Blended Family Finances

Jane Bennett Clark, Senior Associate Editor, Kiplinger's Personal Finance

Dave Sassaman has his kids, Natalie and Nicholas, three days a week and every other weekend. Jennifer Sassaman has her son, Kaden, during the week, every other weekend and for half the summer. Both parents divvy up vacation time and holidays with the kids' other parents. Jennifer cares for all three children after school.

Welcome to the world of blended families, where the calendar is king and the soccer shoes are always at the other house. More than ten million kids live with a biological parent and a stepparent, according to the Census Bureau. In almost half of stepfamilies, each parent brings one or more kids to the mix. Most of those parents go on to have children together.

That makes for a complicated day planner, not to mention group dynamic. But the challenges don't stop there. When two families join forces, "there's a financial implication around every corner," says financial planner Tim Maurer, of the Financial Consulate, in Lutherville, Md. Issues include everything from where all of you will live to whose kid gets to take the car to college.

The good news? "You don't have to have everything worked out within the week," says planner Brian Jones, of CJM Wealth Advisers, in Fairfax, Va. "You have the rest of your life to figure this out." Still, you have the best shot at meshing families and finances if you talk through the plan before the wedding and revisit it regularly. Here are topics to consider before and after quaffing the champagne.

The Sassamans, of Portland, Ore., took a cautious approach to their new enterprise. Before they married four years ago, they attended a parenting class to ensure that they would be on the same page in raising Natalie, now 11, Nicholas, 8, and Kaden, 8. They also discussed drawing up a prenuptial agreement but decided against it. Says Jennifer, "We didn't want to go into the relationship not trusting each other."

Fair enough, but a prenup can help you sort out your finances regardless of whether your marriage ends in divorce after six months or with the death of one spouse after a long, happy union. Not only does a prenup spell out what each of you owns and can expect if you end up single again, but it also lets one spouse waive rights to any property -- say, a family business or an investment account -- that the other wants to preserve for his or her kids. Without a prenup, state property-division law bestows a share of the marital property on the other spouse, no matter how the marriage ends.

Before Jaymi Davison, of Seattle, married her husband 16 years ago, they drew up a prenup that put their respective assets in several pots, including one that held a college fund for his two sons and another that set aside money for their future children. "It was a framework for the goals we wanted to accomplish," she says. The couple later had two daughters, whose education will be covered before any inheritance gets divvied up.

If you decide to go the prenup route, you'll each need a lawyer to represent your interests, for which you'll pay a total of $2,500 to $10,000, depending on where you live and how complicated your affairs are. Sign off on the prenup well before the wedding. Otherwise, a judge might conclude that one of you was pressured and refuse to honor it.

Never got around to discussing the p word? You could always ask your spouse to sign a postmarital agreement, although you each have less leverage with the other once you have tied the knot. If you don't want to put the plan on paper at all, you may be able to preserve assets for yourself or your children by keeping the property you acquired before the wedding separate from the marital mix. The definition of "separate," however, depends on state law and maybe the courts. Research how your state interprets separate and commingled property, or check with a lawyer.

Many blended families establish a joint household account and joint savings for their life together and keep other accounts separate. The Sassamans started out with separate bank accounts but eventually concluded that the process was unwieldy. "If she needed to get more things, I'd have to write a check from my account to her account," says Dave. Eventually, they created a single fund for household expenses. "Now we just talk about what needs to be paid," he says.

How you keep your accounts can affect your financial obligations. In some states, a stepparent who significantly contributes to the support of stepchildren -- and who lets the parent who is legally responsible for support off the hook -- can become responsible for supporting the stepchildren even if the marriage ends. That scenario won't happen if the biological parent pays major child expenses from a separate account.

One more argument for stand-alone accounts: better access to college financial aid. You must include the stepparent's income and assets on the financial-aid application (assuming you're the parent who applies), but you may be able to persuade a college later to remove the stepparent's separate assets from the financial-aid equation, says Deborah Fox, of Fox College Funding, in San Diego. You'll have to wait until you receive your financial-aid statement and make your case in an appeal. (For more about financial aid, see the box on page 84.)

Whether you anticipate inheritance issues in a prenup or worry about them later, at some point you must face the question of who inherits what. Estate planning is the "big hairy issue" for blended families, says Maurer, especially when grown children from one marriage and young children from the new one are involved. You may have accumulated a lot of equity in your house, for instance, and want that money to go to your kids from a previous marriage. Meanwhile, you have your new family to protect.

The simplest solution is to take out a life-insurance policy and name the children from your previous marriage as beneficiaries, says Wendy Goffe, an estate-planning attorney in Seattle. The house and other assets would then go to the new family. If the insurance, added to your estate, would trigger the federal estate tax (payable on estates larger than $2 million in 2008 and $3.5 million in 2009), go instead with an irrevocable life-insurance trust, which keeps the money out of the estate.

Alternatively, you could give your spouse lifetime use of the house and the income to maintain it through a marital trust, such as a qualified terminable interest property trust, or QTIP. Such trusts end upon the surviving spouse's death, after which the property goes to the heirs. Don't name the grown children as trustees, says Goffe. "They will always be watching over the stepparent's shoulder, wondering just how much money went to repair the roof."

While you're reviewing your arrangements, make sure you update your will, review your guardianship provisions and rename the beneficiaries on your retirement plans and insurance policies to reflect your new circumstances. Be aware that a qualified retirement plan, such as a 401(k), pays out to a spouse; if you name someone else as beneficiary, your spouse must waive the right to it after you marry. With an IRA or a SEP, you need no such waiver, although the accounts are subject to property laws.

The Sassamans knew from the start where they would live as a family. Jennifer and Kaden had been living in an apartment, and Dave's house was big enough to provide separate bedrooms for all three children. (They invested in a bunk bed later, when Kaden and Nicholas asked to share a room.)

When both of you own a house, you have to decide whether to sell one and live in the other or sell both houses and start fresh. Before you put out two For Sale signs, consider that single homeowners can exclude $250,000 from the capital-gains tax, whereas married couples get double the exclusion provided they live in the house for at least two years. If one of your homes has appreciated more than $250,000, you're better off living in that one for at least two years before selling it.

You don't both have to be on the deed to qualify for the tax break, but you should retitle the house to reflect joint ownership if you want your spouse to have full title (you can accomplish the same goal in a will). Without any agreement, the house will be subject to state property-division laws upon your death or a divorce. You can file a joint tax return and deduct the mortgage interest regardless of whether one or both of you are on the title.

Imagine letting one teenager drive to high school in a new Jeep and insisting that the other teen take the bus. It's not so unlikely. Many couples start their marriage with unequal resources and very different attitudes about spending, especially on the kids. "If one person is a hoarder and he gets into the boat with a spendthrift, that causes strife," says Maurer. "With children, the strife is compounded."

You'll preempt some of the drama by discussing the history that got you to this point and agreeing to start fresh, says Maurer. If you head in a dramatically new direction, give the children time to adjust, he says. "You don't want them to think the life they lived up to now is turned on its head."

One of the hardest questions parents face is how to treat the children evenhandedly, be they their own kids, the stepkids or both. "From a parenting perspective, you have to look at the difference between equal and equitable," says Davison. "Some kids need more. It can't be about money. It's about how you love and support them."

That said, the answer may be as straightforward as adding money to one child's college account or buying the bus-riding kid a car, says Cary Carbonaro, of Family Financial Research, in Huntington Village, N.Y. She grew up in a blended family in which "everyone got the same thing, no matter what. My opinion is, make everything fair."

For the Sassamans, the fairness issue is muddied by the approach that the children's other parents take when it comes to finances. All the kids keep a close eye on what their siblings bring back from their other homes, says Jennifer, but "here, at our house, we try to be fair. If we buy one thing, we've got to buy three."

That one-for-all-and-all-for-one attitude keeps their blended family on track, says Dave. "There are challenges that we'll continue to face. But we decided that whatever happens, we're going to make it work for us and our kids."

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