Are you prepared for a sudden windfall of wealth?

  • How to avoid losing a windfall? Go slow, work with experts, figure out how much you can spend and then stay on track.
  • Divorce can wipe out 50 percent or more of your wealth overnight.
  • The Bernie Madoff disaster proved that you cannot trust anyone.

Sudden wealth can be a wonderful opportunity to create a better life for yourself and others.

Many sudden-wealth recipients manage this process deftly and with few issues. It's critically important to stay on track and to adjust your plan when necessary. It's also important to stay away from these common sudden-wealth sins, which have led to many bankruptcies.

Scott Serio | Eclipse Sportswire | Getty Images

It may be incomprehensible for someone who was making $50,000 a year to go broke after receiving a $10 million windfall, but it happens. It might not disappear in a year or two but if the person is consistently making bad financial decisions, they can go through the money in less than a decade and much quicker if they also engage in one of the other sudden wealth sins below.

How can you avoid this fate? Go slow, work with experts, figure out how much you can spend and then stay on track. If you still have problems, work with a therapist or money psychologist. The few hundred you spend learning about your triggers and underlying issues will be one of the best investments you could make

Sudden-wealth recipients who spend too much on themselves will often give too much, as well. When confronted with giving too much to family, one client confessed, "I feel guilty having this new house and stuff when the rest of my family is still struggling. I can't enjoy what I have unless I give them what I have." There are often familial pressures and hidden expectations to take care of the family that can weigh on the person. Helping those in need and others to create a better life for themselves can be one of the most rewarding uses of your windfall, but there is a limit to what you can do.

More from Investor Toolkit:
A 'back door' Roth IRA strategy benefits high earners
Psychology of investing: Don't let emotions influence your decisions
Financial advisors vs. financial counselors: What's the difference?

Stick to an organized spending plan, help others the right way and stay on track with monthly reports. Work with a financial advisor to create a long-term and sustainable plan to assist your family. Also, have that advisor become involved in the discussions with your family, if necessary.

Divorce can wipe out 50 percent or more of your wealth overnight. Divorce is also one of the most common reasons why sudden-wealth recipients lose their money. Protect yourself with co-habitation, prenuptial and postnuptial agreements. Work with a family law attorney to ensure you have some protection against separation or divorce.

A common and large source of loss for sudden-wealth recipients is making bad investment decisions. Many smart people have made bad decisions and have invested too much of their sudden wealth in red investments. Avoid these and stick to mostly green and occasionally some yellow investments. Work closely with your advisors to review each investment — especially those that are yellow or red.

Sign Up for Our Newsletter Your Wealth

Weekly advice on managing your money
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.

The Bernie Madoff Ponzi scheme proved that you cannot trust anyone. Madoff was a highly respected investor and was once chairman of the Nasdaq stock market. The onus is on everyone to create a system of checks and balances to protect their money. Remember, never invest in a company or a business venture your advisor recommends in which he is also involved.

In an instant, all of your assets could be in jeopardy if they are not protected. Lawsuits are all too common, especially for people who have wealth. Your sudden wealth makes you a larger and more visible target. Work with an asset protection attorney to shield your assets from creditors and lawsuits.

Stay on track with your financial plan so you, too, can make minor adjustments and so you and your future generations can enjoy your sudden wealth.

(Editor's note: This guest column originally appeared on Investopedia.)

— By Robert Pagliarini, president of Pacifica Wealth Advisors

Financial Advisor Hub

Latest Special Reports

  • Innovative female entrepreneur examining prototype

    In an era of rapid technological advances and demographic change, how do legacy companies adapt, innovate and evolve? CNBC Evolve features iconic global companies and executives who are embracing change and transforming for the future.

  • Invest in You: Ready. Set. Grow. is focused on improving Americans’ money knowledge of saving, spending and investing.

  • All the tools you need to navigate the financial challenges of planning and paying for college.