Few, if any, people enter into marriage with an expectation of getting divorced. The reality is that for a great many of us divorce and potentially remarriage will become an eventuality. In fact, nearly one out of every three Americans (approximately 100 million people) is today living as a member of a blended family.1 Step-parent/step-child relationships have quickly become a new norm.
For parents, these more complex relationships can be immensely rewarding and fulfilling, but they also bring with them a host of new emotional and financial challenges regarding family dynamics. Not only are there often tensions between current and ex-spouses, but also between children of first and subsequent marriages. Financially, blended families often struggle not only with heightened cost of living expenses—from food and clothing to multiple cars, larger homes and increased educational expenses—but also the long-term impact those expenses can have on their ability to put money away for retirement.
Communication and planning are essential
While it may be a somewhat difficult and uncomfortable topic of conversation, before committing to forging a blended family, both individuals need to communicate openly and honestly about all assets, liabilities and long-term plans regarding the disposition of any assets they bring into the relationship. Make sure you are both on the same page as it relates to spending and saving behaviors. The clearer you both are regarding your expectations for the future and your financial obligations to ex-spouses and children from those relationships, the greater the likelihood that you will be able to steer clear of future conflict.
Make sure beneficiary designations are up-to-date
One critically important but often overlooked consideration for blended families is the beneficiary designations listed on life insurance policies and retirement accounts. Often, beneficiaries are designated when accounts or policies are first established, and then they are forgotten. Unfortunately, regardless of what your will or any trust documents might stipulate, beneficiary designations will ultimately determine who gets what. If your will states that your IRA should be split evenly between your two children but your ex-spouse is the primary beneficiary on the account, the assets go to the ex-spouse to do with as he/she pleases. It’s an oversight that can quickly derail even the most carefully crafted estate plan.
Estate planning strategies for blended families
Suppose you have children from a previous marriage and want to ensure that your assets pass to them upon your death. Yet at the same time, you want to make sure that your current spouse is also financially supported. One strategy estate planners will often use is the establishment of a Qualified Terminable Interest Property (QTIP) Trust, which can be provisioned so that your surviving spouse receives the annual income generated by the trust, and upon his/her death the principal passes to your children from your first marriage.
Alternatively, you might want to consider creating an Irrevocable Life Insurance Trust (ILIT), where you fund the trust with assets, which are used to purchase a life insurance policy on your life. Since the trust (rather than you) owns the policy, insurance proceeds are transferred to the policy beneficiaries outside of your estate. For parents in blended families, ILITs can provide an easy way to ensure a guaranteed inheritance amount for children from a first marriage while preserving the rest of the estate for your surviving spouse and new family.
By their nature, blended families are financially complex structures that present a minefield of potential hurt feelings, ill will and mistrust. If both spouses have children from previous marriages, there are inevitably going to be conflicting loyalties, responsibilities and wishes. While you both want to ensure that the surviving spouse is well cared for, you don’t want to achieve that goal at the expense of disinheriting children from prior marriages.
The accomplishment of those goals takes a considerable amount of communication, understanding and planning. Your SunTrust advisor can help you navigate these turbulent waters—balancing your short-term needs with long-term wishes, all while keeping you on track for a successful retirement. A little planning now can prevent a lot of friction, headaches and potential lawsuits from disinherited children down the road.