Nontraditional families are becoming more traditional. For more than 20% of opposite-sex couples who lived together in 2021, at least one partner had children with another partner, according to the most recent data available from the U.S. Census Bureau. And there were more than 2.4 million stepchildren in the U.S. in 2021, according to the Census Bureau.
If you’re planning to become part of a blended family, consider these financial issues as you and your spouse start a new life.
Prepare with a prenump
Before you tie the knot, consider signing a prenuptial agreement (and don’t wait until the last minute to accomplish this task).
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A prenup can determine how your assets will be divided among your children from a past marriage along with any future children or grandchildren you have with your current spouse.
For instance, if you have a house from your first marriage that you want children from that marriage to inherit, you could designate that as separate property in your prenup. Additionally, your prenup can spell out whether you or your partner will receive spousal support if the marriage ends, which could be critical if you have minor children from your first marriage, your current marriage or both.
You may want to use your prenup to outline whether you’ll be responsible for debts your spouse brings to the marriage, which is particularly important if your spouse is paying child support. A prenup will help clarify how you’ll handle premarital debt as well as debt you incur after the marriage.
Without a prenup, a judge could hold you responsible for your spouse’s debt if you divorce in one of the nine community property states, even if the debt is not in your name.
A prenup can also help couples address different spending habits and expenses related to children from previous marriages, says Cameron Normand, chief executive officer of Stepfamily Solutions, which provides educational resources to blended families.
“You don’t want to have these conversations after the fact,” she says. “It’s not what you’re thinking about when you get married, but conversations about money can alleviate a lot of stress.”
Talk about expenses
When Cameron became a stepmother to four children, she and her husband, Craig, set up a joint checking account for pooled expenses, such as their mortgage and monthly bills, and separate checking accounts for individual expenses, such as Craig’s child-support payments and expenses related to Cameron’s business.
Shweta Lawande, a certified financial planner with Francis Financial, suggests clearly delineating how you’ll split expenses for your kids, such as funding a 529 college savings plan. You can do this on a spreadsheet or with help from a financial planner.
Not all expenses can be kept separate, which is why it’s important to have a family budget. For example, Cameron and Craig share educational costs for his stepchildren, including expenses for after-school sports and school supplies.
If your stepchildren are of college age, your remarriage will affect their eligibility for financial aid. Cameron recalls that when one of her stepchildren applied to college, her financial information, as well as Craig’s, had to be included in his financial aid applications.
Even if you’re not contributing to your stepchild’s educational costs, federal law requires that your finances must be included on your stepchild’s Free Application for Federal Student Aid (FAFSA), which the federal government as well as colleges and universities use to determine aid eligibility.
Update your estate plan
After her marriage, Cameron updated her will, life insurance, health care directive forms and other crucial documents to include her husband and stepchildren as designated beneficiaries.
If you don’t update these documents, your current spouse may not be able to manage your finances and health care decisions if you become incapacitated, and your former spouse may inherit some of your assets. You should also update beneficiaries for your retirement plans, such as IRAs and 401(k)s.
Even if your will states that you want your new spouse to inherit those accounts, the first will inherit them if he or she is listed as the beneficiary, says Tim Maurer, a CFP and chief advisory officer at Signature FD. A divorce decree doesn’t override a beneficiary designation.
Everyone needs a will or trust, but it’s especially important to have a solid estate plan if you’re in a blended family. Otherwise, your estate will be distributed according to the probate laws of your state, and those laws generally default to your spouse and biological or legally adopted children—not stepchildren—when they reach the age of majority.
Plus, if you fail to update your estate plan, your adult children from your previous marriage could be disinherited in favor of your second spouse.
Tasha Dickinson, estate attorney and partner at Day Pitney LLP, recommends that you and your spouse consult with an estate attorney to create a revocable trust — also known as a living trust—that determines how assets will be distributed among your new family and children from your previous marriage.
A living trust is a legal agreement that allows you, the grantor, to control how your assets are managed and distributed during your lifetime and after your death.
This document should include a designated trustee who is responsible for managing assets in the trust according to what’s best for its beneficiaries. You can amend it to include more beneficiaries from your blended family if you and your new spouse have more children.
In addition to a living trust, Maurer suggests that you and your spouse create a testamentary trust to determine how assets will be distributed to your children after your death. A testamentary trust is created by your will and, unlike a living trust, goes into effect only after you die.
This tool is often recommended for couples who have minor children and want to impose some restrictions on how the inheritance is distributed. The terms of a testamentary trust can’t be changed after the death of the individual who created it, known as the testator.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
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