You may remember Richard Hatch, the first million-dollar winner of CBS’s Survivor. Well, so does the IRS. I was watching "Good Morning America" recently and came across their story discussing Mr. Hatch’s run-in with the IRS.
Apparently, Hatch didn’t realize that it was his responsibility to pay taxes on his $1,000,000 winnings, which amounted to $300,000. Instead, Hatch argued, it was CBS’s responsibility to have "grossed" up his winnings and presented him with an "after tax" amount. The IRS was not impressed with this argument. So now he’s in jail and will be sentenced in April. In fact, he’s facing a sentence of up to 13 years.
But I think that "Good Morning America" missed the big story.
Even more astounding than his excuse for not paying his taxes is the fact that Mr. Hatch has apparently gone through all of his million-dollar winnings! The IRS, known for being merciless in collecting back taxes, has the power to strip personal bank and investment accounts. The fact that he is going to jail over this would indicate that the IRS had nothing to go after. So it’s clear that over the past five years Hatch has blown every last penny he won.
Had Mr. Hatch put his winnings into the bank, he would have certainly had the $300,000 to pay his taxes. In fact, had Mr. Hatch taken his winnings and promptly invested them in our KFG moderate model portfolio, not only would he be free today, he would have close to $1,400,000. And that’s after paying the $300,000 tax on his initial winnings.
Sadly, Mr. Hatch’s experience is not unusual. Lots of people who find themselves recipients of large amounts of money just don’t know how to handle it. A survey by the Certified Financial Planner Board of Standards followed the financial well-being of recent lottery winners. They found that due to lack of financial guidance after winning their prizes, nearly one-third of lottery winners went bankrupt, most within five years of winning their prizes.
You may not think the problems of such a financial windfall would ever apply to you. They certainly could. You don’t have to be in a situation as dramatic as Hatch’s, nor do you have to ever buy a lottery ticket. The same dynamic is at work for anyone who inherits substantial assets, sells a business, or receives a large bonus or increase in salary.
This public example from Richard Hatch is one more reminder that even a million dollars won’t last long unless you take care of it. If CBS, Grandma, or your boss hands you that $1,000,000 check or even that $50,000 check, what’s the first thing you should do? Call a fee-only Certified Financial Planner (CFP®).
The second thing you should do is—nothing. Susan Bradley, author of Sudden Money, strongly recommends taking a time out after receiving any large sum. A cooling-off period in which you don’t make any big purchases can give you time to get used to your new status and think about what you really want to do.
During this time, consulting a CFP®) can help you view that financial windfall more realistically. With such professional help, you can set up a plan to manage the money so you can enjoy having it and can use it in ways that enhance your life.
Getting financial advice may not seem to be a fun or exciting response to becoming an instant millionaire. It’s a good way, though, to make sure you can continue to enjoy your new wealth. And it’s certainly a lot more fun than going to jail.