ON THE MONEY: Financial planning in a blended marriage
The best definition of a blended family is one in which one or both spouses enter the marriage with children from a previous marriage. Believe it or not, these relationships now outnumber traditional nuclear families, and experts believe that their numbers are likely to increase, based on current social trends.
There is a lot of psychological pressure in blended families, since spouses are attempting to provide for their new partner, their children from a previous marriage and any children with their new spouse.
When you throw aging parents, grandparents and others into the mix, the emotional and financial challenges can be enormous.
The first issue that must be dealt with is: how will current family expenses be handled and where will the money come from? In many cases these current expenses are involved with alimony and/or child support – either paid to a former spouse or received from a previous spouse.
Couples must decide how these financial arrangements will be handled and the impact on the blended family.
It is not a bad idea to have discussions with the ex-spouse(s) to discuss these issues and possibly have an attorney draft a formal agreement to cover all of the financial issues that are not specifically dealt with in the divorce and child support agreements.
One of the most important tax issues that should have been covered in the divorce decree is which spouse may claim the children as dependents when tax time rolls around.
It may be just as important to recognize differences in money management styles, and both partners in the new marriage must realize that they each may bring baggage filled with mistrust and insecurity from having divided their respective assets in a previous marriage.
If the new marriage is recent, each spouse may speak of “my money” and “your money,” since the trust factor has not been fully developed yet.
Other issues to be considered are: Who owes what money to whom and how will those debts be repaid; do any of your beneficiary designations on your life insurance policies or retirement plans need to be changed or updated; how does your new spouse feel about the use of credit cards; is he or she a shopper who uses a credit card perhaps too freely; and do you have financial obligations to parents or others.
Finally, perhaps the most sensitive issue faced by blended families is: how should the respective assets of the blended family pass on to heirs and assigns after each spouse has died?
Certainly, if there is appreciable wealth involved, it will always be best to contact an estate planning attorney to be certain that you are not unintentionally disinheriting any of your children.
One of the best ways to equalize distributions to current and former children, as well as to former spouses, is through the use of an irrevocable life insurance trust.
This trust will own life insurance on the life of either or both spouses, and upon death, the proceeds of any policies can be paid out income tax and estate tax free to designated beneficiaries.
In this manner, one could pass the insurance proceeds to the spouse and the remainder of the assets could go to the children.
Another way to make inheritance rights for stepchildren more equitable is to have your will state that stepchildren will be treated as if they were your natural children.
Also, it will be helpful to discuss your plans with your more mature children to circumvent any potential hard feelings when you and your new spouse are no longer around to adjudicate matters for your kids.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience. Got a financial planning question for Greg? You may email him at email@example.com.