One of the most difficult tasks for many newlywed couples is marrying their finances. Blending families rather than individuals is trickier but it can be done if there is open communication with clear and full disclosure of both families' finances.
The key to success in merging a blended family's finances is planning — financial planning, tax planning and estate planning. Spending time on these planning issues before the marriage allows both partners, and possibly their children, to enter this new union with their eyes wide open.
To begin, each family should prepare their own statement of financial net worth, as well as their monthly cash flow for the year. These will provide full disclosure to each spouse about the other's assets, liabilities and spending habits.
If one partner is a spender and the other one is a saver, that will come out during this analysis. Setting ground rules that both partners can live with should occur in advance of combining the families.
In most cases, combining two households into one will result in a significant expense reduction, even if the blended family is moving into a new house, since there will only be one rent or mortgage payment, not to mention savings on utilities and property taxes. This may be the biggest financial benefit from combining the two households.
The first question is, will the couple change their tax status by getting married or simply live together in the same household with their respective families?
Chances are that both partners are currently filing as head of household. Once they legally wed, they will need to change their filing status to married filing jointly or married filing separately. The one they choose can have a big impact on the family's tax bill.
One partner may have a low income and be entitled to earned income credits, child tax credits and education tax credits for their children attending college. These special tax credits can completely disappear if their combined married income is above a certain level, or if they elect to file as married filing separately.
Sometimes delaying marriage could be financially beneficial, although the Tax Cuts and Jobs Act of 2017 eliminated many of the marriage penalties that existed previously.
It's very important to do a projection of what the couple's tax situation will look like after they are married and how that compares to their individual tax situations prior to the marriage. Once again, it may be financially beneficial to move in together but not get married until the tax situation is more favorable.
After marriage, it will be necessary to update wills, health-care proxies and power of attorney to include the expanded family. This is an excellent time to look at how your assets are titled and make sure the correct beneficiaries are named on life insurance policies and retirement accounts.
If the partners came into the marriage with different degrees of wealth, how will finances be divided upon death? Will the surviving partner get everything, or will there be bequests for biological children of the deceased? Will the children of both spouses be treated equally?
Estate planning goes well beyond preparing for death in blended families. It's important to plan for how assets will be distributed throughout the couple's lifetime, as well as after death.
The No. 1 failure in any marriage, especially when it combines two families, is a lack of trust. Not addressing these critically important financial issues before deciding to combine two households can lead to a disaster. Comprehensive financial planning addressing the three areas mentioned above can go a long way toward building and preserving the trust that is so important in keeping families together.
John J. Vento is president of Comprehensive Wealth Management, an HD Vest affiliate.