As a planning expert often on the speaking tour, I’m often asked, “What else do we need to know?” I always look at the younger audience members and think, if only I knew when. That’s the motivation behind this expert series on planning tips I would give my younger self. Last month, I wrote the first of four articles and started with the topic of education funding planning. This month, I’ll be following my younger self through college and my first job, and into the next “typical” stage of life: getting married and starting a family.
When you meet the love of your life and talk about marriage, it’s often hard to think beyond the immediate excitement of engagement, wedding and honeymoon. However, discussing your financial philosophy with your future spouse is critical. After all, you are signing 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 who tend to marry later in life, it is more likely that you married after you had acquired a certain level of assets, which need to be protected in the event of a divorce, quite possibly with a prenuptial agreement. Marriage laws vary from state to state. For example, community property states such as California, Washington, and Texas follow the general rule and presumption that assets are split 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 do you need to understand the matrimonial regime that governs your union, you need to understand the nuances. For example, in New York, while property acquired in a marriage is generally considered separate property that is not part of the division of marital assets, earnings and appreciation of such separate property may be property marriages subject to division.
What happens when you combine assets with your spouse and open a joint account? What if your spouse contributes to the mortgage, but the title to the home is already in your name? There are many of these types of issues that newlyweds with existing assets need to think about and agree on, so there are no surprises if the marriage doesn’t work out.
I can fully understand and appreciate how difficult the prenuptial conversation can be. I always tell my clients: These are two consenting adults who are committed to making decisions together for life. You want to understand the terms of everything you do in life, no matter how transactional and transitory, a job offer, buying a car or a house, why not do the same for the equivalent of a contract of life?
Align with financial goals and philosophy
Have you had a conversation with your loved one about your financial goals, spending and saving philosophy? If not, it is absolutely necessary as it serves as the foundation for the life you will build together.
Here are some sample topics to get you started:
- Do you plan to do a joint budget, and if so, who will contribute?
- Is there an agreed spending limit where the other spouse must be consulted?
- Are you both on the same page regarding risk tolerance in investments and comfort level with debt?
Start by talking broadly with long-term horizons in mind:
- When do you really want to retire?
- Is there a financial milestone you would like to reach at a certain stage in life?
- There are current or future financial obligations that the other person should be aware of (for examplecare for aging parents, alimony)?
Once you have an agreed-upon financial goal, move to the immediate next five years with these long-term goals in mind:
- Is your combined income enough 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 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 together or keep them separate?
While there are no right or wrong answers, the process of going through these questions and having this discussion is very important.
Be prepared when you expand your family
Once married, and especially when you have a child on the way, it’s important to make sure you have your estate plan in order. At a minimum, everyone needs a will, a power of attorney, a health care power of attorney, and a living will (the last two are often combined into one document).
A will is the legal document that states who inherits your property upon your death. Without a valid will, your estate would pass under your state’s intestacy laws, which describe your next of kin for inheritance purposes. Intestacy laws in all states tend to follow family lines: spouse, children, parents, siblings, etc. While many people may find this acceptable, what many people don’t think about is how their loved ones will receive these assets. If your beneficiary is too young or not yet capable of making financial decisions, should the assets be held in trust for the benefit of your beneficiary? If you have a minor child, who will be your child’s guardian if both parents are dead? To me, the most important reason for a young parent to have a will is to name a guardian of your choice for your minor children.
Another common mistake is not updating 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 in 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 leave the beneficiary blank. However, these default rules usually don’t apply when it comes to children.
Here’s a mistake I made as a kid: When I had my first child, I updated my beneficiary designation to my husband as the primary beneficiary and my son as the secondary beneficiary. When my daughter was born, it took me years to realize that I never added her to the list. I accidentally disinherited my daughter simply because I was too busy with work and being a mother of two young children. Lessons learned that estate planning is not a one-time thing: you need to constantly review and update it, especially if you’ve just experienced a life event.
Protect yourself from unthinkable disaster
Now that you have a family and dependents, it’s important to think about risk mitigation and protection. Do you have adequate life insurance if something happens to you? At the very least, I think everyone should have a term policy to help the surviving spouse with immediate cash flow needs and any ongoing fixed expenses.
I am often asked: How much insurance is enough? This really depends on what your needs are, and the best way to quantify that need is to have a financial plan that focuses on survivor needs. Common factors to consider in this analysis include having enough coverage to pay fixed costs like a mortgage or to get dependents to a certain point in life, like 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 earning spouse needs to be insured. This could be a mistake. If something were to happen to the stay-at-home parent, you would probably have to hire someone to provide childcare and other services at home, all of which cost money. Alternatively, you might consider taking a less demanding job so you can be home with the kids more in this situation. All of these mean additional costs that need to be covered, and having a life insurance policy can help you with these cash flow needs.
I hope you found this helpful and stay tuned for next month’s column: Financial Advice I’d Give My Younger Self: Planning for Retirement and Having Enough of a Nest Egg to See It Out.
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Please note that tax, estate planning, investment and financial strategies require consideration of the suitability of the individual, business or investor, and there is no guarantee that any strategy will be successful. Wilmington Trust is not authorized and does not provide legal, accounting or tax advice. Our advice and recommendations that we provide to you are illustrative only and are subject to the opinions and advice of your own attorney, tax advisor or other professional advisor. Investing involves risk and may incur gains or losses. There is no guarantee that any investment strategy will be successful.
Chief Wealth Strategist, Wilmington Trust
Alvina Lo is head of family office and strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina previously worked with Citi Private Bank, Credit Suisse Private Wealth and a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. He holds a bachelor’s degree in civil engineering from the University of Virginia and a doctorate from the University of Pennsylvania. She is a published author, frequent speaker and has been quoted in major media such as “The New York Times”.