Premarital Financial Planning Part 4: Get Your Legal Life in Order, and Protect Your Family
Combining your lives means combining your finances in one sense or another. Learn some key conversations to have as you embark on pre-marital financial planning from Adam Kol, Couples Financial Coach.
There are many ways to protect yourselves and your family, mainly centered around the legal documents and types of insurance I discuss below. If your eyes glaze over at those topics, or you want to avoid them, that makes it all the more important to learn a bit about them.
As a quick reminder, here’s a bit about me:
- I’m Adam Kol, The Couples Financial Coach. I help couples navigate sticky money situations together, whether they’re combining finances or not.
If you keep reading, I’ll keep it brief and even toss in a couple of bad puns!
Today, we’re covering Key #4 – let’s get into it.
Key 4: Get Your Legal Life in Order, and Protect Your Family
Prenuptial and Postnuptial Agreements
Ah, prenups, AKA prenuptial agreements. To many people, its reputation precedes it. To the unacquainted, Forbes explains it as “a private agreement between a couple signed before they get married which sets forth the division of their assets in the event of divorce or death.” A postnup, or postnuptial agreement, is a similar document executed by a couple who is already married.
While a prenup may not be for everyone, the stigma is largely overblown.
For one, you actually already have a prenup… it’s just that you didn’t get any say in it. Come again?
Well, without any other agreements, state law dictates what would happen in case of divorce or death. Do you prefer to have your state government decide how to handle things, or do you prefer to make your own choices?
Second, some people worry a prenuptial or postnuptial agreement invites negativity, almost like you’re expecting to divorce. I disagree.
These documents can and should be drafted to protect each spouse, ensuring they will be treated fairly in case of divorce. For example, imagine you take care of the kids and home so your spouse can build a business. If anything should happen to your marriage, you deserve a piece of that business, right? After all, even its future success would owe much to the earlier efforts, which your contribution made possible. Prenups or postnups can provide for this.
Do you see how this could matter (and benefit) just as much to people who aren’t uber-wealthy? Plus, since divorce rates are still pretty high, it’s healthy to balance the starry eyes with some realism.
The benefits of prenups and postnups mean they may actually increase each partner’s sense of financial safety and security, nup-ping those fears in the bud. In turn, each person is then freed up to invest 100% in the overall success of your family without fear of losing out later.
What difference might that type of assurance make in your life?
More Reasons to Consider a Prenup
Third, should death or divorce unfortunately occur, these agreements can bring some relative simplicity during a complex, difficult time. Rather than letting grief or anger run the show, instead, you have an agreement you created with clear heads and loving hearts. This can ease the significant burden of a loss like death or divorce.
Fourth, these agreements may offer important financial or tax planning opportunities, for example, around student loan debt, business ownership, inheritances, etc. Note that pride and fairness are common and powerful considerations with these items, as well.
Relatedly, prenups and postnups allow you to strengthen your partnership by having important financial conversations sooner rather than later. For instance, you may end up discussing where you want to live, retirement, career goals, family-related financial commitments you have or might have, and so on.
Finally, note that you typically can update or replace these agreements as your circumstances evolve.
Protection and Legacy Planning: The Legal Documents
There are many recommendations, products, and opinions about protecting your nest egg and your family. I’ll do my best to give an unbiased explanation of the most popular ones that you may want to consider – the rest is up to you.
First, the legal documents.
A will or a trust are standard documents that can govern how your estate – which is basically everything you own – ahem, will be distributed after your death, allowing you to trust that your wishes will be followed.
For some things, like a 401(k), you name the beneficiary, so they may not require a will. For many other items, without a will or trust, they will be distributed according to your state’s laws.
Notice some similarities with the prenup conversation – you can choose for yourself, or else the state essentially decides for you. Trusts usually cost more to have a lawyer draft, but they can also avoid a lengthy court process called probate and may have certain tax or legal advantages. For specifics, speak with a local attorney specializing in estate planning (AKA names like trusts & estates or legacy planning) or Elder Law.
A power of attorney is a document that gives one party the legal right to act in the place of a different party. The power of attorney document lays out which rights and powers you are granting to the other party, called the attorney-in-fact, and in which circumstances you are granting those rights and powers.
This has many uses, but the most important here is allowing someone to act or make decisions on your behalf if you are unable. For example, if you are sick, you may want someone to be able to pay your bills and manage your bank accounts.
You can also use a power of attorney or similar documents, like a living will or healthcare proxy, to identify who would make healthcare-related decisions for you if you cannot do so yourself. This could mean anything from decisions while you’re under anesthesia to whether or not to use artificial respiration if you can’t breathe on your own.
Protection and Legacy Planning: Insurance
Next up is insurance. Here are the key types that can help lower your family’s exposure to financial risks.
- Life insurance pays a benefit if the insured person passes away while the policy is in force. The two most common types are term insurance, which usually lasts for a fixed number of years, and permanent insurance, which lasts until the insured person dies (or to age 100).
- Disability insurance covers some of your salaries if you get hurt and can’t work.
- Long-term care insurance covers care for chronic conditions (health insurance often has limited coverage for chronic care), skilled nurses or nursing homes, and possibly even assisted living facilities.
If you’re familiar with these insurance types, that’s great! If not, I suggest doing more research and contacting a licensed insurance agent in your area.
These aren’t the easiest or most enjoyable topics to discuss, so kudos to you for making it this far. Take a deep breath in and out, and go enjoy a hot or cold beverage!
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