Unique Financial and Tax Planning Needs of Blended Families

In today's society, the definition of a blended family has come to mean "a family group that comprises two adults, married or unmarried, of the same or different gender, one of both of whom has children from a prior relationship, and possibility having children from the current union of adults." This definition includes the common "yours, mine, and ours" phenomena. Even this definition fails to encompass a family headed by a single adult with children from multiple relationships.

Multi-tiered blended families, those with a wide disparity of ages in either the adults or children, present special challenges. Blended families have unique financial, tax, and estate planning needs. Traditional family estate financial and tax planning techniques (the classic A/B trust with lifetime income to the surviving spouse, corpus to children at the death of the surviving spouse) are simply insufficient for those blended families with the resources to provide for multiple families.

Common goals of planning for blended families include:

  • budgeting current income, which may be effected by alimony or child support paid of received (or both),
  •  education of children,
  • provision of current income (desired or required by law) for former spouse,
  • provision at death for children from prior relationships, step-children, children from the current relationship,
  • future protection of current spouse, and
  • protection of one (or both) family's assets.

State law commonly gives certain rights to spouses (and in some cases ex-spouses) and children. A blended family in which the adults have no wills, or outdated ones, will likely be unpleasantly surprised by the operation of the law. Contracts, such as life insurance policies and retirement plans must be modified in the planning process to provide the desired income. A common family planning goal of income or transfer tax minimization become of secondary importance to meeting the needs of blended families.

Prenuptial and ante-nuptial agreements are advisable, particularly where there is a disparity in wealth, or potential future wealth through inheritance, or power between the parties. Dialogue, as opposed to simple talking, is mandatory. Separate property issues must be addressed. Long-term discretionary trust arrangements or testamentary trusts with carefully selected, independent trustees may provide parts of the solution to planning for blended families. Life insurance may be required to meet required or desired objectives. Carefully and thoughtfully drafted wills are a necessity.

In short, the unique nature of blended families requires unique family financial and tax planning approaches. Planning for blended families first requires detailed inquiry into and understanding of current and prior relationships, family history, and current goals and objectives. Reasonable and achievable well formed outcomes must be developed. Existing documents, contracts, and state law must be considered. Existing and expected future resources must be identified. Only then can creative planning and careful selection of resources be applied to obtain the desired outcomes. We have worked with blended families and their attorneys, accountants, financial planners, and insurance counselors to create workable plans to meet their needs and objectives. We are prepared to work with your blended family in the same manner.

©2008 Ronnie C. McClure, PhD, CPA