03/11/2023
I met a magician yesterday. It was a client seeking a solution to a potential bankruptcy. How did he come to this crossroads? Last year, he inherited $700,000. At age 21. He was able to make the whole thing disappear.
Within one year, he had withdrawn the full amount at a tax rate of ~39% and purchased three pieces of very expensive real estate. This year, the interest rates turned against him and property values declined dramatically where he bought. So now he owns three pieces of underwater real estate with no income stream to pay the mortgage. He’ll lose those investments to the bank but he won’t have to declare personal bankruptcy.
Lessons learned?
One: Always consult your CPA before making large transactions, especially if you’re learning about a new investment or if the transaction is a significant one considering your net worth.
Two: If you are planning to pass on assets to a young person, there are planning tools you can use to help that person to avoid burning through that asset. In this case, I would have advised his great aunt to structure the access to the inheritance over time so this client would be forced to seek approval from the trustee before making large, unfamiliar purchases using funds from a one-time source.
