Windfall: any unexpected acquisition, gain or stroke of luck. -- Webster's

What would you do if you hit the lottery? Won a big court judgment? Inherited Aunt Tillie's millions?

Of course, everyone dreams of fancy cars and sunny isles, but what would or should you do with a windfall to make it last a lifetime and provide for your heirs?

It's not as easy as it seems. To get a sense of the options and problems, The Washington Post took a set of circumstances, based on a real situation, and gave them to three local planners to find out what they would recommend.

The situation involved a traditional family. The husband, age 40, worked at a major company and earned $60,000 annually. His income was sufficient to support his wife and their three young children, but not to allow them to accumulate savings or to buy the home they wanted.

Then tragedy struck. A truck rammed the wife's car and badly injured her, and she died four days later. The husband sued the trucking company, which agreed to pay $2.5 million in damages. After lawyers' fees and court expenses, he was left with a tax-free windfall of $1.5 million.

The first financial question he faced was whether to accept a lump sum payment or to take the money over 30 years in the form of an annuity established by the trucking company. A top priority was finding someone to take care of the children, ages 4, 7 and 12.

There were $115,000 in hospital bills for the wife, who had no insurance of her own. The husband also wanted to help out her retired parents with a $200 monthly gift.

Beyond these immediate needs, the widowed father wanted to provide for his children's college education and also for some extended family vacations involving travel.

Despite the tragic circumstances of his windfall, the husband was a millionaire now. He started to think about buying a $425,000 house he liked in Chevy Chase. And he wondered if he would have enough money to let him realize another dream: quitting his job and writing a novel. How should he invest his money to achieve these goals?

Although some facts have been changed to protect the family, the case is real. In real life, the husband paid off his debts, bought the house for cash and took the rest of the money in an annuity. This year it will pay him $3,900 a month, with a 3 percent annual increase for 30 years.

Did he act wisely? Although there were areas of unanimity among the three financial planners -- who were not told about the husband's actual choices -- there were substantial differences among them on the advice given and the fees charged.

The range of advice vividly illustrates both the complexity of personal finance today and the reality that even professionals do not always agree on the best strategy to deal with a problem or achieve a goal.

The participants were Richard L. Cooper, a certified financial planner with Richard L. Cooper & Associates Ltd. of Fairfax; Margaret Miller Welch, a certified financial planner with Alexandra Armstrong Advisors Inc. of Washington; and Paul A. Yurachek, a certified public accountant with Dennis M. Gurtz and Associates Inc. of Washington.

The planners unanimously recommended accepting a lump sum payment rather than an annuity. "It's always better to take the cash," said Welch. "Let the money grow for you rather than accepting a fixed sum offered by someone else. By agreeing to an annuity, he gave up control of the money."

Two of the three advised the husband to take a mortgage on his house rather than pay all cash. Despite the fact that he will pay one dollar in interest for each 28 cents he gets in tax benefits, Cooper said there was nothing to be gained from letting $425,000 equity in the house sit idle. It's better to have two assets (the house and the cash minus the down payment) working at once, he said.

Each planner devised a different way to take care of the monthly stipend for the wife's parents: income from a $35,000 municipal bond trust, or a $50,000 conservative income equity fund, or payments from current cash.

The means to provide for the children's college education varied from giving $10,000 a year to each under the Uniform Gifts to Minors Act, to putting $105,000 in savings bonds and a municipal bond fund, to investing $145,000 in a stock fund and zero coupon bonds.

The $105,000 that Cooper would set aside now for the children's college education is calculated to grow into $200,000 by enrollment time. Instead of a trust, Yurachek suggested annual gifts to the children. All of the planners stressed the importance of keeping the bulk of the money in the father's name until the children reach age 14, when they will be taxed at a lower rate.

Welch recommended making provisions for a guardian for the children should the father die young. She and Yurachek suggested establishing a revocable living trust with the father as trustee and successor trustees in case of his death or disability. Naturally, he should update and revise his will.

The husband said he would like to spend $10,000 to $15,000 a year to travel with his children. Welch suggested a special $200,000 tax-free bond fund to finance that; Cooper and Yuracheck advised financing travel from current accounts or by selling assets.

The husband's employer provides medical coverage for himself and his children and life insurance for him amounting to $85,000. Since he is in effect self-insured by virtue of his windfall, the only reason he might want to buy additional life insurance would be to cover the substantial estate taxes after his death, said two planners.

The husband describes his investment philosophy as conservative. His risk tolerance is moderate, meaning that he would like to put half his money in very safe investments and the other half in investments that have the potential for increasing his net worth.

Each planner recommended a diversified portfolio with varying amounts in stock and bond funds, real estate and other limited partnerships, and cash or cash equivalents. All of the plans were crafted after the Oct. 19 stock market collapse and reflect a cautious approach toward investing and results. The investment totals on the chart represent the amount left from the $1.5 million settlement after disbursements have been made for all other things.

Cooper gave the husband the largest investment portfolio, $1 million, and projected the highest yield, 8 percent over the next year. Under his scenario, the annual family income would be about $140,000 (including the husband's $60,000 salary).

Welch projected total income in 1988 of $117,230 (including a $3,000 salary raise), for a total cash yield of 5.3 percent on investments. Yurachek's estimate of $114,684 in annual income works out to a 5.8 percent annual yield.

The annuity will pay the husband $46,800 this year, for a total annual income of $106,800, or $7,900 less than the most conservative income projected by the planners.

The annuity will pay $3,900 a month toward expenses estimated at $5,000 without a mortgage. On a monthly basis, Yurachek projects income of $5,700. Welch and Cooper, who advise holding a mortgage, would provide $6,900 and $7,080 respectively.

As for the husband's thought of quitting to write a novel, the planners took a dim view. "I would never advise him to quit. Or at least he shouldn't stop working for a year until he sees how the finances work out," said Cooper.

Welch counseled him not to leave before he is vested in his company's pension plan in 1990. She added, "Realistically speaking, if Ben wants to quit work and write a novel, he should give serious thought to a less expensive house and to cutting back on his planned travel expenses so that he is not using such a large percentage of his asset base to generate income."

Yurachek went further and devised an alternative investment strategy for the husband if he seeks to become a novelist. He would increase the amount kept in cash and cash equivalents from 25 to 42 percent of portfolio. He would decrease the relative amounts in all other investments except stocks.

The cost for such advice -- presented in narrative form with tables showing cash flow, asset allocation and, in one case, actual investments -- would vary significantly, from $1,000 to $3,000, although the higher figure includes one year of consulting services.endqua