Blended family finances

The money part is the tricky part

July 6, 2017

Quite frankly, there’s an awful lot of over-optimistic twaddle out there – both discussed and written – about the so-called blended family. According to the 2011 Canadian census, stepfamilies with children represent approximately one in eight of the total.

The evidence suggests that while most blended families live contentedly and co-exist happily along with one another, there remain some issues – principally financial ones –that can lead to unanticipated difficulties, and even outright friction, if left unaddressed.

A financial implication around every corner

These issues and more were identified in an issue of Kiplinger (July 31,2008) – an authoritative US based financial newsletter – by senior editor Jane Bennett Clark. She quoted Tim Maurer, a financial planner with the Financial Consulate, a Maryland-based financial advisory group. Not only do blended families make for a complicated day planner, not to mention group dynamic, says Mr. Maurer, ‘there’s a financial implication around every corner.’

Aim to be fair

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.

You’ll pre-empt some of the drama by discussing the history that got you to this point and agreeing to start fresh, says Mr. 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.’

Equal and equitable are not the same

One of the hardest questions parents face is how to treat the children even-handedly, be they their own kids, the step-kids or both. From a parenting perspective, you have to look at the difference between equal and equitable. 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.’

Family dynamics aside, there are five key issues you should look out for when orchestrating blended family life:

1. Keeping estate-related documents up-to-date

Not updating a will a common mistake. In some provinces, a marriage revokes any previous wills. So if you remarry and then pass away without drafting a new will, you may die intestate and your estate will be distributed in accordance with the provincial intestacy laws.

It’s also important for to review any plan where a beneficiary is named, such as an RRSP, insurance, or work pension. Estate conflicts have been known to arise if a spouse neglects to remove a former partner from these plans or policies.

2. Choosing an executor

In the context of a blended family it is important to nominate someone who is reliable, punctilious and organized. The possession of sold people skills can be an important asset – so he or she can work comfortably and (if necessary) tactfully with extended family members. A thought: it may be beneficial to choose a third party such as a trust company, lawyer, or accountant to act in this situation. We can offer you advice in this situation.

3. Giving gifts and establishing trusts

Trusts can be an effective method for distributing assets. For those of you wishing to
divide assets during your lifetime, outright gifts or inter-vivos family trusts may be the route to take. For division after death, testamentary trusts (with possibly an independent trustee) can be an ideal option. If your intent is to have assets fund a testamentary trust that will eventually benefit children from a previous marriage, as a spouse in a second marriage you may not want to hold certain assets jointly with right of survivorship.

4. Life insurance

Life insurance can be an important tool for many blended families. Because proceeds of a policy will be available at death, it can be an effective way to create an inheritance for beneficiaries. Remember, life insurance proceeds are not taxable in the hands of the beneficiaries. Also, if you name your beneficiaries on their life insurance policy, the proceeds can be paid directly to them avoiding the need for probate. Don’t forget that life insurance proceeds can be used to pay your estate’s liabilities, such as taxes, mortgages or debts. This will help to ensure that non-liquid assets, such as a business or vacation property, don’t have to be sold to pay bills.

5. The role of marriage contracts

There is a great deal to be said in defense of a marriage contract, especially in the context of a second marriage. Here’s why:

  • The contract-writing process involves thorough and open communication.
  • The contract is a way to assure both people in the relationship that they’re protected.
  • The contract is an effective way for both spouses to outline the assets each will allocate to their respective children.

While we don’t pretend to be experts in marriage contract writing, we would be happy to introduce you to legal experts who are. The blended family is a social trend that shows no sign of slowing. And these five issues are not the only ones that need to be considered. Let us know if we can help.

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.