More Americans are living in blended families than ever before. According to study conducted by Pew Research, nearly one out of every three Americans (approximately 100 million people) are today part of some form of step-parent/step-child relationship.Disclosure 1
For parents, these more complex relationships can be incredibly rewarding and fulfilling. But they can also bring with them new family dynamic challenges—both financial and emotional.
- A higher cost of living—from food and clothing to multiple cars, larger homes and additional educational expenses;
- The potential for those expenses to impact the family’s ability to put money away for retirement; and
- A greater likelihood of family tensions between ex-spouses as well as between children of first and second marriages.
Communication and planning are key
Before you commit to forging a blended family, sit down with your future spouse for an openly and honestly discussion about all assets, liabilities and long-term plans regarding the disposition of any assets each of you are bringing into the relationship. Make sure you’re on the same page as far as spending and saving behaviors. The clearer you both are about your financial obligations to ex-spouses and children from those relationships, the better your chances of avoiding future conflicts.
Make sure beneficiary designations are up to date
Often, beneficiaries on retirement accounts, insurance policies and annuities are chosen when the account or policy is first established. Then, those choices are simply forgotten. What most people don’t realize, however, is that even if your will or trust stipulates otherwise, your beneficiary designations will ultimately determine who gets what. If your will states that your IRA should be split evenly between your two adult children but your ex-spouse is still the primary beneficiary on the account, the assets will go to your ex. It’s an oversight that can throw a wrench in 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 they inherit your assets. But at the same time, you want to make sure your current spouse is also financially supported. Two common strategies estate planners often turn to are establishing:
- Qualified Terminable Interest Property Trusts (QTIPs): these can be set up so your surviving spouse receives an annual income generated by the trust, and then when they die, the trust assets are distributed to your children from the first marriage.
- Irrevocable Life Insurance Trusts (ILITs): where you fund the trust with assets that are then used to purchase a life insurance policy on you. Since the trust (rather than you) owns the policy, the death benefit is transferred to the policy beneficiaries outside of your estate. An ILIT can provide a simple 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.
Blended families are financially complex structures that require careful financial planning and communication to avoid any potential hurt feelings. While you both want to ensure that each other is well cared for, you don’t want to achieve that goal at the expense of potentially disinheriting your adult children. Your Truist Wealth advisor can help you navigate these challenges—balancing your short-term needs with long-term wishes, all while keeping you on track for a successful retirement. A little planning now can avoid a lot of headaches down the road.