When I saw the name of this post, the first thing that popped into my head was the song Golddigger by Kanye West. Judge me, if you want to, but song lyrics constantly pop into my head when I hear words and phrases. Oh, a post about prenups, huh? Holla, “We want prenup! We want prenup!”
Kanye references aside, this is an important question to consider. If getting married should you get a prenup? That’s a highly sensitive topic, but WCI is here to help you out.
This was post was originally published on the White Coat Investor.
Take it away WCI!
Prenups, Trusts, and Beneficiary Designations – Friday Q&A Series
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?
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.
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?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.
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.)
Do I Need a Prenup?
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!