Pre-Nups, Trusts, and Beneficiary Designations – Friday Q&A Series

Q.

I am single mid-forties female physician and am engaged to a man about a decade older with 2 adult children who want him to get me to sign a pre-nup.  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.

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.

Thoughts On Pre-Nups

My wife and I don’t have a pre-nup.  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 pre-nup agreement is mandatory in that kind of a situation.

However, if your fiancee’ was asking me about his situation, I would definitely recommend a pre-nup.  He presumably has significant assets and he has children from a prior relationship.  So I don’t see anything wrong with him (or his sons) 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 pre-nup in the event of divorce or even death of one spouse.

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 pre-nup (with regards to that particular issue.)  Your advisor, despite his conflicts of interest with regard to your investments, is correct about that.

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 up front 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 pre-nup would likely be the agreement that dictated where your car and gold went (either to you or split between you and your ex-spouse.)  I’ve written more about trusts here.

So, in the end, you probably need a pre-nup, 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 fiancee’ 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 pre-nup is just the written documentation of the verbal agreement.

Readers- what do you think? Did you get married later in life? Did you get a pre-nup? What was your agreement? Comment below!

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Comments

Pre-Nups, Trusts, and Beneficiary Designations – Friday Q&A Series — 11 Comments

  1. 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.

  2. 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)).

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

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