Blended families—where partners bring children, assets, and histories from prior relationships—face many challenges as they come together. One of the biggest challenges is money matters, but this is something that can be worked through. Here’s how to address the unique blended family financial planning challenges that come with different support obligations, asset ownership, mismatched benefits, spending habits, and other financial matters.
Open and Honest Communication
Combining finances doesn’t begin with money or assets, but rather with communication. Doing this well requires open and honest communication about all of the financial aspects that follow. If you’re at the point of combining finances, though, you should already have an established rapport of good communication.
Agree on a Joint Budget and Financial Goals
With good communication in place, you can first establish both a joint budget and joint financial goals.
Budgets are for daily income and expenses, guiding your spending so that you’re on the same page. You might maintain largely separate daily finances, combine some expenses but not others, or put everything in both names. There’s no single way to handle a joint budget, just as there’s not one way for any other aspect of blending a family. Make sure to include all alimony and child support, along with any other preexisting obligations.
Financial goals change when you come together, and many couples don’t immediately agree on all long-term goals. Be willing to compromise as you discuss your financial hopes. It may be helpful to involve a marriage counselor and/or a financial advisor who specializes in blended family financial planning.
Address Assets and Liabilities
How will you handle those preexisting assets and liabilities that each partner has? Three questions can help you think through this: What remains separate? What is joint now? What might be joint later?
This is one area where you should involve a tax professional and an attorney, especially if you’re in a community-property or equitable-distribution state. Living together in a community-property state can impact how assets are treated. A tax professional can help you minimize tax obligations when combining assets.
While the legalities can be complex, these issues are fairly easily addressed through a prenup/postnup agreement drafted by an attorney.
Begin Investing
At this point, you’re ready to begin investing for the long term. You’ve established goals, determined who owns what, and can build toward a solid financial future.
There are three overarching decisions that should be made initially:
- Time Frame: You should have an idea of your investment time frame based on your financial goals. Your time frame will impact the amount of risk you accept and the accounts you use. For example, some tax-advantaged accounts only provide benefits after age 59½. Keep in mind that you’ll likely have different time frames for different goals.
- Risk: Almost all investing involves at least some risk, but it doesn’t have to be a lot. How much risk you accept will depend largely on your investment time frames, but it is also affected by your personal risk tolerance. Many couples don’t have the exact same risk tolerance.
- Accounts: Tax-advantaged accounts, such as a 401(k), IRA, HSA, 529 plan, and more, may be worth considering first. They can provide different tax benefits, depending on the account and how it is used.
| A note on tax-efficient investing Tax-advantaged accounts are not the only place where thoughtful tax planning matters. Individual or joint taxable investment accounts can provide flexibility for goals that fall outside the rules of retirement or education accounts. The right account mix and ownership structure will depend on your benefits, financial goals, existing obligations, and how you and your spouse choose to organize your finances. Read more on choosing between Roth, traditional, and taxable accounts. |
How you address each of these three will largely guide which asset classes you invest in. You’ll probably have a mix of stocks, bonds, ETFs, and possibly other assets like real estate, precious metals, or derivatives.
A financial planner can help you with all three of these, guiding you through the decision-making and explaining each in detail. They can assist with financial planning now and in the future.
Estate Planning
What type of legacy do you want to leave? A beautiful aspect of financial planning is that it gives you an opportunity to impact children or others even after you’re gone.
Estate planning is one of the more complex aspects of financial planning, often requiring a financial advisor, a tax professional, and possibly an attorney. The minutiae become more complex as assets and family members increase.
The simplest aspect of estate planning is naming beneficiaries. Beneficiaries are those (usually people but possibly organizations) who will receive any benefits from your accounts if you pass. Life insurance, retirement accounts and HSAs all typically have designated beneficiaries. Each will need to be updated. This is something you can actually do yourself fairly easily.
Where professional expertise comes in is with the other tools that can be used when estate planning. Wills are always recommended. You could also use a revocable living trust, irrevocable trust, power of attorney, and other tools. Which best suits your situation is determined by goals, tax implications, and situation.
Work With Professionals
Blended family financial planning is not simple, but is very doable with some guidance from experienced professionals. Plan on working with a tax professional, attorney, and financial planner—and preferably ones who have extensive experience with blended families and couples.
To speak with someone who knows the financial and tax sides, contact us at Prommus Advisors. We’re here to help your new family financially succeed, and we have the expertise to guide you toward your goals.
Promus Advisors, an SEC-registered investment adviser, is an affiliate of Bellwether Investment Management, Inc. (“Bellwether”). Promus Advisors provides fee-based asset management and advisory services. Bellwether and Promus Advisors have entered into arrangements in which Bellwether may refer clients with financial advisory needs to Promus Advisors. Please note that SEC registration does not constitute an endorsement of the firm by the Securities and Exchange Commission, nor does it indicate that the adviser has attained a particular level of skill. Promus Advisors and its investment adviser representatives are in compliance with the current filing requirements imposed upon SEC-registered investment advisers by those states in which Promus Advisors maintains clients.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any corresponding performance level(s), or be suitable for any specific client’s portfolio. Promus Advisors does not guarantee that any benchmark or indices used by Bellwether will match a given portfolio. Furthermore, asset allocation and/or diversification does not necessarily improve an investor’s performance or eliminate the risk of investment loss.