Q.
I am a single mid-forties female physician, engaged to a man about a decade older with 2 adult children who want him to get me to sign a prenup. Likewise, I want to protect my assets too — from them.
My Fidelity advisor (I have been with Fidelity since my residency days for my Roth, Rollover and Individual IRAs) said that if I have my transfer on death (TOD) beneficiaries (my sister and a charity) named on my brokerage and bank accounts that I won't need to waste time and money creating a trust to protect my assets in this marriage. My assets include bank accounts, investing accounts at Fidelity and Vanguard, my car, and some physical gold, but no real property. Is that correct or should I get a trust?
A.
There are a number of questions wrapped up in that paragraph, so let's address them one by one.
#1 Avoid Commissioned Advisors
First, let's talk about your financial advisor. As I've mentioned many times on this blog before, I don't have a problem with people paying a fair price for good financial advice. I generally recommend a fee-only advisor who is preferably paid with a flat fee, an hourly fee, or an annual retainer fee. An asset management fee based on the percentage of assets under management (AUM) is also reasonable so long as the percentage isn't too high and decreases as AUM increase.
My least favorite type of advisor is a commissioned salesman paid by mutual fund loads or insurance product commissions. Not only are they often tied to a specific company, but they also have a constant financial incentive to churn your account from one (usually bad) product to another. Fidelity advisors generally fall into this last category. They tend to recommend Fidelity Advisor funds, which are basically high-cost loaded mutual funds.
For example, the Fidelity Advisors Total Bond Fund is sold with either a 4% front load with a 0.82% expense ratio, a 5% back load with a 1.5% expense ratio, or a 1% per year ongoing load with a 1.5% expense ratio. I don't have a problem with Fidelity funds. In fact, they have a very good bond fund, the Spartan Total Bond Index Fund available to individual investors without a load and charging just 0.10% per year as an expense ratio.
Why you would be willing to pay 15 times more (not to mention the commission) for a mutual fund to receive bad advice (invest in expensive mutual funds that are unlikely to perform well due to their high expenses), however, is beyond me. You would probably also benefit from learning about backdoor Roth IRAs, but that would likely require you to roll your tax-deferred IRAs into a 401K of some type.
The other thing that concerns me about your advisory relationship is that you don't seem to have 100% trust in this fellow as evidenced by your coming to me with your concerns. I don't have a problem with getting a second opinion, but why pay someone for advice (especially 4-5% of all assets invested) if you have to go check it out with someone else every time?
I would highly recommend you spend some time on the blog reading about financial advisors and consider changing yours. Another great person for a third opinion would be the attorney representing you in the drafting of the pre-nuptial agreement.
#2 Should You Get A Prenuptial Agreement?
My wife and I don't have a prenup. We didn't even consider it. But the truth is that when we got married in our early twenties neither of us really had any assets. Neither of us even had a job. Nor did we have any previous marriages or children. I don't think a prenup agreement is mandatory in that kind of situation.
However, if your fiancè was asking me about his situation, I would definitely recommend a prenup. He presumably has significant assets and he has children from a prior relationship. So I don't see anything wrong with him (or his children) pushing for one and I think you should be perfectly open to it. You just need to make sure it is fair to you.
A common approach is that your assets from prior to the marriage go to your selected heirs, his assets from prior to the marriage go to his selected heirs, and assets that were accumulated during the marriage go to the other spouse upon the death of the first, but there can be lots of variation.
The important thing is the process you go through. By ironing out all these issues prior to marriage, your communication and relationships will be much stronger and you'll be much less likely to need that prenup in the event of divorce or even death of one spouse.
#3 Naming Beneficiaries
Bank, brokerage, mutual fund, and retirement accounts will generally allow you to name beneficiaries. Upon your death, the beneficiary gets the account. I name my spouse as the beneficiary on all my accounts, and she names me as the beneficiary on all of her accounts. Our children are the secondary beneficiaries for each of our accounts and for our joint accounts. This allows all of these accounts to pass to our heirs in the event of our death without going through probate.
But there is no reason I had to name my spouse. I could have named the neighbor's dog if I so chose. So if all the assets you wish to protect in the event of a divorce (or death) are in bank and brokerage accounts, you can just name your beneficiaries and be done with it. No need for a trust. No need for a prenup (with regards to that particular issue.) Your advisor, despite his conflicts of interest with regard to your investments, is correct about that.
#4 Most People Probably Need A Revocable Trust
The point of a trust is to keep assets from going through probate. Some people use a will, which dictates who their assets go to upon their death. This is cheaper upfront than a trust but can be more expensive on the back end as probate takes time and money.
While you don't need a trust to avoid probate for your bank and brokerage accounts, you would need one in order to make sure your sister or desired charity received your car and physical gold in the event of your death without going through probate. In the event of divorce, the prenup would likely be the agreement that dictated where your car and gold went (either to you or split between you and your ex-spouse.)
So, in the end, you probably need a prenup, appropriately named beneficiaries, and a new investment manager. You should eventually get a trust as well, but not necessarily before the marriage. Most importantly, you need to have an open and frank discussion with your fiancé and come to an agreement about what should happen to all of your current and future assets in the event of a divorce or death of a spouse. Like a good job contract, the prenup is just the written documentation of the verbal agreement.
What do you think? Did you get married later in life? Did you get a prenup? What was your agreement? Comment below!
My will calls for the creation of a trust in the case of death to my spouse and I (to care for children). Actually it creates a trust in the case of death of just me as well albeit most of our assets go to my wife outside of that trust.
Is this how most are done? I had mine done in the military and had them use future language should I have more children (as I am having in August). Just curious.
I think that’s a reasonable way to do it.
Great post, as always. Something else to keep in mind when naming beneficiaries is that by federal law if you want to name a non-spouse as beneficiary of your 401(k) or other qualified plan, your spouse must sign a waiver consenting to the non-spouse beneficiary designation (IRC § 417(a)(2)).
Great point Cynthia, but it’s also worth mentioning that any beneficiaries named in these plans prior to marriage don’t have to be changed and do not require a waiver. (Yet another reason to do regular reviews of plans for those who want their new spouse as the beneficiary or their previous spouse removed.)
@ WCI, another great post. I agree that an attorney (not a shared attorney) should review both sides of the pre-nup. Advisors can help guide, but it’s going to come down to the law and attorneys need to take the lead here.
Alex – I dont know if you are an attorney but my family went through this – my wife and her brother were named beneficiaries on an ERISA retirement plan and the account went to the new spouse of 6 months- they were named prior to the marriage. If you know this differently and are an attorney maybe you can get 1.5mil back from fidelity and my six month MIL.
They also experienced the problem of a single attorney for both sides of a prenup- makes it worthless. Funny how hard it is to find an attorney to take a legal malpractice case.
My bigger point is get professional legal advice AND sit down with your future family and spell out exactly what should happen if one of you dies- and put it in writing for them and you. My MIL said she had no interest in my FIL assets but the shock of his death had not faded before she lawyered up, knocked out the prenup, took the retirement accounts and served us with half the loan on their house (which he put the down payment and made all prior payments).
My FIL went through an attorney and drafted a trust, a prenup and a will- but the attorney was incompetent so all his spelled out wishes were wasted paper. This is why I believe you have to reinforce your and your new husbands wishes in writing to everyone that may be involved.
No, I’m not an attorney. That’s why I suggested each side have an attorney of their own and advisors (like me) should not be the ones you rely on for legal advice. I don’t think you should get legal advice from an advisor (nor should you get insurance from an investment advisor). Your FIL didn’t make either of those mistakes, but your family still got screwed.
I’m sorry your FIL’s attorney was so bad. That’s ridiculous that his documentation was worthless. I hope you can find a better attorney who can convince the court of your FIL’s intentions. Good luck!
I could probably refer you to a better one in GA, but don’t have the close connections elsewhere. WCI has my email address or you can track me down from my site (linked above) if you are in GA.
Using TOD provisions in accounts becomes much more complicated if you live in a community property state, like I do. If you don’t have a prenup, then to the extent your TOD accounts end up including ANY proceeds from your post-marriage earnings, the TOD provision may not override the community property laws and your spouse could be entitled to half of community assets (depends on law of the particular community property state). So, prenup becomes critical in community property state.
It really depends what state you live in, assets, and goals if you need a trust. It would be nearly impossible to provide good advice given the variables involved in regards to this question. I would definitely seek the advice of an attorney to draft the prenup and weigh in on the trust. Just make sure the attorney isn’t a trust salesman. In general you can typcially accomplish your goals with trust provisions inside a will without setting up a revocable living trust. Exceptions to this include: 1. owning real property in California or another state that charges high probate costs. 2. Owning property in multiple states (avoid ancillary probate) 3. if you need assistance from corporate trustee or another person to handle your affairs 4. Privacy – wills can typically be requested as public information.
As far as distribution of assets a prudent trustee of a will typically won’t distribute assets until after the four-month waiting period has passed for the notice to creditors and they have received an IRS closing letter, so there isn’t a significant benefit here.
My wife and I specifically chose to set up trusts as secondary beneficiaries (after each other). We did this so that if we both passed away, any inherited monies will not be automatically available to our children when they turn 18. All assets go into the trust with certain stipulations for education, living expenses, etc. until the children are 30, at which point the trust dissolves and they get whatever is left. For us, we didn’t think that them having access to significant life insurance proceeds and investment money at 18 was the best choice.
One thing not mentioned about Pre-nups is debt, current and future. Most of the surprises have been that debts weren’t mentioned. Or one spouse incurs debt that both will be required to pay. A Prenup covers this specifically, along with all kinds of issues not normally discussed in sufficient detail while dating. If the parties are unequal in any way, or either or both have assets before marriage, you need a prenup IMHO, if for no other reason than to clear the air.
I agree that the discussion matters as much or more than the final contract.
as someone who has been peripherally involved in a fair number of these types of situations, I have developed some strong opinions . . .
1. Prenups are commonly contested and rarely settle to the satisfaction of the sponsoring partner. They often create unnecessary stress and conflict early in a relationship.
2. Trusts are the vehicle recommended by every single estate and asset protection lawyer I know. Trusts are backed by decades of legal precedent. Much more difficult to contest than prenups. Personal property premarital trusts can be formed without the spouse’s knowledge or participation.
The above being said, for most people, it may make sense to use both!! (as will as scrupulously maintaining separate bank and security accounts for premarital assets).
The big problem with this topic is that it is extraordinarily complex.
How to put it all together?
As someone who has been peripherally involved in a fair number of these types of situations, I have developed some strong opinions . . .
1. Divorce is soooooo common among physicians that to not perform premarital asset protection and post-marital asset distribution planning is about one of the stupidest things a person can do.
2. Prenups are commonly contested and rarely settle to the satisfaction of the sponsoring partner. They often create unnecessary stress and conflict early in a relationship. On the other hand, they can help open and foster discussion of financial issues between partners. Clearing this air early can be a good thing for a relationship.
3. Trusts are a vehicle recommended by every single estate and asset protection lawyer I know. Trusts are backed by decades of legal precedent. Much more difficult to contest than prenups. Personal property premarital trusts can be formed without the spouse’s knowledge or participation. On the down side, they can be quite pricey.
The above being said, for most people, it may make sense to use both!! (as will as scrupulously maintaining separate bank and security accounts for premarital assets).
The big problem with this topic is that it is extraordinarily complex and beyond the scope of this forum. The laws that govern this area vary A LOT by state and include federal input (ERISA, for example). For ANYONE getting married with significant premarital assets and/or children from previous marriage(s), I recommend consulting TWO attorneys that specialize in the areas of asset protection and estate planning and implementing the plan long before the wedding date.
The original post says “…beneficiary on all my accounts.” Did you really mean all? My wife and I do the same for all the retirement accounts, but Vanguard does not allow beneficiary designations for jointly held no retirement accounts. Of course, they are jointly held so we are protected if only one of us dies, but as best I can tell these accounts must go through probate if we were both to die. Any thoughts about placing taxable mutual fund accounts in a revocable trust?
Hello
What if the wife will sign a prenup
What about keeping assets in a brokerage account and retirement account roth and 401k roth separate, do not reinvest dividends no active management just passive growth no contributions during the marriage. Literally lock down all the accounts and throw up the key metaphorically speaking, other ailmony and spousal support and child support can this be consider marital property?
I bet it still can in some states with the right attorney and judge!
If you have any significant assets going into the marriage, a pre-nup should be considered mandatory.
Not “significant assets” but enough that I you put the fear of God in me. I have been trying to months to get her to sign it and she finally agreed.
She will sign it hopefully one week before marriage.
She only agrees to keep premarital assets separate.
What would you recommend
Lock down the accounts, stop all dividend and interest investments. Download all statements and put then in a storage vault. Notarize the assets at the bank and put that into a digital storage vault now offered by a lot of brokerages. Do not actively manage any accounts!
What should I ask the prenup lawyer to further strengthen my position to keep all premarital assets separate? I plan to never comingle any of my bank accounts (poison the well so to speak with any marital money). I have all my paychecks one week before marriage going to my new bank account which will joint owned.
I understand if I die she may be entitled to premarital roth401k or ira (some portion) should I put that in a will it does not go to her as well. i plan to take the assets and put into a trust at 59.5 years for other family members (avoid fraudulent conveyance) I understand that the assets can be used against me for ailmony or spousal support. What steps can I take to mitigate that, what should I ask my lawyer.
I actually found a lawyer who can review with her next week. Ultimate xmas present, any further thoughts or advice!
I’d talk to your attorney about specifics, but the idea is for the two of you to decide what happens in advance. If you can’t come to an agreement now while you love each other, it’s going to be ugly on the other end (if it gets to that.)
A lot of times it is a second marriage for one party and there are kids from the first marriage that will be getting a big chunk instead of the new spouse. But it might just be as simple as you brought $2 million into the marriage, so you take $2 million out plus half of what is accumulated going forward. Discuss with your lawyer.
Hello
I have a complex question that I probably need to ask a lawyer about but I wanted to see if anyone has any experience with this issue.
If you have prenuptial agreement that protects premartial assets and allow me to invest my premarital assets as I please can I use it in the following situation.
I was wondering if I create a IRA while I am married and take the money from premarital bank account will it still remain mine or under the law it is presumed that I would have to use my marital income to create it.
If anyone has any idea let me know. I believe you can create a 6K post tax ira and do backdoor conversion
My impression is that the more complex sometimes the less likely a court or jury will accept it.
Thank you
IRA contributions always come from earned income. So you’d be living on the premarital income and deferring in current income. I don’t think you need a lawyer.
Sorry I want to thank you for your answer.
May I imply that the pre-martial income would then become marital since I am putting that into the IRA for the year that I am married. That was my main question. The deferred income that does not go into my IRA would then my marital income since i used my premarital income to put into the IRA. I have looked at some of your books they are really good!
Thank you
You’re not putting that money into an IRA. That’s my point. You’re putting in your earnings. You do have earnings, right?
My question . If I am the stocker beneficiary does that cancel our prenup we had 40 years ago.
Stocker?
Prenup applies to what happens in the event of divorce. Beneficiary designation applies to what happens in the event of death.