One of the biggest challenges for married couples with a blended family is the impact that a suddenly larger, more unconventional family unit has on the family’s finances. It’s important to have financial discussions prior to marriage for any couple, but especially for those couples planning to take on stepchildren, new children between them, and ex-spouses, there are unique budget and spending challenges that can be overcome with the right level of consideration.
Blending Budgets and Expenses
When discussing how to blend budgets and expenses in this new family dynamic, it’s important to cover every aspect of how a blended family might change the household finances. Some questions blended families should ask themselves are: How will costs related to children from prior marriages be handled? Will the family absorb all expenses related to every child in the new blended family? For example, if one of the children is involved in an expensive activity, will the biological parent be solely responsible for covering the cost of that activity?
Overall, it’s important to decide if the new blended family will fall under a single budget based on the combined needs of the family.
Another consideration is how any alimony or child support obligations of either spouse will be handled within the constraints of the new blended family’s budget.
Estate Planning Issues
Estate planning can be complicated under any circumstances, and a blended family situation makes this process even more complicated.
One challenge to consider is the desire of either spouse to designate certain assets of theirs that were acquired before their current marriage to their children from a prior marriage. This might include things like property or other valuable items that have been in their family for a number of years.
Another issue is that one spouse may be involved in a family business that they want to keep out of their current marriage. Perhaps other members of that spouse’s family are involved in the business and they don’t want to dilute the ownership interests of the family by delegating aspects of the business to the other spouse in this marriage. A prenup might be used to deal with this business interest to keep it out of the estate for the new marriage.
A new marriage and blended family will likely dictate the need to update wills, other estate planning documents and beneficiary designations to reflect the intentions of both spouses. This will help ensure that various accounts and other assets go to the proper people within the new blended family.
Beneficiary designations are a critical piece of this. Retirement accounts, life insurance policies and annuities all use beneficiary designations in order to pass on the assets or pay out benefits upon the death of the account holder. The beneficiary designation will govern this process, and an outdated beneficiary designation could deprive your desired beneficiaries of the money you want to leave them.
Another consideration is a review of the new family’s life insurance needs. If there are assets or accounts that one spouse needs to exclude from the marital estate, life insurance can offer a relatively inexpensive way to provide a death benefit for a spouse or other family members.
For example, if one spouse is part of a business - either with business partners or with other members of their family-life insurance will provide a death benefit replacing some or all of the value of that spouse’s interest in the business. This provides value to the surviving spouse without them getting involved in the business.
A trust might also be an effective estate planning tool, especially where minor children are involved. Assets can be put into the trust and distributed on schedule, either during the creator of the trust’s lifetime or based upon a schedule after their death.
Financial and Retirement Planning
It’s important for the new couple to engage in overall financial planning for their blended family, which also includes their retirement plans.
You’ll want to review their various investment and retirement accounts that they have accumulated prior to the marriage with an eye towards developing a consolidated investment strategy based on their joint goals as a new couple and family.
Specifically, they will want to do a comprehensive financial plan that considers such major life events such as planning for retirement and saving for college.If there are children from a prior marriage, it might be useful to consider if an ex-spouse will be contributing to the college expenses for these children.
As for retirement planning, it’s important to consider where does the newly combined couple stands in terms of retirement assets. This analysis should look at accounts like 401(k)s or other workplace retirement plans, IRAs and taxable investment accounts, and their potential income replacement level in retirement, all of which offer a snapshot of the couple’s combined retirement savings. This analysis can help determine if the couple is on track or if they need to ramp up their savings and consider working for a few more years.
The new couple will also want to take into account any pensions either of them may be eligible for from current or former employers, as well as potential claiming strategies for Social Security.
Where the new couple and any minor children will live is another key financial issue to resolve.
Will the newly blended family live in a house owned by one of the spouses? Will the family buy a new house? What happens to the proceeds if either spouse sells their old residence?
If the decision is to move into the existing home of one of the spouses, should the other spouse be added to the title?
Buying a house is one of the largest financial purchases a couple will ever make, so this is an issue that requires planning that balances the living space needs of the newly blended family with the financial limitations of their budget.
Every blended family’s situation will be a bit different. In addition to blending two families together, these new couples are blending the finances of two families into one. Getting on top of these critical financial aspects of their newly formed family unit can go a long way towards making the transition easier.