As a planning expert frequently on the lecture tour, I often get asked, “What else should we know?” I always look at the younger audience members and think – if only I knew this back when. That’s the motivation behind this expert series on planning advice I would give to my younger self. Last month, I penned the first of four articles and began with the topic of planning for education funding. This month, I shall follow my younger self past college and my first job, and into the next “typical” stage in life – getting married and starting a family.
When you meet the love of your life and are talking marriage, it’s often hard to think beyond the immediate excitement of the engagement, wedding, and honeymoon. Yet, discussing your financial philosophy with your future spouse is critical. You are, after all, entering into a contract to live your lives together, and therefore make decisions together, until death do you part.
Consider a prenuptial agreement
Here’s the dreaded “P” word: prenup. With people tending to get married later in life, it is more likely that one goes into a marriage having already obtained a certain level of assets, which need to be protected in case of divorce, quite possibly with a prenuptial agreement. Matrimony laws vary in each state. For example, community property states, such as California, Washington, and Texas, follow the general rule and presumption that assets are divided 50-50 with divorcing spouses. Meanwhile, equitable distribution states, such as New York, Connecticut, and Florida, use a variety of factors to determine what is “fair and equitable.”
Not only does one need to understand the matrimony regime that governs their union, one needs to understand the nuances. For example, in New York, while assets brought into a marriage are generally regarded as separate property that is not part of the marital assets division, earnings and appreciation from such separate property may be marital property that is subject to division.
What happens when you combine assets with your spouse and open a joint account? What happens if your spouse contributes to the mortgage, but the title of the home is already in your name? There are many of these types of questions that soon-to-be newlyweds with existing assets need to think about and agree on, so that there are no surprises if the marriage does not work.
I fully understand and appreciate how difficult the prenuptial conversation can be. I always tell my clients – these are two consenting adults committing to a lifelong choice together. You want to understand the terms of everything else you do in life, however transactional and transient, a job offer, buying a car or a home, why wouldn’t you do the same for what is the equivalent of a lifetime contract?
Get aligned on financial goals and philosophy
Have you had a conversation with your loved one about your financial goals, spending, and saving philosophy? If not, you absolutely need to as it serves as the very foundation of the life you’ll build together.
Here are some sample topics to start:
- Do you plan to do a joint budget, and if so, who is going to contribute to what?
- Is there an agreed upon spending limit where the other spouse needs to be consulted?
- Are you both on the same page when it comes to risk tolerance in investments and comfort level with debt?
Start by talking in broad strokes with long-term horizons in mind:
- When do you realistically wish to retire?
- Are there any financial milestones you’d like to achieve by a certain stage in life?
- Are there any current or future financial obligations the other should know about (egtaking care of aging parents, alimony)?
Once you have an agreed-upon financial goal, then drill down to the next immediate five years with those long-term goals in mind:
- Is your joint income sufficient to support your combined lifestyle? If so, what will you do with the excess?
- Will you spend, save, invest, or maybe a combination?
- If the income is insufficient, what can you cut out and for how long?
- Will you buy a house or rent? How much can you afford, and do you have an agreed upon plan to save for the down payment?
- Will you retitle your accounts jointly or keep them separate?
While there are no right or wrong answers, the process of going through these questions and having that discussion is very important.
Be prepared when you expand your family
Once you’re married, and especially for when you have a child on the way, it is important to ensure that you have your estate plan in order. At a minimum, everyone needs a will, power of attorney, health care proxy, and living will (the last two often combined in one document).
A will is the legal document that directs who inherits your assets upon your death. Without a valid will, your estate would pass under your state’s intestacy laws, which outline your next of kin for inheritance purposes. Every state’s intestacy laws typically follow family lines – spouse, children, parents, siblings, etc. While many people may find that acceptable, what a lot of people do not think about is how their loved ones will receive those assets. If your beneficiary is too young or not yet capable of making financial decisions, should the assets be instead held in trust for the benefit of your beneficiary? If you have a minor child, who will be the guardian of your child if both parents are deceased? To me, the single most important reason for a young parent to have a will is to name a guardian of your choice for your minor child(ren).
Another common mistake is the failure to update your beneficiary designation on your retirement plans and insurance policies. These are called “non-probate” assets that are not subject to the terms of your will. Rather, the inheritance of these assets is governed by the beneficiary you named on the individual plan or policy. For a newly married couple, state law or often the retirement plan policy itself would automatically designate your spouse if you left the beneficiary blank. However, such default rules typically do not apply when it comes to children.
Here’s a mistake I made when I was young: When I had my first child, I updated my beneficiary designation to my husband as my primary beneficiary and my son as the secondary. When my daughter was born, it took me years to realize that I never added her to the list. I had accidentally disinherited my daughter simply because I was too busy with work and being a mother to two young children. Lessons learned that estate planning is not a one-and-done thing — you have to constantly review and update it, especially if you just experienced a life event.
Protect against an unthinkable disaster
Now that you have a family and dependents, it’s important to think about risk mitigation and protection. Do you have the proper life insurance coverage if something were to happen to you? At a minimum, I believe that everyone should have a term policy to help the surviving spouse with immediate cash flow needs and any ongoing fixed expenses.
I often get asked: How much insurance is enough? That greatly depends on what your needs are, and the best way to quantify that need is to have a financial plan with a focus on survivor needs. Common factors to consider in such an analysis include having enough coverage to pay for fixed costs like a mortgage or to carry dependents to a certain point in life, such as college graduation.
For many couples where one spouse may choose to stay at home to care for young children, the immediate reaction may be that only the money-earning spouse needs to be insured. That could be a mistake. If something were to happen to the stay-at-home parent, you would likely need to hire someone to provide childcare and other services at home, which all costs money. Alternatively, you may consider taking a less demanding job so that you can be home with the children more in that situation. All of this means additional costs that need to be covered, and having a life insurance policy can help you with those cash flow needs.
I hope this has been helpful, and stay tuned for next month’s column: Financial Advice I Would Give My Younger Self: Planning for Retirement and Having Enough of a Nest Egg to See it Through.
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Note that tax, estate planning, investing, and financial strategies require consideration for the suitability of the individual, business, or investor, and there is no assurance that any strategy will be successful. Wilmington Trust is not authorized to and does not provide legal, accounting, or tax advice. Our advice and recommendations provided to you are illustrative only and subject to the opinions and advice of your own attorney, tax advisor, or other professional advisor. Investing involves risks and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful.
Chief Wealth Strategist, Wilmington Trust
Alvina Lo is responsible for family office and strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina was previously with Citi Private Bank, Credit Suisse Private Wealth and a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. She holds a BS in civil engineering from the University of Virginia and a JD from the University of Pennsylvania. She is a published author, frequent lecturer and has been quoted in major outlets such as “The New York Times.”