Financial Planning for Remarriages

Not only do they merge their financial lives, as all married couples do, but remarried couples also bring with them financial “issues” from their previous marriage(s) such as unpaid debts and payments to, or income from, an ex-spouse for alimony and/or child support obligations. Estate planning is also complicated by remarriage (e.g., providing for both a new spouse and children from a prior marriage). Below are six financial planning tips for people who are remarrying:           

¨      Consider a Prenuptial Agreement (a.k.a., prenup)- Interview at least three family law attorneys to prepare a plan. Define assets that each partner brings to the marriage, how they will be titled, how expenses and existing debts will be repaid, and how property will be distributed in the event of death or divorce.

 

¨      Develop a Spending Plan (a.k.a., budget)- Include anticipated income and expenses and decide who will pay what bills. It is generally fairer to all involved to pay current expenses (not those related to a prior marriage) in proportion to each partner’s contribution to total household income.

 

¨      Separate the Past From the Present- Accept the fact that support payments to an ex-spouse are an ongoing “fixed expense.” Remarried couples may prefer paying support obligations and other expenses for children with their personal funds so they are not constantly “visible” to their new spouse.

 

¨      Treat Children Fairly- Develop uniform policies for all children living at home regarding allowances, spending money, payment for services, and equipment purchases (e.g., cell phone). Otherwise, children and stepchildren, alike, are likely to cry “unfair” about differences in the parents’ money management practices.

 

¨      Consider a QTIP trust- Create this legal document to leave income to a spouse for life but distribute assets to children from a prior marriage.

 

Communication about financial matters is important in all marriages but especially in remarriages which come with more complications and where spouses may have developed long-standing money management practices. The University of Florida publication So You Want to Remarry? has additional information about financial issues related to remarriage.

Financial Planning for a Divorce

Death, disability, and divorce are three common life events that impact personal finances. Divorce is the only one that cannot be provided for in advance with some type of insurance. What to do? Consider these seven action steps:

¨      Learn the Local Laws- Determine if the divorce will be filed in a community property state or the majority of states with an equitable distribution approach where property acquired during a marriage in either or both spouse’s name (except gifts and inheritances) is considered a marital asset subject to division in a property settlement agreement.

 

¨      Prepare a Net Worth Statement- Tally up assets minus debts (net worth) because an attorney and the courts will request a complete accounting of a couple’s separate and joint property.

 

¨      Do Some Math- Consider carefully whether either spouse can afford to keep the family home following divorce, especially if it took two paychecks to qualify for the mortgage.

 

¨      Protect a Good Credit History- Close joint credit accounts with an ex-spouse. Also request duplicate statements from creditors if you have doubts that an ex-spouse will make payments on jointly-held debts as per a divorce decree.

 

¨      Prepare to Live on Less-Develop a realistic post-divorce budget that may involve “downsizing” from your previous lifestyle as part of a married couple. Do not attempt to try to live beyond your means using payday loans or credit.

 

¨      Review Insurance Coverage- Make sure that the spouse(s) paying alimony and/or child support have adequate life and disability insurance so that payments will continue no matter what.

 

¨      Consider Retirement Plan Distributions- Make arrangements to share spousal benefits earned by a worker during a marriage with a Qualified Domestic Relations Order (QDRO). This is a court-ordered document that tells the retirement plan administrator how to divide benefits between divorcing spouses.

Financial Planning Tips for New Parents

According to the U.S. Department of Agriculture, child rearing is a costly endeavor. From birth through age 17, for middle-income households, the cost to raise a child in 2015 was $235,670. Add in post-secondary education and child rearing expenses, from cradle through college, can easily exceed $300,000.

Conventional cash flow wisdom is to increase income and reduce expenses to make ends meet. Having children often results in the exact opposite scenario. Expenses increase at exactly the same time that income either stays the same or is reduced. What to do? Below are recommendations to consider:

¨      Plan Proactively- Prepare a list of anticipated expenses and calculate the total cost. Add a “miscellaneous” category for unanticipated items. Try to pro-rate prenatal expenses (e.g., $4,000 divided by 9 months = $445 per month) and “pay as you go” rather than purchasing everything at once on credit.

 

¨      Shop Inexpensively- Consider making purchases at consignment and thrift shops and garage sales for clothing and nursery equipment in good condition. Another money-saving option is hand-me-downs from friends and family.

 

¨      Investigate Employee Benefits Related to Parenting- Explore your options for parental leave, Family and Medical Leave, maternity coverage, disability coverage, and pediatric care. Contact your employer’s human resources department for information and assistance.

 

¨      Plan Your Estate- Draft a will, or revise a previous one, to name a guardian and back-up guardian for a newborn child. Guardians do not necessarily have to be family members. Parents can choose anyone they feel would be best suited to raising their child. Be sure to discuss your selection with the designated guardian first.

Conference Take-Aways from ASEC and the CFPB

This week, I attended the Fall American Savings Education Council (ASEC) meeting and, via phone, part of a Consumer Financial Protection Bureau (CFPB) meeting for financial practitioners. Below are some take-aways:

¨      Four key factors can affect worker (and dependent) health status: worker share of health insurance premium, cost-sharing (e.g., deductibles, coinsurance, and copayments), choice of health plan, and workplace wellness programs.

 

¨      Nearly half of the U.S. working population with employer health insurance is in a high-deductible health plan.

 

¨      A study of a large employer that replaced PPOs with a HSA (health savings account)-eligible, high-deductible health plan (HDHP) found decreases in outpatient office visits, prescription drug fills, and medication adherence and more emergency room visits. Even preventive services not subject to a deductible were used less after the HDHP started.

 

¨      Some employers encourage workplace wellness by offering financial incentives such as prizes, gift cards, and premium contributions.  Prizes are often used in conjunction with health risk assessments or biometric screenings.

 

¨      Only 1 in 10 Americans is saving enough money to cover short-term needs and retire comfortably. Health care expenses take a big chunk out of people’s income. Some employers are starting to coordinate HSAs and 401(k)s.

 

¨      Caregiving is a threat to retirement security. For example, caregivers may have reduced work hours and missed work days or have to quit their job. The majority of caregivers work full- or part-time (52%) or are self-employed (8%).

 

¨      To increase savings, break goals into small steps and identify a “why” that is driving savings decisions.

 

¨      Using savings that is set aside for emergencies is not a failure. It is what the money was set aside for! Be sure to replenish emergency savings as needed.

Financial Issues for Cohabitating Couples

Many people, at all ages, choose to live together without getting married. Unmarried partners do not qualify for joint income tax filing or the estate tax spousal exemption. Rather, they are treated as single individuals. In other areas of personal finance, however, they operate like married couples. For example, there are economies of scale (e.g., one cable bill instead of two) and the need to jointly pay household expenses. The longer a couple lives together, the more likely they will need to jointly make important financial and legal decisions. Below are five financial recommendations:

• Develop a Method for Bill-Paying- Consider holding separate credit cards and bank accounts and divide household expenses evenly or proportionate to each partner’s income. Keeping assets separate avoids the problem of becoming liable for a partner’s debts.
   
• Know the Law- Check with an attorney about the impact of cohabitation on alimony and child support from a previous marriage. State laws vary. Social Security benefits are not affected, however, which is why some retirees choose to live together but not marry so they won’t suffer a reduction in benefits based on an earlier marriage.
  
  

• Consider Purchasing Joint Property Coverage- Find out if this is an option. Insurance companies may allow this if both partners have an ownership interest in property being insured. Many insurance companies also allow someone with renters insurance to add a partner for less than it costs for two separate policies. Consider increasing the coverage, however, to reflect the increased value of both partners’ possessions.
   

• Understand the Fine Print- Be aware that, if both partners sign loan documents, an apartment lease, or a contract with a utility company, both are legally responsible for payments, even if one partner moves out.
   
• Consider Beneficiary Designations- Consider naming an unmarried partner as a beneficiary on retirement plans (e.g., IRAs) and/or a life insurance policy in the case of long-term relationships. Ditto for a will. Unlike surviving spouses in a married couple, unmarried partners will not inherit anything automatically through state intestacy laws if a partner dies without a will. Instead, surviving blood relatives will receive the deceased partner’s property.