Smart Couples Finish Rich, Revised and Updated: 9 Steps to Creating a Rich Future for You and Your Partner

by David Bach

  DON’T LET THE BANKS GET RICH OFF YOUR CUSHION

  It’s not just how much you save in your security basket that matters. You also need to address where you save it. Most people put their emergency cash cushion in the wrong place—which is to say they keep the money in a checking or savings account at the local bank. That’s too bad, because these kinds of accounts pay you almost no interest.

  The fact is that the banks get rich off of ordinary checking and savings accounts. That’s because while the money sitting in them (your money!) is out working for the bank, you’re being paid barely any interest at all—and in many cases no interest whatsoever! Not too long ago, out of curiosity, I went to a local branch of one of the biggest banks in the country and asked how much interest they paid on checking-account deposits. The answer was 0.01 percent. Pardon me, but that’s too low!

  For your own good, please decide today that you will stop letting the banks pay you a low level of interest on your checking account. The fact is, you can go to virtually any brokerage firm in any city—or go on the Internet—and open an online savings account, what is known as a money-market account, that will pay you 100 times more, or 1.0 percent or higher. Now, as I write this, I realize that 1 percent is still low, but it is 100 times better than zero.

  In most cases, money-market accounts can offer check writing, an ATM debit card that can also be used as a credit card (and in some cases also earns you frequent-flyer mileage), an annual summary statement that shows where your money was spent, and online bill payment! Think about that. You get a ton of great features and you earn more interest on your money.

  Moreover, these money-market accounts are safe. In fact, they are probably the safest investment you can buy. And if you happen to be ultraconservative, you can even get an insured money-market account (though it will usually pay less than an uninsured account). Again, many banks do offer these accounts, but you must ask for them.

  HERE’S HOW TO FIND A MONEY-MARKET ACCOUNT

  If all this about money-market checking accounts comes as news to you, don’t worry—you’re not alone. I can’t tell you how many times I’ve talked about them during lectures and seminars and TV shows, and had people come up to me afterward asking me how they can get one. That’s not surprising, since the banks don’t want you to know about them.

  The fact is, these accounts have been around for years. The key difference today is that you no longer have to be rich to open one. You used to need an initial deposit of $10,000 or more to be able to open a money-market checking account. These days, you can open one with as little as $2,000—and in some cases, with no minimum amount at all.

  To save myself the trouble of having to answer all the e-mails I’m bound to get on this question, here is a sample list of several reputable institutions that offer these kinds of accounts. This list is not intended to be exhaustive, nor am I endorsing any of these brokerage firms. It’s just meant to give you somewhere to start. I haven’t listed the rates—you’ll need to do that directly at the websites listed. Not all of these accounts offer checking.

  Vanguard ($3,000 minimum)

  (877) 662–7447

  www.vanguard.com

  Fidelity Investments ($2,500 minimum)

  (800) FIDELITY

  www.fidelity.com

  Merrill Lynch ($2,000 minimum)

  (877) 653–4732

  www.ml.com

  Morgan Stanley ($2,000 minimum)

  (800) 688–6896

  www.morganstanley.com

  Charles Schwab ($2,500 minimum)

  (800) 225–8570

  www.schwab.com

  Edward Jones ($1,000 minimum)

  www.edwardjones.com

  TDAmeritrade (no minimum to invest)

  (800) 669–3900

  www.tdameritrade.com

  Ally Bank (no minimum to invest)

  (877) 247–2559

  www.ally.com

  GSBANK (Goldman Sachs; no minimum required to invest)

  (800) 836–1997

  www.gsbank.com

  Capital One (no minimum to invest)

  (800) 289–1992

  www.capitalone.com

  Five-Star Tip: Interest rates change daily. To find the current rates on money-market accounts and compare them, visit www.bankrate.com and www.ratepro.com [website no longer available] (reviews nearly 5,000 funds and highlights the highest rates; this site is owned by bankrate.com).

  SAFEGUARD NO. 2

  Both of you absolutely MUST write a will or set up a living trust.

  People come up to me at seminars all the time and ask, “If I die, what type of will should I have?”

  If you die?

  I’m sorry, but we’re all going to die. This is one fact of life that we simply can’t avoid. People may be living longer these days, but sooner or later every one of us is going to wind up somewhere other than here. Sure, it’s sad, but you know what the real tragedy is? The real tragedy is that two-thirds of us die intestate—that is, without having written a will or set up a living trust that specifies what should be done with our money and other property, to whom it should be distributed, and how.

  If you love anyone—anyone—you can’t let that happen. You must set up a will or living trust!

  This is not debatable. This is not couple-specific. If you are in a committed, long-term relationship, whether the two of you are married or not, you must arrange to have a qualified attorney draft a legal document that sets out what you want to happen in the event one or both of you becomes incapacitated or dies. Remember, stuff happens.

  This legal document should address the following key issues:

  WHAT SHOULD BE DONE WITH YOUR PROPERTY WHEN YOU DIE?

  Do you want all of your assets to go to your spouse or partner? Maybe you want to leave something to a sibling or a parent or a friend. What about your children? What about your partner’s children? Perhaps there is a charity, church, or school you want to remember. If you don’t prepare a legal document that spells all this out, you’re going to leave a terrible mess for those you love. And I’m talking about a lot more than just a minor inconvenience. Families are torn apart by these sorts of issues all the time.

  WHAT HAPPENS IF BOTH OF YOU DIE AT THE SAME TIME?

  You may think this is far-fetched, but it does happen and it’s something you need to consider—especially if you have kids. What would you want done with your assets if the two of you were to die together? If you have kids, who would you want to raise them? Who should be responsible for managing their money? Unless you specify all this in advance, the government will step in and make these decisions in your place. Do you want the government deciding what to do with your kids? Smart Couples don’t let the government decide anything this important. Smart Couples make sure they have a properly drafted will or trust.

  WHAT HAPPENS IF ONE OF YOU GETS SICK (OR BECOMES OTHERWISE INCAPACITATED) AND CAN NO LONGER MAKE DECISIONS?

  This thorny question is handled by a document known as a “living will.” It’s an attachment to your will or trust that spells out how each of you wants to be treated in the event either of you gets so sick or is so badly injured that you can’t communicate your needs and desires. If, say, you are hit by a car and are brain-dead, do you want the hospital to keep you alive by hooking you up to a respirator? Speaking personally, if it happened to me, I wouldn’t. You may feel differently. The point is, if you don’t specify this sort of thing in your will or trust, someone else is going to have to make this brutal decision for you. This is not the kind of issue you want your family fighting over in the midst of a tragedy. Among other things, your living will should contain a durable and healthcare power of attorney. This gives a designated person (such as your partner) the legal right to make financial and medical decisions for you in the event you become incapacitated.

  Wills and living trusts are not documents you should ever try to draft at home by yourself. Yes, it’s true that you can buy a software program for $29.95 that supposed
ly provides you with all the forms and templates you need. But probate law is very tricky and complicated, and it varies from state to state. Moreover, one tiny mistake in a poorly drafted will or trust can invalidate the whole thing, or at the least open it up to being contested.

  The point is, there’s too much at stake here for you to take any chances. Spend the time and money to find a good attorney who specializes in wills and trusts, and have him or her draft the document for you. A decent will shouldn’t cost you more than $1,000; setting up a trust is a bit more expensive—between $1,000 and $2,500. No, none of it is cheap…but believe me, it’s worth it.

  WHAT IS A LIVING TRUST?

  Before we go any further, I should probably explain a little about living trusts. A living trust is basically a legal document that does two things. First, it allows you to transfer the ownership of any of your assets (your house, your car, your investment accounts, whatever you like) to a trust while you are still alive. Second, it designates who should be given those assets after you die. By naming yourself the trustee of your trust, you can continue to control your assets—which means that as long as you live, the transfer of ownership will have no practical impact on your ability to enjoy and manage your property.

  The main advantage a living trust has over a simple will is that if you create a living trust properly and fund it correctly, your assets won’t have to go through probate when you die. That is, your instructions regarding the distribution of your assets won’t be reviewed by the courts. This is very, very important. By avoiding probate, you can save thousands of dollars in attorney’s fees.

  In addition, you will be able to maintain your estate’s privacy. (Once an estate goes through probate, all the details become a matter of public record.) In a perfect world, this might not matter, but the world isn’t perfect. Sadly, there are people out there who make their living reading probate records and trying to figure out how they can get their hands on your money. The fact is, anyone can say that they were promised a piece of your estate. They can show up in court and insist they were your best friend and that you promised to leave them $50,000 when you died. Even if it’s a total fabrication, your family will still have to pay some attorney good money to fight the claim.

  Another big advantage of a trust is that it can save your heirs a lot of money. If you have a large estate (that is, one worth more than $650,000), a well-written trust can reduce the estate-tax bill by tens—sometimes hundreds—of thousands of dollars.

  There are too many different kinds of trusts for me to be able to list them all. The key thing to know about trusts is that there are primarily two types: one that is revocable and the other type that is irrevocable. You can change or cancel revocable trusts at any time. With an irrevocable trust, you’ve made a decision for life (that’s a big deal, as circumstances do change). Irrevocable trusts are typically used to hold insurance policies and can be very helpful to reduce estate taxes. Just be very careful before you sign an irrevocable trust, because it’s a permanent decision. The next thing to know is that trusts are either “living trusts” or “testamentary trusts.” In other words, a living trust benefits you while you are alive and is transferred to your beneficiaries when you die, an example being a “Revocable Living Trust.” A testamentary trust is a trust that goes into place after death. This is very common for parents to set up for their kids or grandchildren to take effect upon the death of the parents.

  Here is a list of some common types of trusts. It is not exhaustive, but should give you a helpful overview.

  Revocable Living Trust: This type of trust is designed to protect your home and your brokerage accounts, and to help your estate avoid probate. It is extremely flexible and easy to set up, and can be changed whenever you like throughout your lifetime. It’s the most commonly used trust, and you don’t need to be rich to want to have one of these (you simply want to avoid probate).

  Marital and Bypass Trust: This is also a revocable living trust. Often referred to as an “AB” trust, it is mainly used to reduce estate taxes. This was hugely popular when this book was originally written and is less popular now. Why? Because today, as a result of portability provisions in the the American Tax Relief Act, if you have more than $10 million, that can be excluded from a couples estate.* If you’re approaching this number, you really should review this with an estate attorney. Lastly, each state has its own limits, making it more complicated.

  Qualified Terminable Interest Property Trust: The QTIP trust is often used by wealthy people who’ve been married more than once. Say you’ve got a new spouse and want him or her to be provided for, but intend your family fortune to eventually go to your children by a previous marriage. A QTIP trust will provide income to your surviving spouse for the rest of his or her life, then pass to your children (or whomever you happen to name as the ultimate beneficiary).

  Charitable Remainder Trust: This trust allows you to continue to live off the proceeds of your estate even after you’ve donated it all to a charity (and presumably reaped some hefty tax advantages in the process). Typically set up by very wealthy families, it can provide you and your designated heirs with income for the rest of your lives, but once you are all gone, the estate will go to the charity.

  Irrevocable Life Insurance Trust: This is a great way to protect the real value of your estate using life insurance to fund and pay for the estate taxes or simply remove the life insurance from the brutal impact of estate taxes. The key thing I want to remind you of here is that once you put the asset in this trust, it’s technically not yours and the decision is irrevocable. High-net-worth clients use these trusts regularly; just make sure you know the pros and cons clearly.

  Because estate planning is so important and so complicated, I strongly recommend that you hire a qualified professional who specializes in this sort of thing. Don’t hire the local attorney; hire an estate-planning expert who spends all his or her time drafting trusts.

  WHAT NOT TO DO WITH A LIVING TRUST

  The trick to making a living trust work for you is to fund it correctly. Many well-intentioned couples set up a living trust, but then they forget to switch their house title or their brokerage accounts from their own name to the trust’s name. If you neglect to do this, instead of being protected, your most important assets could end up in probate when you die.

  Changing the name in which an account or some other asset is held is called “replating.” It’s an easy process, but you have to remember to do it. Just call your brokerage firm or your real estate title company and explain to them that you’ve created a living trust and you need your account “replated.” They handle this sort of thing all the time and will know exactly what to do.

  You’ll still need to double-check their work. A minor typo—a misspelled name or an incorrect account number—can create major problems later. Generally, the best way to protect yourself is to have your attorney add what’s called a “spillover clause” to the trust. This is an addendum that lists what you intend to put in the trust; as a result, even if you forget to replate some assets, they’ll still be covered.

  DON’T PUT YOUR IRA IN A TRUST

  Occasionally, a couple will take the advice of an inexperienced attorney who recommends that they put their IRA in their trust or make their trust the beneficiary of their retirement accounts. Or they will misunderstand their attorney and do this on their own. Leaving a retirement account to a trust is one of the biggest—and most common—mistakes people make with trusts. The fact is, on its own, a retirement account is not subject to probate or estate taxes. If your spouse has a qualified retirement account that names you as the beneficiary, you are eligible to inherit it free and clear. But if you put the IRA in the trust or if the beneficiary happens to be a trust—even if it’s your trust—the retirement account can become subject to estate taxes. This is not a good thing, and I’ve seen it happen more than once. So if you set up a trust, leave your retirement accounts out of it. One possible exception to this rule is if your kids
are the contingent beneficiaries and you have set up a trust for them upon the death of both you and your spouse. The trust can have “qualified language” which will allow the retirement assets to be in a “Stretch IRA” and the money can then be taken out over the beneficiary’s lifetime vs. the five-year mandate. Confused? I told you this was confusing, which is why you really need to work with professionals on this.

  Of course, this is hardly the only mistake people make concerning wills and trusts. Here are three other ones I come across all the time.

  THE MOST COMMON ERRORS PEOPLE MAKE WITH WILLS AND TRUSTS

  1. Not seeing it through

  A couple meets with an attorney to discuss drafting a will or living trust. The attorney gives them a list of things to think about and decide—whereupon the couple goes home and never follows through. Or worse, they make the decisions but never get around to signing the trust documents. As a financial advisor, I see this constantly. In some cases, I’ve had clients take a full year to finish the process, mainly because they kept procrastinating. Don’t procrastinate. Make an appointment with a lawyer, give yourselves a deadline, and get it done.

  2. Hiding the documents where no one can find them

  People go to all the time and expense of drafting a will or living trust, and then what do they do? They hide the documents! Sometimes they hide the documents so well that they stay hidden, never to be found by those who need them.

  Either that or they put their will or trust documents in an obvious place—like a safety deposit box at the bank—and guess what they do with the key? That’s right, they hide it.