Getty Images When Carol and Mike Brady got together on the classic TV show “The Brady Bunch,” there wasn’t a lot of discussion about how the couple would handle things like updating their life insurance policies to reflect their new, blended family, or covering the cost of things like braces and college tuition for their six kids.
Admittedly, problems like those probably wouldn’t have made scintillating plot lines for a sitcom, but for real-life Bradys, the financial challenges can feel like a never-ending drama.
All couples should have talk finances before they get married. But it’s especially important to cover all the bases when the union involves two previously established households with children and other complications, such as parents who may need financial or physical support as they age, or ex-spouses still in the financial picture.
“Ideally, this conversation should happen early on in your relationship, before you move in with one another,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial in Minneapolis. “But it’s a must once you decide to take that step.”
De Baca says couples should exchange honest information about income and expenses, including any debt or other financial obligations. “It’s crucial to practice full disclosure when you and your partner talk about money,” she says. “If you’re surprised by what you hear, take time to absorb this information and then talk about how it will impact your household finances.”
Financial Planning for Blended Families
As far as the nuts and bolts of combining the family finances, there is no right or wrong way. Each couple needs to find one that works for their particular new household.
“You and your new spouse may be completely compatible when it comes to money and combining everything makes the most sense,” says de Baca. “On the other hand, it might make more sense for you to separate your money or only share certain accounts or expenses.”
Some of the things that you will need to address: Taxes and Estate Planning Must-Dos for Blended Families
One financial area that can be tricky for blended families is taxes, particularly because new living arrangements may change a parent’s ability to claim a child as a dependent. Sometimes this topic will be addressed in the divorce agreement with the previous spouse, but if not, all the parents must abide by IRS rules and agree on who provides the primary support for each child.
Hand-in-hand with taxes comes the necessity of facing another unpleasant topic: death. Blended families have more choices in deciding how assets will be passed down to the deceased’s loved ones. Yet making those decisions is often overlooked when parents combine households.
“It seems obvious, but many people forget to do it [review beneficiary designations for personal savings, investment accounts, workplace retirement accounts, and life insurance policies],” says Mela Garber, a tax partner at accounting firm Anchin, Block & Anchin in New York City, “and the ramifications for people at all income levels can be tragic.”
Garber says that most people pick a beneficiary when they start a new job and sign up for benefits or when they buy a new life insurance policy. But years can pass between when they sign those papers and when they get a divorce, so it’s common to forget about the designation.
Such seemingly innocuous memory slips can have serious consequences. “I’ve seen numerous times in my practice where a client passes away and his new wife finds out that the proceeds from the life insurance or payout from the pension account will be distributed to his ex-wife,” says Garber. “Needless to say it’s a disastrous surprise, especially when the family is of a moderate means and the insurance proceeds may be needed for the funeral expenses and maintaining the widow’s home.”
For wealthier families, having the ex-spouse as beneficiary could also have tax consequences. “Usually if a spouse is a beneficiary of the insurance or pension accounts there’s an unlimited marital deduction available and no estate taxes will be due on the values of these assets,” says Garber. If the beneficiary is an ex-spouse, then the marital deduction isn’t available and estate taxes are due within nine months. “To add an insult to the injury, depending on the provisions of the will, the current wife may end up paying estate taxes on the money distributed to the ex-wife,” says Garber.
Make It One Big Happy and Financially Up-to-Date Family
Whether you’re setting up a bill-paying system or planning for your family’s well-being after you’re gone, pay attention to the details. While financial planning won’t ensure that a couple stays together for the long haul, it can go a long way toward making the blending of two households go more smoothly.
Michele Lerner is a Motley Fool contributing writer.