Financial Planning for Blended Families

Financial Planning for Blended FamiliesA blended family is one in which the partners or spouses have children from previous relationships.  Statistics show that 65% of remarriages in the United States involve blended families.  Figuring out finances is one of the most difficult tasks a blended family faces.  But with honesty, good planning and some professional assistance, blended families can work through their finances – and stay blended.

Below are five financial issues every blended family should consider.  It’s also recommended to consult with a family lawyer or financial planner when remarrying.

1.  One, two or three bank accounts?  The recommended approach is to keep separate accounts but also have a shared bank account, with each partner depositing a percentage of income or a fixed amount each month.  This makes it more equitable to both sides.

It also means each side pays for their own children’s expenses, so there’s no resentment if one spouse feels they are paying too much for their partner’s children.  Separate accounts protect the spouse from the other partner’s debts, including any alimony or child support payments.

A separate account also allows each partner to keep assets acquired before the marriage.   For a parent saving for a child’s college education, this is important.  And separate accounts may also be better for obtaining financial aid.

Finally, separate accounts also protect both sides if the second marriage doesn’t work out.

The shared bank account is used to cover family expenses – mortgages, vacations, cars, everyday expenses and emergencies.

2.  Which house to live in? If both spouses own a home, they can choose to sell one and live in the other, or sell both and buy a new home together.  Before selling, learn about the various tax considerations in your state.  The exclusion on the capital-gains tax is larger for married couples than for singles.  So depending on the value of the home, it may make sense to keep it a bit longer after getting remarried.

3.  Who Inherits? There are many ways of insuring that property is passed on correctly after death, whether to the new spouse, children from an earlier marriage or children from the current marriage.  Life insurance, wills and trusts allow for designated beneficiaries.

Using a combination of approaches allows a family to provide for the surviving spouse while still providing for the children.  For example, spouses can give each other lifetime use of the house, as well as the money to maintain the home, through a bypass trust or a Qualified Terminable Interest Property (QTIP) trust.  Once the spouse dies, the specified heirs inherit the house.

In order to provide for all children, a parent can make the older children from the first marriage beneficiaries on a life insurance policy and leave the rest of the property to the children from the second marriage.  Retirement plans, such as 401(k) plans or IRAs can also be considered in the inheritance question but they have different rules and taxes so couples figuring out how to divide these monies should speak to a professional financial planner.

4.  Write it up!  Many couples entering a second marriage are a little bit weary, but also a little bit wiser. Signing a prenuptial agreement – or a postnuptial if already married – enables spouses to clearly lay out what belongs to whom.  While some people view these agreements as a sign of doom, they can often help clarify not only ownership, but also financial and marital obligations.  Knowing they’ve worked out these issues often helps people feel safer and more secure in the marriage.  And when new issues come up, these agreements can be used as a reference or new contracts written up.

5.  Create a budget.    A second marriage is going to cost more than the first one.  There’s the initial desire to buy new in order to create a new home together.  There are also more children and more daily expenses.   Annual expenses such as vacations and travel will also increase.  Every blended (and nonblended family for that matter) should create a daily and yearly budget, as well as a long-term financial plan.

The budget should include a savings plan for the family.  Families should do everything possible to abide by the budget, but recognize that emergencies come up.  Some families choose to eliminate credit cards to avoid debt and temptation.  In order to make sure the budget is working, families should discuss their finances regularly.  This guarantees stability and openness.

Sometimes putting these items into place for your blended family can be overwhelming. A certified family law attorney or a financial planner can often provide needed guidance and help ensure things are set up correctly.

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Disclaimer – The materials contained in this blog have been prepared for informational purposes only. The information contained is general in nature, and may not apply to particular factual or legal   circumstances. In any event, the materials do not constitute legal advice or opinions and should not be relied up on as such.