ON THE MONEY: Financial planning in a second marriage
If you have children and are considering remarriage, your new marriage will result in what is referred to as a blended family since there will be children from a previous marriage. Believe it or not, these relationships now outnumber traditional nuclear families, and experts believe that their numbers are likely to increase based on current social trends.
There is a lot of psychological pressure in blended families since spouses are attempting to provide for their new partner as well as their children from a previous marriage. There also could be children with their new spouse. When you throw aging parents, grandparents and others into the mix, the emotional and financial challenges can be enormous.
The first issue that must be dealt with is: how will current family expenses be handled and where will the money come from? In many cases these current expenses are involved with alimony and/or child support – either paid to a former spouse or received from a previous spouse.
Couples must decide how these financial arrangements will be handled and the impact on the blended family. It is not a bad idea to have discussions with the ex-spouse(s) to discuss these issues and possibly have an attorney draft a formal agreement to cover all of the financial issues that are not specifically dealt with in the divorce and child support agreements.
One of the most important tax issues that should have been covered in the divorce decree is which spouse may claim the children as dependents when tax time rolls around.
Personally, I am not an advocate of prenuptial agreements, but if there are substantial assets on one or both sides of the new marriage, the children of each marriage partner could make a strong case for such an agreement.
In every new second marriage, it is also very important to recognize and appreciate any differences in money management styles. Both partners must realize that they each bring baggage filled with mistrust and insecurity from having divided their respective assets in a previous marriage. If the new marriage is recent, each spouse may speak of “my money” and “your money,” since the trust factor has not been fully developed yet.
Other issues to be considered are:
• Who owes what money to whom and how will those debts be repaid?
• Do any of your beneficiary designations on your life insurance policies or retirement plans need to be changed or updated?
• How does your new spouse feel about the use of credit cards? Is he or she a shopper who uses a credit card perhaps too freely?
• Do you have financial obligations to parents or others?
Finally, perhaps the most sensitive issue faced by blended families is: how should the respective assets of the blended family pass on to heirs and assigns after each spouse has died?
Certainly, if there is appreciable wealth involved, it will always be best to contact an estate planning attorney to be certain that you are not unintentionally disinheriting any of your children.
One time-honored approach to equalize distributions to current and former children, as well as to former spouses, is through the use of an irrevocable life insurance trust. Such a trust would own life insurance on the life of either or both spouses, and upon death, the proceeds of any policies can be paid out income tax and estate tax free to designated beneficiaries. The required premiums would be gifted each year to the trust, but use of this technique would make certain that the deceased partner could arrange to pass the insurance proceeds to the spouse and the remainder of the assets could go to the children.
Another way to make inheritance rights for stepchildren more equitable is to have your will state that stepchildren will be treated as if they were your natural children. Also, it will be helpful to discuss your plans with your more mature children to circumvent any potential hard feelings when you and your new spouse are no longer around to adjudicate matters for your kids.