Roughly 1,300 new stepfamilies are formed every day, according to the Stepfamily Foundation
. And based on Pew Research Center
findings, 41 percent of all Americans have at least one step relative. These blended families have an opportunity to launch new relationships and traditions, but they often face pitfalls where finances are concerned. The Pennsylvania Institute of Certified Public Accountants provides these tips for how to address some of the issues stepfamilies may face.
What Kinds of Accounts?
One challenge for stepfamilies is deciding how to split or combine finances. Many remarrying couples start out with separate accounts from which they pay for their own expenses, including those for any children from a previous marriage. They may also maintain a joint account for their ongoing expenses as a couple, to which they contribute either an equal amount every month or a percentage of each spouse’s income. Any combination of accounts can work, but given the opportunities for confusion and misunderstanding, spouses should be sure to clarify the ground rules
up front. This includes determining what amount each person will deposit in each account every month, and which expenses the different accounts will cover. Couples should also consider revisiting this arrangement regularly. Financial or other circumstances change, so revisiting will help ensure that their approach best serves their needs. This kind of ongoing communication will help prevent misunderstandings. It’s also particularly important to maintain clear and updated records, and to use a budget that encompasses all the accounts so the couple can easily see where they stand financially.
Which Documents Need Updating?
When you remarry, review your estate plan and update the beneficiaries named in life insurance and various other financial accounts. You should also consider creating or updating a durable power of attorney, living will, or a health care proxy, which designates someone to make decisions in case you are incapacitated. Inheritance can also pose thorny problems for stepfamilies, leaving children and spouses anxious about their financial futures. It’s best for a newly remarried couple to make a new will or revise existing wills as necessary soon after the wedding so they can address important estate planning issues.
What Should a Will Cover?
Wills should set forth, as specifically as possible, what each beneficiary will inherit. This will help minimize potential squabbles among siblings and between the surviving spouse and children from an earlier marriage. If you want to leave some assets to your stepchildren, it’s important to remember to include them in your will. Since they generally are not considered to be among your legal heirs, and they likely wouldn’t inherit if you pass away without a will. If you have a will but it says you want your estate to be divided among your “children,” a court may decide that doesn’t include stepchildren. Estate planning can also be complicated when one spouse wants to provide for a surviving spouse but also give their children access to their inheritance as soon as possible. Your CPA can advise you on the best ways to use options such as life insurance or trusts to ensure that the needs of all your beneficiaries are met.
Income Tax Issues for Dependents in Blended Families
For blended families, it is important to consider who gets the dependency exemption for the children. This issue should be addressed in the divorce decree. If it is not, care must be given when determining which parent is eligible to claim the personal exemption for a child. It is usually based on who has custody and who provides more than half of the child’s support, as well as a number of other factors. The custodial parent may wish to release the exemption to the noncustodial parent by completing a Form 8332. In the event that both parents attempt to claim the exemption for the same child, the return for second-to-file parent will be rejected when it is electronically submitted. It will then be necessary to file a paper return, which will in turn generate notice letters from the IRS to both parents.
Consult Your CPA
If you want to ensure greater family harmony and need help navigating the financial considerations for blended families, be sure to contact your CPA. He or she can offer the advice you need to resolve all financial issues. To find a CPA by location and area of expertise, ask family and friends for recommendations or use the CPA Locator