Can a prenup & liability coverage be enough to forego having a trust?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
DiehardDisciple
Posts: 93
Joined: Mon Jul 23, 2007 11:15 pm

Can a prenup & liability coverage be enough to forego having a trust?

Post by DiehardDisciple » Wed Nov 06, 2019 7:40 am

Hi Bogleheads,

I am wondering if the use of a well-designed prenuptial agreement combined with liability coverage - including umbrella liability for my investment portfolio - can work in place of a trust.

My very thoughtful mother shared with me her estate intentions and was curious of my opinion in leaving her estate to me in a trust. I will show her this thread. I am single and childless but I may get married someday, and my mother is particularly worried that a future spouse might clean me out. She doesn't seem to be worried about other lawsuit/creditor scenarios.

She inherited an existing trust that will be passed down to me and will only open (ie, end) after I die. But she is thinking about leaving the rest of her portfolio in a trust for me.

Having helped her interact with her trust representative at the bank that is the corporate trustee for her existing trust, I know that the trustee fees are high, often 1% - 2.5%. I don't know if the bank offers a sliding fee schedule for higher portfolios, but her portfolio that is not in a trust is substantial, and I admit I hate the idea of uncapped percentage fees. It feels like highway robbery to me.

I am lucky to have an excellent investment adviser (one-man shop) whose fees hit a flat amount at a certain growth point in one's portfolio, and I have already hit that amount with my own portfolio. When the time comes, it would be great to just add my inheritance from her that is not currently in a trust to the portfolio that I have with my adviser, a portfolio invested in Vanguard & DFA funds and custodied at TD Ameritrade. I have a great hourly tax-prep guy and a good lawyer too whom I trust. I also have insurance policies that include excess liability coverage (umbrella liability) to cover my net worth beyond the liability coverage offered by my other insurance policies, which is currently just renter's insurance as I do not own property at the moment nor a motor vehicle. [I live in a city and bike everywhere.]

I have looked carefully at prenuptial agreements and what is required to maximize the chances that they will hold up in court. This includes making sure the agreement is "not unconscionable" and that it is fair to the spouse (does not leave them destitute or on public assistance).

If I am lucky enough to meet the right person and one day get engaged, I will ask if she wants to do this prenup. If she doesn't want to do it and if I still want to marry her, at that point I will put my non-trust money in some sort of trust. However, my intention will be to be as open, collaborative, and fair as possible when drawing up the prenup together, while still protecting myself, so if the "hypothetical she" still doesn't want to sign the prenup, that should probably be a red flag to not proceed.

My question for you all is, "Do you think enough umbrella liability coverage - not "portfolio insurance" - combined with an agreed-upon prenup can protect my assets as well as a trust can?" :?:

Also...
- Though I am not employed at the moment, my portfolio grows enough each year for me to take out more income each successive year, but never more than 3% per annum. I wouldn't be frivolous with the money she leaves me. I'm 44 years old.
- I have a good estate plan myself and POA documents in case I get incapacitated.
- The umbrella liability coverage (aka, "excess liability") is costly each year. But that premium is about a .025 % fee as opposed to a 1% trustee fee.
- I think there are some trust options where you don't need the corporate trustee, but here I'm wondering if I can forego the whole thing and just be protected with a prenup and enough liability coverage.
- The existing trust will leave me with some income each year if by a bad stroke of luck, my adviser and I royally screw up my portfolio. But relying on that alone would mean moving to another country with a much lower cost of living than the USA.
- If there is some global cataclysm, I figure it won't matter if she leaves this money to me in a trust or not.

Thank you for reading this. All thoughts and questions are welcome.

RubyTuesday
Posts: 251
Joined: Fri Oct 19, 2012 11:24 am

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by RubyTuesday » Wed Nov 06, 2019 8:10 am

IANAL... and I Am Not Trust Expert... that said, I believe your mother could name you as trustee as well as beneficiary.

NotWhoYouThink
Posts: 2742
Joined: Fri Dec 26, 2014 4:19 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by NotWhoYouThink » Wed Nov 06, 2019 9:22 am

You might want to talk with a family law attorney in your state.

Normally inheritances are not considered marital property, so if you inherit money free of trust after you get married it typically would not be split up in a divorce. Similarly, funds you have prior to getting married would not be considered marital property.

But stuff happens in a divorce, so who knows. Maybe you have 2 special needs children. You may still have to spend extensively from your own funds to support them, divorced or not. If you divorce and your ex has primary custody, you may have to spend to support her so that she can care for the kids.

I'm not clear how putting money in a trust yourself will protect you. Usually revocable living trusts don't provide much protection. If you are talking about 8 or 9 figure amounts, you should be talking with an attorney.

Generally you have to pay for things you want. If you want protection from creditors of future exes, you have to pay for it. That may mean paying trustees.

User avatar
celia
Posts: 9833
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by celia » Wed Nov 06, 2019 10:54 am

DiehardDisciple wrote:
Wed Nov 06, 2019 7:40 am
I am wondering if the use of a well-designed prenuptial agreement combined with liability coverage - including umbrella liability for my investment portfolio - can work in place of a trust.
...
I also have insurance policies that include excess liability coverage (umbrella liability) to cover my net worth beyond the liability coverage offered by my other insurance policies, which is currently just renter's insurance as I do not own property at the moment nor a motor vehicle.
...
My question for you all is, "Do you think enough umbrella liability coverage - not "portfolio insurance" - combined with an agreed-upon prenup can protect my assets as well as a trust can?"
A pre-nup agreement, umbrella insurance, and a trust all have different purposes so it doesn't make sense to me to compare therm.

Umbrella insurance also doesn't cover your portfolio. (To protect yourself against drastic market losses, you could "short" your holdings.) The amount of financial loss you are insured for doesn't have to have anything to do with your net worth or how much you would be liable for should you lose in a lawsuit. For example, your net worth could be $5M and you have $7M of umbrella insurance. You could still be sued for (and lose a case) for $53M. However, that is unlikely to happen since since the liability insurance lawyers would work very hard so the carrier doesn't have to pay out the first $7M. (You would be on the hook for the rest--should you lose.)

bsteiner
Posts: 4395
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by bsteiner » Wed Nov 06, 2019 11:23 am

Banks and trust companies usually charge about 1% to act as trustee, less for large trusts and a little more for small trusts, but nowhere near 2.5%.

If your mother provides for you in trust rather than outright, she need not name a corporate trustee. You could be a trustee together with someone you're comfortable with, and you could have the power to remove and replace your co-trustee (provided the replacement trustee isn't a close relative or subordinate employee). In that way, you would effectively control the trust.

Your mother should check to see whether she has a power of appointment over her existing trust, and if so, whether she can appoint it in further trust for you at her death such that you would effectively control it, just like with her own assets (if that's not already the default provisions of the Will or trust agreement in which your mother's existing trust was created).

While they're not mutually exclusive, having your inheritance in trust rather than outright is preferable to a prenuptial agreement. In addition to protecting your inheritance from your future spouse, it will also keep your inheritance out of your estate for estate tax purposes, and will protect your inheritance from your creditors, and Medicaid. It will also avoid the emotional issues that arise in a prenuptial agreement, especially in a first marriage.

smackboy1
Posts: 1133
Joined: Wed Mar 14, 2007 9:41 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by smackboy1 » Wed Nov 06, 2019 9:28 pm

DiehardDisciple wrote:
Wed Nov 06, 2019 7:40 am
My question for you all is, "Do you think enough umbrella liability coverage - not "portfolio insurance" - combined with an agreed-upon prenup can protect my assets as well as a trust can?" :?:
The short answer is "no". These are 3 completely different tools and their functions are not the same at all. As this problem seems to stem from your mother's estate plan, you should probably start by talking to an estate planning lawyer. Although it seems that asset protection is your main focus, so seeking the advice of that legal specialty would not be a bad idea either.

TBH I say inherit in trust and buy adequate insurance. Forget about the prenup. To be valid both spouses have to have their own lawyers. It's negotiated so both parties have to agree. Depending on state law, not everything involved in a divorce can be settled in stone with a prenup. It can also get pretty acrimonious. A prenup only deals with 1 type of risk. The beauty of your mother leaving your inheritance in trust is that it's not subject to a future spouse's approval.

With respect to trusts, it's preferable to have your mother leave you assets in trust rather than leaving you assets in your name and then you trying to place your own assets into trust. While self settled domestic asset protection trusts are a useful tool, there can be many shortcomings compared to an inherited trust.
Disclaimer: nothing written here should be taken as legal advice, but I did stay at a Holiday Inn Express last night.

Topic Author
DiehardDisciple
Posts: 93
Joined: Mon Jul 23, 2007 11:15 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by DiehardDisciple » Sat Nov 09, 2019 7:05 am

Thank you for your responses, everyone. I took some time to mull over your replies.

- I will encourage my mom to do the trust, likely an irrevocable trust.

- Schwab offers trust administration services at 0.5% for the first $5million (and a lower % above that), which looks great (and maybe too good to be true). https://www.schwab.com/public/schwab/in ... vices#fees .

- I live in PA, and Schwab bases their trusts in Nevada, so I hope that won't be a problem (basing the trust in a different state)

- I believe my mom can arrange it so that my current investment adviser can still manage it so that one person has that full view of my portfolio, and my fees with him have already hit that flat ceiling.

- I haven't completely ruled out having her name me as the trustee and not Schwab (and will discuss this with our trust lawyer), but if the Schwab schedule is indeed at 0.5%, I will do that over any umbrella policy.

- My one sibling is on the opposite side of the USA as me. We are very close and trust each other. However, I see on some websites that siblings should not be co-trustees if they are hours apart. It might be best to just have Schwab be the trustee.

- I found out that umbrella policies only go up to $10m . I am well below that, but I am share that info in case it is of interest.

afan
Posts: 4400
Joined: Sun Jul 25, 2010 4:01 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by afan » Sat Nov 09, 2019 9:28 am

Again, an umbrella policy does something completely different than the trust. Having your assets in trust in no way eliminates your need for insurance.

If you routinely take money out of the trust for your support and continue that once married then the assets of the trust may not be so well protected in case of divorce. In some states judges look at where the money to support the family was coming from and can pull trust money into consideration in determining equitable treatment.

It is worth discussing the protection you would have in PA but remember the decisions will be made by the state in which you would be living at the time of a divorce.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

User avatar
RickBoglehead
Posts: 4853
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by RickBoglehead » Sat Nov 09, 2019 9:57 am

DiehardDisciple wrote:
Sat Nov 09, 2019 7:05 am
- Schwab offers trust administration services at 0.5% for the first $5million (and a lower % above that), which looks great (and maybe too good to be true). https://www.schwab.com/public/schwab/in ... vices#fees .

- I live in PA, and Schwab bases their trusts in Nevada, so I hope that won't be a problem (basing the trust in a different state)
Vanguard charges 0.25% for trust services, so 1/2 of Schwab (and a lower percentage above that). They also charge for management, i.e. Vanguard PAS, but it sounds like you don't need that, but you will pay for it anyway I believe.

First $5 million is 0.25% + 0.30% = 0.55%
Next $5 million is 0.10% + 0.20% = 0.30%
Next $15 million to $25 million is 0% + .10% = .10%

Vanguard is based in PA.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

Topic Author
DiehardDisciple
Posts: 93
Joined: Mon Jul 23, 2007 11:15 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by DiehardDisciple » Sat Nov 09, 2019 10:00 am

afan wrote:
Sat Nov 09, 2019 9:28 am
Again, an umbrella policy does something completely different than the trust. Having your assets in trust in no way eliminates your need for insurance.

If you routinely take money out of the trust for your support and continue that once married then the assets of the trust may not be so well protected in case of divorce. In some states judges look at where the money to support the family was coming from and can pull trust money into consideration in determining equitable treatment.

It is worth discussing the protection you would have in PA but remember the decisions will be made by the state in which you would be living at the time of a divorce.
Hi afan. Thanks for your post. :beer

I have umbrella (and underlying renter's) for my own assets, which are not in trust.

About the marriage issue, I will likely still do a prenup and will follow all the suggestions that are out there to make it as fair as possible to both spouses. Given that, I will then be at the mercy of the judge - if I get a divorce - since there is nothing else I can do, having both made sure to have a trust and a fair prenup.

Topic Author
DiehardDisciple
Posts: 93
Joined: Mon Jul 23, 2007 11:15 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by DiehardDisciple » Sat Nov 09, 2019 10:15 am

RickBoglehead wrote:
Sat Nov 09, 2019 9:57 am
Vanguard charges 0.25% for trust services, so 1/2 of Schwab (and a lower percentage above that). They also charge for management, i.e. Vanguard PAS, but it sounds like you don't need that, but you will pay for it anyway I believe.

First $5 million is 0.25% + 0.30% = 0.55%
Next $5 million is 0.10% + 0.20% = 0.30%
Next $15 million to $25 million is 0% + .10% = .10%

Vanguard is based in PA.
Hi RickBoglehead,

Thank you for your post. :beer

This is interesting. Thanks for sharing and for bringing Vanguard's trust abilities to my attention. I just went and found the document for this after reading your message. https://www.vanguard.com/pdf/a196.pdf . My investment adviser uses mostly Dimensional Funds for my equities and is in the Schwab network. I wonder if he would be able to buy DFA funds if the trust is based at Vanguard. But I think he prefers the Schwab platform to Vanguard, and with my advisory fees already paid off, Schwab would be 5 bps less than Vanguard (.50 >.55 for the first $5m; .25 > .30 for the next $5m) .

afan
Posts: 4400
Joined: Sun Jul 25, 2010 4:01 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by afan » Sat Nov 09, 2019 12:40 pm

Vanguard charges a little more than Schwab, not less.

If Vanguard were the trustee then Vanguard would do the investment management, not your current manager. Vanguard would use Vanguard funds.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

afan
Posts: 4400
Joined: Sun Jul 25, 2010 4:01 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by afan » Sat Nov 09, 2019 12:51 pm

Schwab has two programs. In one, Schwab does the investing and serves as trustee. In the other, Schwab does the administrative work and a member of their advisor network manages the investments. The latter is the program you would use if you want to keep your current advisor. As I understand it, the cost of the advisor would be determined by the advisor and is not the same for all.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Startingover2019
Posts: 28
Joined: Thu Oct 17, 2019 7:24 pm

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by Startingover2019 » Sat Nov 09, 2019 9:50 pm

DiehardDisciple wrote:
Sat Nov 09, 2019 10:00 am
afan wrote:
Sat Nov 09, 2019 9:28 am
Again, an umbrella policy does something completely different than the trust. Having your assets in trust in no way eliminates your need for insurance.

If you routinely take money out of the trust for your support and continue that once married then the assets of the trust may not be so well protected in case of divorce. In some states judges look at where the money to support the family was coming from and can pull trust money into consideration in determining equitable treatment.

It is worth discussing the protection you would have in PA but remember the decisions will be made by the state in which you would be living at the time of a divorce.
Hi afan. Thanks for your post. :beer

I have umbrella (and underlying renter's) for my own assets, which are not in trust.

About the marriage issue, I will likely still do a prenup and will follow all the suggestions that are out there to make it as fair as possible to both spouses. Given that, I will then be at the mercy of the judge - if I get a divorce - since there is nothing else I can do, having both made sure to have a trust and a fair prenup.
I would advise you to NOT get married and live in sin. You’d be better off financially and not potentially be taken advantage of. Prenups are challenged by greedy spouses all the time.

bsteiner
Posts: 4395
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Can a prenup & liability coverage be enough to forego having a trust?

Post by bsteiner » Sat Nov 09, 2019 10:49 pm

DiehardDisciple wrote:
Sat Nov 09, 2019 7:05 am
...
- I will encourage my mom to do the trust, likely an irrevocable.
...
- I believe my mom can arrange it so that my current investment adviser can still manage ....
Why not simply a trust under her Will? Is her estate large enough to pay estate tax?

The trustees may hire whomever they want to manage the trust assets. Or they can manage the trust assets themselves.

Post Reply