Yours, mine, and OURS.

BLENDED FINANCIAL PLANNING FOR COUPLES WITH STEPCHILDREN

DIVORCED COUPLES WHO MARRY AGAIN HOPE

they are renewing their home life for the better. However, a new marriage means taking on new responsibilities while maintaining existing ones, and those responsibilities are magnified when one or both spouses bring children into the new union.

The issue is particularly challenging when the two-some attempt to blend his and her finances into our finances. Michael M. Smith sees the concerns of blended families from two perspectives, inside and outside. As an insider, he married his wife, Greta, who already had a son from a previous marriage. Since then, they have had three children of their own. "I adopted her biological son, so he's my son, too," Smith says. "That makes it easier. Nevertheless, problems are bound to arise, so it's vital for spouses to be honest with each other in this type of situation."

As an outside observer, Smith is a certified financial planner and investment advisor in suburban Phoenix (his wife helps in the office), with many blended families among his clients. "On occasion," he says, "I'll meet with a couple who agree that all the children must be treated equally. After the meeting, though, one of the spouses will have a private conversation with me in which he or she says, 'I really want to do more for my kids.'"

CHILD SUPPORT

Leftover financial rights and obligations may complicate matters when it comes to getting a blended marriage off on the right foot. "In some blended families one spouse, often the husband, will have to make child support payments to a former spouse," says Cheryl Creuzot, president and COO of the AFP Group. "There may be income, too, if one spouse is receiving child support payments. The family's budget must be planned with these factors in mind."

Child support obligations definitely were on the minds of David and Gloria Williams when they were married in 1969. David had a daughter from a previous marriage and Gloria had three daughters from her previous marriage. David's daughter remained with his ex-wife and his child support obligations continued through the child's four years of college. "That was an expense that we had to deal with for years, under a court order," he says, "so there was just that much less for everything else."

Careful planning and an emphasis on education helped this blended family succeed, according to David. Both he and Gloria earned doctorates in education. He is now a manager of educational research and development while Gloria works as the director of school support services for the local school district in Austin, Texas, where they're now living. They also had a daughter together. "All five are now professional women, doing very well," says Gloria.

Indeed, one of those five is Creuzot, who sometimes advises blended families as part of her financial planning practice. "I generally tell people to talk over all of these issues before marrying," says Creuzot. "They should have an idea of how they'll handle budgeting and education funding."

Another financial advisor recommends premarital counseling, which includes scenario sessions with Current, real-life financial situations--either from personal experience or observation.

Financial issues facing blended families may be cultural as well as quantitative. Often, remarried couples coming from different lifestyles have issues that are difficult to reconcile. One spouse might believe that parents should spend everything necessary to make sure children get the best education while the other spouse believes that students should earn the money to pay for college. Agree on these issues before you tie the knot, or come up with a workable solution afterward.

PRENUPTIAL AGREEMENTS 

Assuming that couples won't want to send one spouse's kids to Stanford while the other spouse's children work their way through community college, such issues must be resolved by communication and compromise. Once agreement is reached on financial issues, should that agreement be formalized in a prenuptial agreement?

Experts say that prenups, as they're known, can cause dissension. At times these agreements are waved in the face of the other spouse during heated arguments. The terms of the agreement may become points of contention. Smith, too, is skeptical of prenups but says that it is his standard practice to recommend them to clients who are remarrying so that assets will be protected.

"If you have children from a previous marriage, you should take steps to protect them, especially if those children are young," says Mal Makin, a financial planner in Westerly, Rhode Island. "It's not realistic to expect a new spouse to have the same loyalties to those children as your former spouse, the children's mother or father."

According to Makin, when some people remarry, they put all of their assets in joint name with their new spouse or they make wills leaving everything to that spouse. "There may be a verbal agreement that the new spouse will take care of the children if anything should happen," he says, "but that puts the children from the first marriage at risk"

A reluctance to enter into a prenup is understandable. "People want to be in a strong relationship with a trusted party," says Makin, "and to demonstrate this trust they share all of their assets with the new spouse. But that's not fair to the children of the first marriage, especially if there eventually are children from the remarriage."

A valid prenup can protect the property of all the parties involved. "In order for a prenuptial agreement to be recognized by a court, both sides should have independent counsel and the agreement should not be one-sided," says Creuzot. "Such an agreement should list both parties' assets as of the date of the marriage."

Of course, asking a spouse-to-be to provide a list of assets for a prenup isn't going to win you any points at home. One tactic is to tell your prospective spouse that you're revising your entire estate plan, which you should be doing in any event. That estate plan might include a prenup along with a new will and trust, for example.

Another approach is to tell your spouse that you have an advisor, such as an accountant or attorney or financial planner, who insists that you have a prenup agreement in place before taking new vows. "Blame anyone you want," says Makin, "but just make sure you get it done."

PROPERTY OWNERSHIP

Whether or not you have a prenup, the ownership of the assets each spouse brings into a remarriage should be considered. "You need to decide if these 'sole and separate assets' will be kept separate or co-mingled," says Creuzot. "If they're kept separate, the original owners may be able to claim their individual assets in the case of a subsequent divorce, or direct how they'll be transferred, as part of an estate plan."

Although Smith did not enter into a prenup when he and Greta married, they kept their assets separate for six of the 11 years they've been married. "After a while," he says, "my apprehensions subsided and we decided to co-mingle our assets."

Remarried couples need to be careful how property is titled, Makin cautions. "Holding assets in joint name with your spouse may make your home life easier, but it will cost you flexibility," he says. "All property held JTROS (joint tenants with rights of survivorship) automatically will go to your spouse if you're the first to die."

If you transfer your brokerage account into joint name, for example, all of those securities will pass to your spouse and not to your children.

"The drawback to JTROS," says Creuzot, "is that the surviving owner inherits the property no matter what you put into your will. If you have some other intention, joint ownership may not be the best choice. The bottom line is that you need to coordinate your entire plan--your will, your property ownership, your life insurance, your trusts--to get the results you want."

HOME OWNERSHIP

Among the most important assets to be considered, of course, is the place where you'll live. Will you move into a home that one or the other of you already owns or into a different one? "Often," says Smith, "moving into a home already owned by one spouse or the other doesn't work. The husband might feel that he's moving into his wife's home, for example, where he's just a visitor. I usually recommend that couples sell the house or houses they own and buy one that's really their house, to suit the needs of the new family."

If one or even two homes will be sold by a remarrying couple, it may be better to wait until after the marriage to make the sale. That's because a married home owner who has lived in his or her house for two or more years with a joint tenant agreement can claim a $500,000 capital gain exclusion ($250,000 per person) on the sale of a principal residence while a single home owner can exclude only $250,000 worth of gain. Thus, couples with a highly appreciated home can receive a sizable wedding gift from the IRS.

RETIREMENT PLANS

What else needs to be done by blended families? "You should update your beneficiary designations," says Smith. "If you have life insurance and retirement plans, make sure the proceeds will go to the proper parties after a death. You probably won't want your ex-spouse to remain the beneficiary of your IRA, for example."

When making decisions about retirement plans, keep in mind that spouses are entitled to be the beneficiaries of employer-sponsored plans, unless the spouse consents to waive his or her rights to that benefit, and typically the waiver has to be notarized. If you intend to designate someone besides your spouse, such as a child from a previous marriage, as a retirement plan beneficiary, be aware that a spouse's rights may only be waived by a spouse. Thus, such a waiver can't be included in a prenuptial agreement. However, a prenuptial agreement might include a promise that such rights will be waived after the marriage, and penalties can be established, in the prenup agreement, in case of failure to fulfill such a promise.

ESTATE PLANNING 

A prenuptial agreement should be coordinated with your will, any trust documents, and other elements of your estate plan. You don't want your will to leave certain assets to your children while those same assets are given to your new spouse as part of a prenuptial agreement. "Whether or not you have a prenuptial agreement," says Creuzot, "anyone who brings assets into a remarriage, and has concerns about the disposition of those assets, should have a will. What's more, your will should be prepared by an attorney who specializes in estate planning."

The Williamses, who tried to treat each of their daughters equally while they were growing up, have carried the same philosophy into their estate planning. "We have individual wills," says David, "and we both try to provide for each daughter according to her wishes and needs." As Gloria notes, "Both of our wills contain bequests for all five daughters."

However, estate planning can be a particularly thorny issue, according to Smith. "One spouse may be worried about dying and leaving assets to the other spouse," he says. "That spouse may then leave all of those assets to his or her own children, shutting out the children of the first spouse, the one who provided the assets in the first place."

In such circumstances, Smith says, he'll often recommend a "spendthrift" trust. "The spouse who sets up the trust names the trustee, generally someone from his or her own side of the family. The trustee is instructed to provide the surviving spouse with the amounts necessary for health, education, maintenance, and support. At some point, perhaps when the decedent's own children turn 25 or older, the trustee can distribute trust assets to them."

But not all estate plans work out so easily. "Among my clients is a physician who has a large income and substantial assets, with a son and a daughter who are college educated," says Smith. "Her husband of more than 10 years isn't working now, and his five kids haven't accomplished much in life. When we sat down to come up with an estate plan, he said all of the assets should be divided equally among all the children on both sides, but she just sat there quietly."

No agreement was reached, so Smith came up with a plan. "I suggested they buy a `second-to-die' life insurance policy," he says, "one that would pay off after both of their deaths, and have the owner create an irrevocable life insurance trust to avoid estate taxes. His children would be the beneficiaries and collect the proceeds tax-free, while her children would get her assets, which are mainly in an IRA and in real estate."

So far, says Smith, the plan has not been completely approved, chiefly because of the husband's reluctance. "He can see the money in the retirement plan statements, but the idea of collecting insurance proceeds seems insubstantial to him." In the meantime, as the couple ages they are becoming more expensive to insure and more likely to die without any plan at all, an outcome that may lead to years of family strife and expensive legal fees. At the end of the game, as well as in the beginning, careful compromises may be needed to keep a blended family together.

To Do List

get premarital counseling to deal with personal and financial issues.

* Determine how the two of you will fund education for all of the children well in advance.

* Discuss budgeting issues before marriage.

* Get a prenuptial or postnuptial agreement stipulating how the children from your first relationship will be cared for financially.

* Determine a strategy of how property will be divided upon divorce or you and your spouse's deaths-include provisions for children.

* Move into a home that the two of you "jointly" own.

* Update your beneficiary designations to include your children.

* Each of you should develop your own will.