we're going to bring up here. It's an interesting story. This woman's husband died last fall at the age of 53 unexpectedly. We're sorry for that. He was the ninth employee of Microsoft. She's inheriting several million dollars worth of Microsoft stock.
KAVANAGH: Wow.
SCHAFFLER: The question here does she keep it all invested in Microsoft or does she diversify and the stock is his legacy so there might be an emotional attachment here.
KAVANAGH: There's an emotional attachment with that as well. And, again, this is where sitting down with both a financial planner and a certified public accountant, in my opinion, is a good thing. I don't think even people in my profession, CFPs, have all the answers and we like to sit down with tax people. I have tax people in my office, for example, and we take a look at exactly how to diversify, taking into account the tax situation.
We're also going to leave the legacy, though. There is an emotional component to investigating and so we won't get rid of it all. We won't get rid of it all overnight. One of the things we'll do to make sure that we make that stock work is write some covered calls so we provide some income while we're...
SCHAFFLER: Protection.
KAVANAGH: Yes, while we're diversifying and so that we make sure that we handle that very, very gently.
SCHAFFLER: I love this point that money can be very emotional, Rebecca.
PAUL: Oh, yes.
SCHAFFLER: When we talk about the lottery winners, the emotion, is it primarily euphoria of all the people you've seen? What's the end emotion?
PAUL: Pretty wide spectrum. Some people are very nervous. They're very scared. Some people are just euphoric and want to share that euphoria with everybody. Some people want to do the press conference. Some people don't want anybody to know. So, you get very different reactions from different people but, again as I said earlier, I've never met one who wished they hadn't won.
SCHAFFLER: That's right. Hey, Ali, what's going on up there?
VELSHI: The only thing I'm concerned about, Rhonda, is that you and I can make a deal that if we win really big then the other one will cover our TV shifts because I'm not one of these people (unintelligible).
SCHAFFLER: No, I'm retiring. Are you kidding? I'm going to retire if I win.
VELSHI: Oh, I'm going to work forever, are you kidding me? No way, Rhonda.
SCHAFFLER: That's the difference between us.
VELSHI: So, if I don't show up just understand (unintelligible).
PAUL: If you guys win in Georgia, Mike and I will cover your shift, how's that?
VELSHI: Deal.
SCHAFFLER: There you go, that works.
KAVANAGH: I'll come back here, right.
SCHAFFLER: That works. Well, you know, I mean that's an interesting point. How many people continue working after they're got a windfall because they love what they do?
PAUL: We find most winners if they're under 58 continue to work, but maybe not in the job that they were in.
KAVANAGH: Right.
PAUL: They may buy the business. We had a winner here in Atlanta who worked for the city of Atlanta who wanted to be an opera singer and went to New York to study opera.
SCHAFFLER: Oh, that's great.
PAUL: Or, they may buy the store that they've worked in but unless you're under 58, they tend to keep working. Over 58, they tend to retire a little earlier.
SCHAFFLER: We have to keep working here.
PAUL: Oh.
SCHAFFLER: Rebecca Paul, Mike Kavanagh, Ali Velshi, it's been great talking to everyone here as we wrap up DOLLAR SIGNS, thanks to everyone on this topic of sudden wealth, appreciate it.
And, stay with CNN this evening. Coming up at 5:00 Eastern, "PEOPLE IN THE NEWS" profiles Wimbledon women, the Williams sisters.
Then, on CNN LIVE SATURDAY at 6:00 Eastern the military legacy of Ronald Reagan with our guest historian Doug Brinkley.
And, at 7:00 mix it up with the "CAPITAL GANG" as they take on the State of the Union controversy.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com
