By Tom Fridrich, JD, CLU, ChFC®, Senior Wealth Planner
Blended families, composed of couples who bring children from previous relationships together, have become increasingly common in today’s society. While blending families brings joy and new opportunities, it also can create complex financial challenges.
Here are five areas blended families should consider as they navigate these changing family dynamics.
Day-to-Day Budget Management
Finances are complicated even among traditional families, and it becomes magnified when you bring in new people and perspectives. First, establish ground rules with your new spouse about how you intend to approach finances, specifically around whether you’ll commingle your earnings and assets. This alone can be an emotionally charged discussion, especially if one person is far better off financially.
As you develop your budget, be clear on your obligations and resources related to child support and alimony so you have a handle on exactly how much is coming in and going out in that arena. Then, discuss how you will support the day-to-day needs of your kids. Is your income going just to your kids via separate accounts or are you combining it for one umbrella budget in a joint account? A hybrid solution can also work well for this purpose. You may find that you’ll want to track your finances more than you ever did in the past just to make sure you understand where your dollars are going on a weekly and monthly basis.
There are a host of conversations you’ll need to have and approaches to consider. What if one set of kids has more expensive hobbies than the other, or has more support from the former spouse? What happens when different families have different norms – you may pay for your kids’ cellphones while your new partner expects their kids to earn their own money. Through all of this, you’ll likely need to coordinate with your ex-spouse. Divorce just means you don’t live together anymore; it doesn’t mean you aren’t engaged with that person in co-parenting.
The goal is to treat each child fairly, and communication and transparency are crucial. This may be a good time to talk to a financial planner so there’s no misunderstanding about how routine expenses will be divided.
The parent paying child support should have sufficient life insurance to cover those payments if they die. In many cases the divorce decree will require life insurance on the payor, so check your decree to see if that is a requirement of your divorce. But there may be situations when that person refuses to do it or simply can’t afford it. In that case, you may decide to take out a life insurance policy on your former spouse to ensure your children’s needs will be met.
Even if you’re not the primary wage earner, you also might hold a policy. This can be another way to provide for your kids should something happen to you. Plus, a life insurance payout can help equalize your estate if your new spouse is the beneficiary of your qualified retirement plan (which is required under federal law unless they sign a waiver).
However, no matter who you choose as the beneficiary, confirm you’ve taken your former spouse off any existing life insurance policies and retirement savings plans. It’s all too common to forget to change that.
As you begin to contemplate future college expenses, ask yourself how much support you’ll realistically be able to provide. Between splitting assets and paying attorney fees, divorce is expensive. You must avoid putting your retirement at risk. Talk to your former spouse to gauge their commitment and then be open with your kids about what you intend to cover. The worst scenario is if they assume their college will be taken care of only to discover there’s no hope.
When the time comes to apply for financial aid, the amount of assistance you receive depends on the personal financial situation of the parent who files the Free Application for Federal Student Aid (FAFSA®). There are also new rules around which parent completes the FASFA when the parents are divorced. This is another time when it’s wise to seek advice from a planner who can help you sort through the options to determine what’s best for your situation.
When creating an estate plan for a blended family, it’s best to get rid of old documents and start fresh. If you didn’t have one as part of your first marriage, you’ll certainly want to speak to an attorney to help you document your final wishes when starting a second marriage to ensure your assets are distributed as you wish. Your will is where you can nominate the guardian of your children should you pass away while they are minors. One thing to note is that unless your former spouse’s parent rights have been terminated, the court will likely grant custody to him/her if you pass away regardless of what your new will might say.
While you may be motivated to take care of your new spouse financially, it mustn’t come at the expense of your children. A prenuptial or postnuptial agreement may be in order if this hasn’t been addressed. Above all, you don’t want to wind up in a situation where you leave everything to your new spouse, and then they subsequently leave it to their own kids. One common estate planning approach is creating a trust that allows the surviving spouse access to income as needed but precludes them from dictating where the assets in the trust will go when the surviving spouse passes away. Have discussions with your partner early around these topics so that you can put a plan in place that satisfies your goals for taking care of your expanded family.
Everyone’s picture will look different depending on how accounts were split in the divorce so it’s important to acknowledge your situation.
Savings should be a key line item in your budget. As you combine households, you might end up with more disposable income than you had while you were living on your own. Take advantage of this to beef up your savings, especially if you lost a large chunk of your retirement savings in the divorce. But even if your budget is tight, ideally try to save at least up to any “match” offered by your employer in a defined contribution plan.
You may find a desire to focus your financial means on the kids to assuage their guilt or make up for the hurt that has been inflicted. However, saving for your own retirement is ultimately a gift you’re giving your kids. Be honest with them and explain why you’re allocating money to savings rather than going on a lavish vacation or buying the latest fashions. It’s a good lesson in taking the long view.
Talk to a Qualified Financial Advisor
Navigating the financial intricacies of blended families can be overwhelming, and guidance can help you talk through these thorny issues. You might look for someone with the designation of Certified Divorce Financial Analyst® (CDFA®) as these professionals specialize in addressing the unique challenges faced by blended families and can provide tailored solutions to help you achieve financial security.
While perhaps being a bit more complicated at times, making smart, common-sense decisions to manage your money within your new family will set a good example for the children and help you reach your financial goals. By fostering a culture of understanding, compromise and mutual respect, blended families can tackle financial challenges with resilience and unity.
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For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.