It is axiomatic that one of the most important keys to a solid, fulfilling marriage is open, honest communication between both spouses. And, as we pointed out in a recent article, this is nowhere more important than when discussing marital finances. Whether you’re just starting out or you’ve been married for decades, you and your partner need to be on the same page financially, and that requires good, consistent communication.
But for blended families, whether formed by death, divorce, or a combination of both, clear communication around finance and financial expectations is even more critical—and also comes with even more potential for misunderstanding. Fortunately, many of the miscues and problems that can plague a blended family that is combining financial resources or managing wealth can be avoided by following some basic principles of fairness and having some key conversations.
Blended Families and Estate Planning
One of the most important topics requiring communication early in the marriage for blended families is the topic of how the estate will be handled at the passing of the new spouses. Most of us are accustomed to being reminded of the importance of estate planning: having properly designed wills or trusts; keeping beneficiary designations up to date; periodically reviewing all estate planning documents to be sure they remain current; and everything else that goes along with having a maintaining a solid estate plan. But for blended families, there are some additional conversations that need to take place.
For example, if trusts have been created for college expenses by one of the spouses before remarriage, the new spouse needs to know that these assets will likely be maintained as non-marital, or separate property (as opposed to community property) by the spouse who created the trust. On the other hand, the new spouses may want to formulate a clear agreement about any financial support or inheritance that will be provided by each to their respective stepchildren. If one spouse’s children have received insurance proceeds due to the death of a parent, the deceased spouse’s survivor may want to segregate proceeds from the insurance death benefits for the benefit of the deceased’s children.
In some cases, a partner may come to the new marriage with contractual obligations to an ex-spouse that must be taken into consideration; these should be clearly communicated and understood by the new spouse. Also, for couples residing in a community property state, it’s important to stipulate which assets will remain separate property. Typically, this can include assets that either partner brought into the marriage as well as inheritances received after the marriage began. Form of ownership of such assets is important, too. If they are held in an account designated either “tenants in common” or “joint ownership with right of survivorship,” they will typically be considered commingled assets belonging to both spouses equally. For this reason, assets that are intended to be maintained as separate property should be held either in a trust designated for that purpose or in an account owned only by the partner who owns the assets.
In all of these cases, a pre-nuptial agreement may be appropriate as a way to maintain complete clarity about which property is part of the new marital estate and which is not. Such a document can provide clarity around topics like education funding for children, promoting clarity and confidence for both partners as they begin life together.
Handling Debt
Generally, debt incurred during a marriage is considered the legal responsibility of both spouses. However, in cases of remarriage, one partner may have debt that is related to a former relationship. Once again, a careful conversation about the level of debt both spouses are bringing to the marriage can help resolve matters like whether the new spouses will pay off the debt using joint resources, or whether separate accounts will be maintained until the debt is satisfied. The important thing is to know the precise circumstances and to have a mutually agreed plan for dealing with the debt.
Blending Financial Cultures
Inevitably, different people have differing financial mindsets. Further, these mindsets contribute to the formation of family financial cultures. When a blended family is created, it is vital to recognize not only the differences in the two cultures but also the best ways to bring them together in a way that honors both. Just as different families have different customs about celebrating holidays and family milestones, they also differ in their approaches to spending, saving, and investing.
For example, it’s not uncommon for one partner in a marriage to be savings-oriented, and for the other to enjoy the spending side more. It’s important to recognize that neither one is wrong, per se, as long as no irresponsible behavior is involved (i.e., spending more than you earn). But the difference is still there, and the spouses need to understand it, talk about it, and make a mutual decision about how the differences will be expressed in the marriage. For example, it may be important for the partners to create a “mad money fund” that the “spender” can access at any time, for any reason, with or without permission. By contrast, it could be important for the “saver” to have a special account dedicated to their sole use, providing a sense of security that rewards their instincts toward frugality.
For couples who want to get a better sense of each other’s money personality, a financial advisor can be a great help. Such a disinterested third party can facilitate conversations around this topic and can even work with the new partners to develop a financial strategy that is oriented toward the needs and inclinations of both.
At The Planning Center, we work with clients to develop strategies that take into account their unique circumstances and needs, including those of blended families. If you or someone you know is trying to get a better grip on their finances, please get in touch.
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