The modern household can be complicated. According to Pew Research, by 2014 about 16% of children in the US lived in a blended family—a household that has a stepparent, stepsibling or half-sibling.
Blended family finances can pose unique challenges, which is why having the right strategies in place is so important. Walt Reed, Director of Trust and Estate Tax at First Citizens, suggests that a solid financial plan can help ensure that everyone is on the same page and that financial responsibilities are handled appropriately.
Here's what you should know about blended family finances and tips on how to manage them.
1 Take stock of your situation
It's important to understand the financial impact when two families merge—not just the money coming in, but also the expenses, debts and assets. There are other considerations as well, like the age of each family member.
"A blended family could span generations," says Reed. "And that could make planning difficult when you have children in grade school and possibly an aging parent, too."
Someone who's close to retirement might shift spending and saving habits to accommodate the financial needs of their new spouse's children. Instead of putting most of their earnings into retirement, they may be paying for school-related expenses or extracurricular activities. Similarly, someone with minimal financial obligations might come into a situation where they must help provide for their partner's elderly parent.
2 Talk candidly about your finances
Whether you're blending families, entering your first marriage or cohabiting, talking about finances is an essential element of success. Be open and honest about your financial situation, including each person's income, expenses, debts and investments. Both spouses should have a mutual understanding of each other's goals, expectations and concerns to make sure they're aligned when it comes to spending, saving and passing on assets.
Without that understanding, your financial planning may be less effective, Reed says. "I've been in situations where one spouse is saying something the other spouse hasn't heard before," he says. "It's not the most comfortable position to be in."
Couples in a blended family need to have serious conversations about their newly combined finances and future goals before they can effectively plan their estate.
The need is a common one.
According to the Pew Research Center, one in six children is living in a blended family.
3 Avoid assumptions about filing taxes
When two people get married, they typically file joint tax returns. Whether it's a first marriage or a remarriage, Reed suggests it may not always be a beneficial move.
"If you're marrying someone who's had a life before you, you may or may not know what that person is bringing to the marriage," he says. For example, if one spouse is self-employed and the other isn't completely aware of their business obligations, it might not be wise to sign a joint tax return.
Even if children are involved, it doesn't mean couples can always claim them as dependents. If one spouse is coming out of a divorce and sharing custody of a child, they may only receive the exemption some years, depending on the terms of their divorce.
"It really behooves individuals to stay on top of tax planning from year to year so that there are no surprises," says Reed.
4 Consider separate assets
If one or both spouses are coming into the blended family from a previous divorce, they may be aware of the unpleasant experience of dividing assets between separating parties. They may be less than enthusiastic about joining assets again.
Reed says that's okay. "I'm a big fan of keeping things separate," he says. While it might seem complicated to individually pay for joint expenses, Reed says it doesn't have to be.
"If one person's paying the mortgage and the other is paying the joint utilities and other expenses, one person can cut the other a check for the difference to even things out," he explains.
Separate assets may also help with estate planning. "If you have joint assets, they'll go to the spouse in most cases through rights of survivorship depending on how they're titled," Reed notes.
That could create major headaches if your plan was to leave assets to a child from a previous marriage, especially if that child isn't close to your new spouse. If a stepparent isn't as attached to their stepchildren as they are to their own children, they may skip over them when passing on the deceased's assets.
"You don't need a 50-page trust in order to do some effective estate planning," says Reed. "But there needs to be something to make sure you know where individual and joint assets will go upon the death of one spouse or the other."
5 Pay attention to family dynamics
Family dynamics are easy to overlook because they're not directly related to money, but they could be a big reason for separating or protecting assets. If a child is struggling in a marriage that's likely to end in divorce, you'll want to be sure any assets that child is expecting to receive won't be lost in the separation.
Or there may be in-laws from a previous marriage who still intend to leave assets to their grandchildren in the newly blended family. You should keep that in mind when trying to evenly distribute the family wealth among children and stepchildren.
"There are a lot of blended families who face these issues that people don't necessarily associate with finances," says Reed. "But blended families need to approach their financial planning with the idea that they should account for the totality of their lives and not just dollars and cents."
6 Accept that change is inevitable
With variables like shared child custody, exes and even potentially supporting one spouse's parents in a new marriage, blended families can change quickly and often. Remember that a plan isn't necessarily binding, and it can be updated as new developments emerge. Understanding your challenges, talking about them with a professional and being willing to adapt offer the best chances of success for managing finances in a blended family.
