Blended family finances: Tips for financial harmony

Creating a new family that includes children from previous relationships is a joyful act, to be sure, but it also can be a difficult one to navigate, especially when it comes to finances.

There is a lot to figure out when children are involved, and it can get tricky. How will you handle expenditures concerning stepchildren? Will you combine your finances or keep them separate? Do you need to update or establish legal documents?

One of the best ways to avoid financial conflict and stress about money is for you and your partner to talk openly and honestly about a variety of financial subjects.

Perhaps your ex-spouse handled all things finance while you took a back seat. Or, maybe it was the other way around. Don't assume the handling of your household finances will operate the same way they did in your previous relationship. Make sure your expectations match your partner's expectations.

Here are three common issues that can pop up when merging household finances:

Burying your financial past is one thing. Keeping your current spending habits from your spouse can be equally damaging, especially if they don't match up well with your partner's own financial philosophy. Be sure you're both clear on how you like to spend and save to avoid confusion and conflict.

There are quite a few marriages where at least one spouse hides personal debts, delinquencies, or even income and assets. About 30% of U.S. couples have experienced some form of financial infidelity; hiding debts or accounts is the top culprit. Covering up financial obligations or income can lead to mistrust in the relationship.

One of the most challenging (and uncomfortable) aspects of blended family finances is updating estate planning documentation—wills, powers of attorney, advanced care directives and trusts. If you avoid updating these important documents, you run the risk of excluding your new spouse or stepchildren from asset inheritance if the worst were to happen.

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So, how do you make sure you're on the right track? The four basic steps to successfully blending family finances are to have transparent conversations, create a new financial system, build a blended family budget, and plan for the long-term.

Everyone has unique perspectives around money, and they often come from experiences growing up. Those differing views can make it harder for partners to get on the same page.

Kim Dwyer, a Thrivent financial advisor in Plymouth, Michigan, and a mother and stepmother in a blended family, suggests couples start by prioritizing what’s important to them for their household. “For example, some people prefer to spend their money having experiences with their kids,” she says, “while others prefer to provide things for their kids.”

Besides how and what to provide for your children, other priorities to discuss include your views and priorities about debt, home ownership, paying for public or private schools and college, and giving of your time and money.

Keep in mind that it's never too early to bring financial experts into the conversation. Working with a tax professional will help you understand how your new family might impact your annual tax filing status. For example, what might happen to your return when you have more dependents? In addition to working with a tax professional, a financial advisor can help you and your partner navigate these important conversations that ultimately bring your finances together.

Creating a budget helps every household be intentional about how to pay for expenses now and in the future, build savings, and plan for giving. In a blended family, a budget also takes into consideration how the parent and stepparent will support their children and stepchildren, such as who will pay for items like child support, education, clothing and activities, as well as any support that may need to be provided to ex-spouses.

For some families, keeping their finances somewhat separate works best for them. They might have a shared account for paying rent or the mortgage but separate accounts for individual obligations or savings. Or they might choose to have each parent pay for their own kids’ needs.

Setting a household budget also includes discussing debt. The conversation should start out with open and honest discussions about how much debt each of you may have. What makes it trickier for a blended family is that the debt could be tied to past relationships. Therefore, it’s especially important for each person to be honest about what debt they’re bringing into the relationship.

“Know what your partner’s debt is and make a plan for dealing with it,” says Dwyer. “As a couple, you have to decide: Will you pay it off together or keep separate bank accounts until it’s paid off by the person responsible for the debt? Figure out what works for you.” She recommends looking at different strategies and assessing the pros and cons of each.

Your discussion about debt also should cover how you’ll handle any new debt you take on.

Next, discuss an accountability plan as a couple. A few questions to consider:

• Who will take the lead in making sure the household stays on target?
• How often will you come together to look at and discuss your finances?
• What is the game plan if one (or both) of you veer off track?

You'll be happy you took the time to build a plan and checkpoints that will hold you both accountable down the line.

While having a unified philosophy around money helps your household run more smoothly, it also sets a good example for your kids. But what if the other parent’s household has a different outlook? That can create a challenge for your kids.

Todd Yeiter, director of advisor support at Thrivent, grew up in a blended family and spent time at both parents’ homes. “My mom and stepfather had drastically different opinions about money than my dad and stepmom. It was really difficult as a child. One set of parents was ‘live for the moment, keep up with the Joneses.’ The other set was ‘live well within your means, build a cushion, and be as self-reliant as possible.’”

You might not align with your former spouse’s approach to money, but everyone in your household will do better if you and your partner are aligned. And the differences between the homes can present teachable moments to help your kids understand and accept them.

As a child, Yeiter sometimes felt resentful of the financial restrictions of his mother’s and stepfather’s household. But as he got older, he was very appreciative to have learned their approach to money.

“I remember my stepfather talking about why he chose a different path about money than my father,” says Yeiter. “But he explained that one approach wasn’t necessarily better than the other. It just was his philosophy, and it was important to him to have cash reserves and savings.”

How do you divide assets in a blended family? There are ways to avoid blended family inheritance issues and make sure your spouse, children and stepchildren are well taken care of.

It probably won’t be top of mind at the moment you join together your families, but don’t skip this. Look at your current retirement savings and assets and talk about what goals you want to set—for your own retirement and for any legacy you want to create for your kids and the causes you care about. And discuss how you’ll work toward those goals.

If you have assets you hope to pass on to your children, make sure your wishes are communicated clearly in legal documents and to your kids when they’re old enough.

“This is critical,” says Yeiter. “For example, if a father dies, what’s the expected inheritance for his kids or stepkids? Make sure your wishes are well communicated and the tools are in place to make it fair. And remember that fair doesn’t always mean equal. Try to think through any potential conflict among your heirs before it occurs.”

• Final will. Blended family will considerations include how you want your assets divvied out amongst your spouse, children and stepchildren once you pass away. If you have young children, a will also appoints a guardian. A probate court usually executes a will and the process for receiving assets can be lengthy.

• Power of attorney. This document identifies who will handle your finances if you become incapacitated. You can assign this role to your spouse, children or anyone else you trust deeply to execute your finances on your behalf.

• Trust. A trust documents how you want your assets allocated, similar to a will. A trust differs from the will in that you assign a trustee to execute your trust when you pass away. This process usually avoids court, and your loved ones can have what they need in a more timely fashion. “It can ensure distribution of wealth is done in a way that reflects your values and wishes,” says Yeiter.

  “A trust spells out exactly the wishes of the person who passes away,” he says. “For example, some people worry that if you leave a whole lot of money to kids, they won’t know how to handle it. A trust can describe how assets should be distributed to them over time.”

This is a change in your life circumstances, which means life insurance may need to be updated or established.

The age of the kids can affect how you handle designating beneficiaries. “Our kids were really young when we blended,” says Dwyer. “So we split our life insurance policies equally between our four kids. But it can be different when you have teens coming into a blended family. The new parent and teenagers may have a different relationship than if the kids were young. For some people, it might make sense to just have your own children as beneficiaries. ”A life insurance policy offers an immediate payout to your beneficiaries upon your passing.

There are situations where the children are beneficiaries in your life insurance policy, while the spouse receives the assets outlined in the will or trust.

Estate planning strategies for blended families

How you'll leave behind your money and assets can be an especially tricky web to untangle for blended families. That's what makes a thoughtful estate strategy such a proactive—and necessary—tool.

Dive deeper

With all the joys of a fresh start, blended family finances don't have to be a headache. Being willing to have vulnerable conversations and lay everything on the table is a great start. Then, it's a matter of creating a financial plan that works for your new family structure.

Financial advisors can help establish this plan effectively and efficiently. Not only are they knowledgeable, but they can present an objective point of view and guide conversations that might otherwise be tense and awkward. While Thrivent financial advisors do not provide specific legal or tax advice, they can partner with you and your tax professional or attorney to ensure your new blended family is as financially supported and protected as possible.