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Financial Planning For Blended Families

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Blended families used to be created as a result of deaths. Now, divorce is a far more likely reason. This means that blended families may need to deal with managing relationships with ex-partners while navigating a path forward. Effective financial planning can make that path a lot easier.

Here are some tips to help:

5 Financial Tips For Blended Families

Consider having a legal agreement

If you are planning on getting married, you can have a prenuptial agreement. This can later be updated via a postnuptial agreement if necessary. In fact, you can even have more than one postnuptial agreement if circumstances change enough to warrant it.

If you are planning on living together without getting married, then you can have a cohabitation agreement. Again, this can be updated if necessary to reflect developments in your relationship.

Both forms of agreement can clear out a lot of old ground and help to set down a path forward. If the relationship does break down, a legal agreement can be used to set out the framework for the process of dissolving it. This can make everyone’s life easier at a very difficult time.

I know it can be stressful to bring up these kinds of agreements when entering into a new phase of your relationship, but consider how much you will learn about each other and your views about money during this process. It may be a real eye opener.

Assess your income and expenses

Remarrying will usually not reduce your obligations to your children or a former spouse. The only exception to this might be if you could show that you need to provide care for a new partner. If this reduces your income, then it might be possible for you to reduce your payments. The situation would, however, need to be assessed on its own merits.  

Remarrying may, however, reduce the level of support an ex-spouse is expected to pay you. Essentially, if your divorce settlement was based on perceived need, your partner could apply to reduce their support based on your changed circumstances. That does not mean that their application would be granted but it is a possibility.

If your divorce settlement was based on compensation (e.g. for loss of earnings) or contractual obligation, then it would probably stand. The situation with cohabitation is often more complicated since it is not necessarily formally documented. In principle, however, the same rules apply as for remarriage.

It is highly unlikely that either your ex-spouse or your children would have a legal claim on your new partner’s property. If, however, you and a partner had common property and they had a claim on your share of it, then that does have the potential to impact your partner.

Review your business dealings

These days, it’s increasingly common for people to have income from freelance work and/or entrepreneurial activities. Your business may not be the world’s largest but it has a value and this needs to be recognized.  

If you’ve been operating as a sole proprietor then you should think seriously about whether or not to incorporate. This does entail some administration and hence expense but it also offers a lot of flexibility. For example, if you want your business to be passed to your heirs, you could bring them on board as co-owners now.

If you’re incorporated (on in the process of incorporating), then it’s advisable to make sure you have a current and independent valuation of your business. This will serve as a baseline for assessing the change in its value in the event of a subsequent relationship breakdown.

Plan your estates

From a financial perspective, estate planning is possibly the single, trickiest part of blending families. Legally an asset may belong to an individual. In the eyes of their relatives, however, that asset may belong to the family as a whole.  

Morally, this may be a fair point. Heirlooms are intended to be passed from generation to generation. Assets may be built up thanks to the work of many people. It can therefore be devastating to see them lost as the result of an individual committing to a new relationship.  

There are, however, several ways this can be avoided. The three main ones are gifts, trusts and wills. Gifting assets while you are still alive ensures that they end up with your chosen beneficiary. It may also help to reduce your estate’s tax liability when you die. Gifting physical items also helps to reduce the number of possessions you have to store.

Trusts can be useful if you are happy to give away an asset but still want to retain some control over it. They are particularly useful if gifting assets to minor children. Having a will helps to ensure that your estate is divided according to your wishes. Keep in mind, however, that a will does not protect your assets in the event of a relationship breakdown.

Talk about it

You and your new partner will more than likely have very different views on financial planning and responsibilities to previous families. Don’t let situations sneak up on you. Talk it out before hand so that you can agree about how certain situations will be handled in the future.

For example, when I married my second husband, I found out on the first Easter that we celebrated together that it was common for him to purchase gifts for his children, like a new bike or phone. I was flabbergasted. Together we now had 4 children and I was not for buying those kinds of elaborate gifts for them all. Especially since my kids were used to getting a chocolate bunny.

Though you can’t always anticipate every kind of situation that will come up, it is a good idea to discuss and make some ground rules about things like: gifts, loans, education, inheritances, allowances, etc.

Finances are the leading cause of divorces. Be smart the second time around and have those difficult conversations so that you can compromise and work it out before they become a real issue.

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