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talljasperman's avatar

What new problems come when one becomes financially rich (millionare +)?

Asked by talljasperman (19167 points ) March 23rd, 2014

The Dragons from Dragons Den, and Shark Tank say that when they became rich that new problems crept up. What are some of those problems?
Genre: Reality television
Cast of Dragons Den millionaires.
Arlene Dickinson
Kevin O’Leary
Jim Treliving
David Barr Chilton
Robert Herjavec

Observing members: 0 Composing members: 0

25 Answers

zenvelo's avatar

There is an expectation that having a lot of money will make all your problems go away an you’ll be happy. That’s a false outcome, and the reality of being the same person mens that you have to accept that the problems in your own life can only be resolved by you.

And, people think if they have sudden wealth they don’t have to worry about money. But win $10 million and buy a house for $2 million? You still have to pay taxes on the winning, you have to pay for up deep of the house, you have to furnish your new mansion. It is hard work to manage money so that it lasts.

On top of that, all your relatives come out of the woodwork, every “friend” you ever knew renews the friendship. And every hare-brained business idea, every silly invention, will come to you for “funding”; which is another way of saying pissing it down a rabbit hole.

Darth_Algar's avatar

Pretty much what @zenvelo said. That’s why, should I ever suddenly come into great money such as lottery winnings or what not, the first thing I’m doing is looking for a sound financial adviser. And not some local yokel who maybe advises the local folks who make $80k a year, but looking a bit outward, maybe in the city (Chicago) for someone who regularly deals with millions of dollars and won’t be overwhelmed by the amount I need to manage.

ragingloli's avatar

Moral and ethical corruption, mostly.
Though the road to that starts much earlier.

Darth_Algar's avatar

@ragingloli “Moral and ethical corruption, mostly.
Though the road to that starts much earlier.”

Shit, I’m already morally and ethically corrupt and I’m broke.

creative1's avatar

Just take a look at “Richard Hatch http://en.wikipedia.org/wiki/Richard_Hatch_(Survivor_contestant) the first winner in Survivor. He didn’t pay taxes on the money and wound up in prision for tax evasion

jerv's avatar

Aside from the taxes and the failure to meet expectations (a million dollars really isn’t much), you will run into problems with those who think that the money the rich have is just as free as the money us lower-class folks have; they don’t understand that it isn’t. Their finances aren’t just larger than our’s; they operate differently as well.

Give a guy $10, and he’ll have $10. Give a guy $10,000,000 and he really will be lucky to have $6m in the end (unless he has a good accountant), so there is already a huge chunk missing before any of it has actually been spent. And odds are that what is left over is more likely to be spoken for as the well-off often have non-luxury expenses that most people don’t even know exist.

Being rich isn’t all mansions and luxury cars. Of course, those that don’t know that, who think that being rich just means having more luxuries, will resent you, which is another problem. And even amongst the millionaires, there is a bit of a divide; the top 0.5% makes the lower half of the top 1% look almost like welfare recipients. Like I said earlier, a million dollars isn’t much, so a mere millionaire is far from actually rich despite having more money than many of us will see in our entire lives. Warren Buffet and Bill Gates have problems that mere millionaires don’t ever have to worry about.

Cruiser's avatar

People will resent your wealth and think you are morally and ethically corrupt, they will expect you to always pick up the tab, they will borrow money and not repay you because they believe you do not need the money, bankers will call you by your last name when before you didn’t exist, you will get never ending solicitations from investment opportunities and you will be taxed beyond your wildest dreams.

gailcalled's avatar

Watch the documentary The Queen of Versailles about a billionaire and his oblivious benighted wife. The maids were expected to pick up the dogs’ poop because the eight children were too lazy to walk them outdoors.

“To enjoy their good life, he and his engineer-turned-beauty-queen trophy wife… were building the largest single family private home in America.”

Oddly, having an indoor ice skating rink didn’t make their lifes more blissful.

Coloma's avatar

@gailcalled I saw that! Crazy woman, talk about deluded and ignorantly blissful. Pffft!

I have never had millions but, when I was comfortable I had people wanting to borrow money. It was annoying, to say the least, especially when you say “no” and the person continues to pressure you. Needless to say a couple are no longer “friends.”

Wealthadvisor's avatar

If you are lucky enough to come into a large sum of money, there are really no problems, just opportunities if you handle the money correctly.

People will be jealous of you, and you will probably get a lot of mail and phone calls from people saying they are destitute and really need some money. This is to be expected, but can be mitigated by having the money in a trust with just an annual income distributed from the trust. Once people learn the principal is in trust and not accessible, they will start to back off.

You have to do financial and estate planning. You would need to do the following:

1. Have the inheritance or winnings put in a trust to keep it from being estate taxed at your death. Anything in your estate of $5,340,000 is taxed at a rate of 40%.

2.Put the money in a balanced portfolio of Municipal bonds, Municipal bond mutual funds, tax advantaged funds and fixed income funds to keep your income tax as low as possible. Dividend and interest income are taxed the same as wages.

3. Use some of the earnings each year to buy insurance policies to cover any estate or inheritance taxes your heirs may face. . This policy or policies, (if a spouse is involved) is a great way to add additional wealth to your estate. If the policies are owned by the trust, they are not subject to estate tax.

4. Create a charitable foundation. Gifts to charity are tax deductible up to 50% of annual income each year. This is another way to reduce taxes.

Proper financial planning can eliminate most of the concerns regarding “sudden money.”

In summary,

Phase one is Planning. This is setting goals, making decisions, and your risk tolerance.

Phase two is taking action. This is the financial planning part of the process.

Phase three is monitoring and sharing. This is the part that lasts for the rest of your life. You want the money to work for you and the people you care about.

Wealthadvisor's avatar

That should read, “anything in your estate over $5,340,000 is taxed at a rate of 40%.”

cazzie's avatar

Can someone please give me all the money so I can find out and report back?

chinchin31's avatar

Security I think is the main concern.

A lot of criminals will want to rob you. You will worry more about your children and relatives being kidnapped etc.

Then you will also have a fear of losing the money. Especially if you become comfortable having a certain lifestyle that money can buy.

Exitor98's avatar

I think it’s all relative. I’m amazed when I see people with a $100m net worth buying a jet.
Or when someone wins $40 million buys a new Lamborghini. Just because one had $40 million (after tax) doesn’t mean you can afford $260000 car because the reality is ..you can’t.
People with that kind of money buy Corvettes not exoticars.
No wonder why people come into a lot of money the go broke.

gailcalled's avatar

$40 million will earn conservatively at 3.5% tax free per annum, $1,400,000. If the someone buys a new Lamborghini that year he still gets to take home a decent yearly income with just a little belt tightening here and there.

Darth_Algar's avatar

If I had $40,00,000 I think I’d set my sights a bit higher than a Corvette.

ragingloli's avatar

How about a Porsche 918 Spyder, a Mclaren P1, a Pagani Huayra, or a Lamborghini Aventador.
corvette… low tier junker

Exitor98's avatar

Also when somebody comes into a lot of money it might be a good idea to move to an area where you would blend in. It would be easier to buy expensive cars like ferraris, large diesel pusher motorhomes and boats if you’re surrounded by others with the same kinda stuff.

So if you live in say Bossier city Louisiana and come into $50 million moving to Heath or Rockwall Texas would make it easier to blend in. In fact there would be people around you that make you look like a pauper which is sorta what you want.

Wealthadvisor's avatar

@gailcalled Where are you able to get 3.5% tax free per year. Are you saying 3.5% after taxes, (net) or a pure tax free 3.5% tax free return?

gailcalled's avatar

The triple-tax free Vanguard NYS LT Muni Bond Fund VNYTX comes pretty close over the long haul. There’s some variation due to the buying and selling that the manager might do which will show up in the end-of-year capital gains or losses, but it’s a nice fund. I can, most of the time, let the interest compound. The principal often does not reflect the COLA but I making a point and not giving out investment advice.

Vanguard has similiar funds for MA., CA. OH., NJ, and PA.

If you had $40,000,000 in it, you could afford to buy a Lamborghini occasionally.

Wealthadvisor's avatar

Thanks for the information @gailcalled . Now if you let the interest compound, this interest is income. How are you paying the tax on the compound interest? From other sources of income or are you netting the account?

gailcalled's avatar

I generally don’t fine-tune it. I have a yearly budget, and always note just how much approximately I have left over for discretionary saving and spending. Given that the bulk of my annual income is tax-free, I don’t pay very high taxes and I consider it all fungible.(And I am not investing $40 million either, which simplifies things).

In Dec. I do have a quick look at the cap. gains listed on my Investment account page. If it is very big, I may sell a few stocks for a loss.

I am retired and have a very conservative portfolio, 65% bond funds and 35% balanced between growth and value stocks and in general, do nothing much.

Wealthadvisor's avatar

Your investing philosophy makes sense. And, it works well with low to medium investment amounts.

I was referring in my answer to the problems associated with large lottery winnings or inheritance. It all comes down to preservation of wealth and the lowering of taxes. $40,000,000 leaves an almost $35,000,000 estate tax exposure at a 40% tax rate without proper planning. This is a tax bill of about $14,000,000. While heirs receiving $21,000,000 is nothing to sneeze at, it is a shame to give up that much wealth because of poor planning.

Most people with large windfalls rarely think about the tax consequences of compound interest. There is a direct correlation between compound tax and compound interest. For example if you were to invest $40,000,000, and it was not tax free, you would owe a tax of about $490,000 on $1.4 million. The problem becomes acute when there is no other income to pay the tax. Then the only source of funds is the account itself, which then needs to be netted each year to pay the tax. This netting reduces the compounding. While over time this netting would reduce the tax bill, again you are giving up wealth in the form of income tax to the government. This creates a lost opportunity cost on tax, which then adds to the amount of wealth lost.

It is nice to talk to someone who has a concept on how money works. If you look at some of the answers listed here, the focus seems to be how to spend the money, not how to invest it.

gailcalled's avatar

When I inherit my $40 million, I will check in again. Some of the fluther members don’t read accurately and don’t focus on the actual issues. (Let me tell you about my operation.)

jerv's avatar

@Wealthadvisor That’s why the really rich have personal accountants. At a certain point, things get complex enough that only a trained professional with few/no other duties is not only helpful, but also cost-effective. While accountants aren’t cheap, they generally get paid less than they save once one’s wealth gets to a certain point.

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