Blended family finances need scrutiny

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No matter how your second family comes together, there’s a lot of work to be done before you start picking out china patterns.

Starting, for instance, with some of these common questions:

•   How will the household bills be divided?

•   Is someone paying spousal or child support? How will that impact everyone in the new household?

•   Will the standard of living be set according to the person who brings the most money in?

•   If so, how long will it be before resentment sets in because that person is paying for everything?

Discussing every dark detail of your financial life before embarking on a second or third marriage will make your lives easier and help your marriage succeed.

Blended family issues
  1. Unequal footing
  2. Prenuptial agreements
  3. Separate accounts
  4. Estate planning
  5. Insurance solutions
  6. Working together …
  7. … Or staying apart

Unequal footing

It’s better to tackle money issues before walking down the aisle rather than realizing six months after the honeymoon that you’ve been indirectly putting your spouse’s kids through college by paying all the household expenses. Meanwhile your spouse’s income goes to the ex and their kids’ expenses.

It’s not an unusual situation, says Jeannette Lofas, Ph.D., LCSW, founder and president of the Stepfamily Foundation.

“That happens a great deal of the time,” says Lofas. “She doesn’t directly pay the bills for college, but for everything else over time — the lights, the mortgage, vacations. Essentially she is putting his kid through college,” she says.

The solution? Lofas suggests putting it in writing that both parties acknowledge the imbalance and a plan to pay back the money.

“If she is donating money for his kids’ college, we encourage them to write out a loan agreement, with him saying that he will pay this money back,” Lofas says.

Before it comes to that, couples should know what each party is bringing into the marriage — both assets and liabilities.

And that can mean a prenuptial agreement.

Prenuptial agreements

Prenups do more than protect the rich half of the couple from the grubby hands of the less-well-off partner. They document income, liabilities and assets of both partners and should protect both their interests. The groom and bride each need a lawyer to represent them.  

Lofas suggests that the future husband and wife meet with a mediator experienced in working with stepfamily relationships.

In her practice, the prenuptial agreement spells out not only financial obligations, but domestic duties as well. The details are hashed out and then sent to lawyers to finalize.

“Our prenuptial has to do with money, but also has to do with the responsibilities in the house. Like when my child comes over, I expect you to be here in the morning, you have to have lunch with us, whatever. We take it all the way down to who makes the bed, who takes out the garbage, who waters the plants. None of that is enforceable, but if they negotiate then somehow it becomes a reality,” says Lofas.

Keep it separate

A prenuptial agreement is just the first step toward building a financial agreement. Many couples going into later marriages need to keep their money separate to avoid trouble down the road.

According to Adryenn Ashley, author of “Every Single Girl’s Guide to Her Future Husband’s Last Divorce,” there is never any reason for married couples to commingle their assets. Women marrying men who’ve been married once before may have more compelling reasons for keeping their money separate.

“Keep everything separate no matter what. You don’t know when someone can sue your husband and they will come and take your money,” she warns.

“Putting all the money into a joint account allows collection from that account for the debts of one spouse regardless of who put the money in! This can be very stressful if you direct deposit your money into the account to pay your joint debts, only to find one day that the account has been emptied,” says Ashley.

“For instance, if you’ve been saving for your child’s education and that money is not protected, it can be taken,” she says.

Ashley recommends keeping an untouchable pot of money.

Gale Northrop, a branch manager for Charles Schwab in Las Vegas, agrees.
“There have been a lot of circumstances that I have seen, in second and third marriages, where a commingled account is accessed by a third party, a former wife or husband, for marital support. It is better to keep it separate in those situations,” she says.

Estate planning

How couples plan to live together needs to be discussed, but an equally important consideration is what happens when someone dies.

Estate planning is an important component of preparing for a second marriage — even for people who aren’t vastly wealthy. Anyone with a house or family heirlooms or even just stuff you want to give to your kids should give some thought to planning for the inevitable.

Certified Financial Planner Scott Hill, senior vice president of Kanaly Trust in Houston, says that figuring out how to live together is much easier than dividing assets if someone dies or the marriage falls apart — unless everything is laid out from the beginning, thoroughly planned and communicated.

“Typically during the marriage, the expense side of it will work out a little easier, as one spouse will be responsible for certain expenses and the other spouse will pay other expenses. However once those spouses are no longer in the marriage, how do those assets get divided? That is where a lot of the emotional aspects come into it,” Hill says.

For a couple entering marriage with established families and assets, estate planning attorneys and financial planners have some useful tools to iron out the details of who gets what.

Among those are life insurance, QTIP trusts and personal article lists that can be included with your estate planning documents.

To keep assets separate, married couples need to pay close attention to the way bank accounts are held and titled.

“If they want to keep those assets for their own children from a previous marriage or of their own bloodline, you don’t want to put those assets in the other spouse’s name,” says Gary Gilgen, a Certified Financial Planner at Rehmann Financial in Troy, Mich.

A QTIP, or qualified terminable interest property trust, is another useful instrument for blended families. QTIP trusts can provide for the surviving spouse for a period of time or perhaps through life, but ultimately the trust assets go to specified beneficiaries such as the founding spouse’s children.

“They are a key component for any married couple, but especially when dealing with spouses and children of first and second marriages,” says Gilgen.

For instance, QTIP trusts are often used when it comes to houses. The trust can specify the time or the conditions under which the surviving spouse can remain in the house. After that time is up or they get remarried, ownership of the house is passed to the deceased’s children or whomever the trust specifies.

Not every situation demands a trust. Sometimes simpler methods of estate planning will do as well.

For instance, a personal articles list can be attached to a will. The list details personal possessions and the people to whom you would like to leave them.

“Along the way if you change your mind, just cross it off and initial it. And you keep a running list. All of these family heirlooms, personal property items — you can give them to whomever you want,” says Gilgen.

“That would circumvent a trust and any other issues,” he says.

Insurance solutions

Life insurance can be vital in later marriages — not only to provide for your spouse and children but also, as Ashley points out in her book, to satisfy any child or spousal support from previous marriages.

For basic estate planning, it can be as easy as determining how much you’d like to leave to each person and then buying enough life insurance to cover it, provided that you’re in good health.

“Say each child is going to get $1 million. So we’ll go out and buy three $1 million insurance policies and float each child. And then the surviving spouse can just have the remaining assets,” says Hill.

“Ownership of an insurance policy is also important because if you yourself are the owner, (the insurance policy) will be included in your estate and could be subject to tax. So you’d want to consult with your estate attorney to determine the optimal ownership structure of any insurance,” Hill says.

Working together …

For marriages to thrive, each individual should have their own goals as well as common ones to work toward with their spouse. Then they can shape their finances to fit those objectives.

“If people can map out what their thoughts are on their goals individually and together — his, hers and ours — and map it out and think about what they’re trying to achieve, they can work backwards on how they need to work through what their bills should look like, retirement accounts, children’s accounts, trust accounts, beneficiary accounts moving forward,” says Northrop.

Sherry Campbell of Auxvasse, Mo., came to that conclusion when she got married for a second time. It was a second marriage for her husband as well.

“We do ‘yours, mine and ours’ accounts. I was still paying for child-related items such as yearbooks, sports fees and school lunches while my husband was involved in an expensive restoration of an old truck. So we used our own money for these types of expenses,” she says.

Though they keep some items separate, such as their auto insurance policies and benefits at work, they work together to run the household and help each other out.

“We have an attached household savings account we use to save up for major items like replacing the washing machine. There have been times when one of us was making a lot more, so that one contributed a bit more to cover the bills,” Campbell says.

“When my husband needed dentures, he kept his dental coverage and I signed him up for mine as secondary to defray the expense. We each have enough life insurance to give the other spouse enough money to cover the mortgage and other debts while being able to also give some to our individual children,” she says.

Planning, staying flexible and keeping the lines of communication open have made their marriage a success so far.

… Or staying apart

But it doesn’t always work out that way.

Sometimes couples come together and look at all the numbers before getting married and decide it’s just not worth it.

“What happens is that they realize when they commingle their assets, it’s going to be very difficult to separate them if not impossible and also too expensive, so they just don’t want to do it,” says Northrop.

By the time people get into their 50s or 60s, they may have more than just one or two families under their belt. And planning for all the various contingencies can get messy. Not to mention dealing with a looming retirement.

“It gets more complicated as we get older. You’re talking about second and third families and older children and separate college funds and trust issues — a trust for this family and that family and having estate issues. And if one spouse passes before the other ones, who takes care of which children?” says Northrop.

Not exactly a starry-eyed love scene, but couples have to go into their second and third marriages with a realistic assessment of their finances and accumulated baggage.

After all, marriage isn’t just a romantic entanglement — it’s a legal and financial one as well.