As a planning expert often on lecture tours, I’m often asked, “What else should we know?” I always look at young audiences and think – I wish I knew when. That’s the inspiration behind this expert series on planning advice that I’ll pass on to my younger self. Last month, I wrote the first of four articles and started with the topic of planning education funding, This month, I’ll follow my little one past college and my first job, and into the next “typical” phase of life – getting married and starting a family.
When you’ve met the love of your life and are talking about marriage, it’s often difficult to think beyond the immediate excitement of engagement, wedding, and honeymoon. Still, it’s important to discuss your financial philosophy with your future spouse. After all, you are entering into a contract to live your life together, and therefore make decisions together, until you are separated by death.
Consider a premarital agreement
Here’s the dreaded “P” word: prenup. With people wanting to marry later in life, it is more likely that a person has already acquired a certain level of wealth that needs to be protected in case of divorce, possibly. with premarital agreement, Marriage laws differ in each state. For example, states with community property, such as California, Washington and Texas, follow the general rule and presumption that property is split 50-50 with the divorced spouse. Meanwhile, equitable distribution states, such as New York, Connecticut and Florida, use a variety of factors to determine what is “fair and equitable.”
One needs to understand not only the matrimonial system governing their union but also the nuances. For example, in New York, while property brought into the marriage is generally treated as separate property that is not part of the marital property division, earnings and appreciation from such separate property are may be matrimonial property which is subject to division.
What happens when you bring assets with your spouse and open a joint account? What happens if your spouse contributes to the mortgage, but the title to the house is already in your name? There are many questions like this that newlyweds with existing assets need to think about and agree on, so as not to be surprised if the marriage doesn’t work out.
I can completely understand and appreciate how difficult pre-wedding conversations can be. I always tell my clients – these two consenting adults are committed to making a lifelong choice together. Everything you do in life want to understand the terms of it, whether transactional and momentary, job offers, buying a car or a home, why wouldn’t you do the equivalent of a lifetime contract?
Combine on Financial Goals and Philosophy
Have you had a conversation with your loved one about your financial goals, spending and savings philosophy? If not, you absolutely need it because it serves as the foundation for the life that you will build together.
Here are some sample topics to get you started:
- Are you planning to do a joint budget, and if so, who is going to contribute to what?
- Are spending limits agreed upon where the other spouse needs to be consulted?
- Are you both on the same page when it comes to risk tolerance in investing and comfort level with debt?
Begin by talking in broad strokes with a long-term horizon in mind:
- When do you really want to retire?
- Are there any financial milestones that you would like to achieve by a certain stage in life?
- Are there any current or future financial obligations that the other should be aware of (For example:care of aged parents, alimony)?
Once you have an agreed-upon financial goal, drill down to the next five years with those long-term goals in mind:
- Is your combined income enough to support your joint lifestyle? If so, what would you do with the redundancy?
- Will you spend, save, invest, or maybe a combination?
- If income is insufficient, what can you deduct and for how long?
- Will you buy or rent the house? How much can you spend, 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 is no right or wrong answer, the process of going through and discussing these questions is very important.
Be prepared as you expand your family
Once you’re married, and especially when you have a child on the way, it’s important to make sure you have your estate planning in order. At a minimum, everyone needs a will, a power of attorney, health care proxy, and living will (the last two are often combined into one document).
A will is a legal document that dictates who will inherit your property upon your death. Without a valid will, your estate will pass under your state’s intestacy laws, which outline your next of kin for inheritance purposes. Every state’s intestacy laws generally follow family lines—spouse, children, parents, siblings, etc. While many people may find this acceptable, not many people think about it. How Their loved ones will get those properties. If your beneficiary is too young or not yet able to make financial decisions, should assets be placed in a trust for the benefit of your beneficiary? If you have a minor child, who will be the guardian of your child if both parents die? To me, the single most important reason for a young parent to have a will is to name a guardian of their choice for their minor child(s).
Another common mistake is failure 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. Instead, the inheritance of these assets is controlled by the beneficiary whom you named on the individual plan or policy. For a newly married couple, state law or often the retirement plan policy itself will designate your spouse if you have left a beneficiary blank. However, such default rules usually do not apply to children.
Here’s a mistake I made when I was younger: When I had my first child, I updated my beneficiary designation with my husband as my primary beneficiary and my son as my secondary. When my daughter was born, it took me years to realize that I never included her on this list. I had inherited my daughter by mistake just because I was too busy with work and being the mother of two young children. Lesson learned that estate planning is not a one-time job – you have to Review and update it constantlyEspecially if you have just experienced a life event.
protect from an unimaginable disaster
Now that you have a family and dependents, it is important to think about risk mitigation and protection. Do you have it proper life insurance coverage What if something happened 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 am often asked: How much insurance is enough? It largely depends on what your needs are, and the best way to measure that need is to create a financial plan with a focus on the needs of the survivor. Common factors to consider in this type of analysis include sufficient coverage to pay fixed costs such as a mortgage or to carry dependents to a certain point in life, such as a 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 spouse earning the money should be insured. This could be a mistake. If something happens to a stay-at-home parent, you’ll need to hire someone to provide childcare and other services at home, which all cost money. Alternatively, you might consider taking on a less demanding job so that you can stay home with the kids 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: The Financial Advice I’ll Give My Younger Self: Planning for Retirement and Having Enough of a Nest Egg to Look at It.
Wilmington Trust is a registered service mark used in connection with various fiduciary and non-judicial services offered by certain subsidiaries of M&T Bank Corporation.
Note that tax, estate planning, investment and financial strategies need to be considered for the suitability of the individual, business or investor, and there is no assurance that any given strategy will be successful. Wilmington Trust is not authorized and does not provide legal, accounting, or tax advice. Our advice and recommendations provided to you are illustrative only and are subject to the opinion and advice of your own attorney, tax advisor, or other professional advisor. Investment involves risk and you can make profit or loss. There is no assurance that any investment strategy will be successful.
Chief Wealth Strategist, Wilmington Trust
Alvina is responsible for strategic funding planning in the Low Family Office and 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. He holds a BS in Civil Engineering from the University of Virginia and a JD from the University of Pennsylvania. She is a published author, a frequent lecturer and has been cited in major outlets such as “The New York Times”.