Lehigh Valley Woman – Finance Section – August/September 2012

by Laurie A. Siebert, CPA, CFP®, AEP® Vice President, Valley National Financial Advisors

The big elephant in the room for blended families is that they need special care in financial planning but it’s rarely a comfortable subject area so it often gets overlooked. A blended family typically consists of a mother and father with children from a previous marriage of one or both of the spouses and sometimes children they have together. Maybe not as typical but still needing the same attention are families brought together not by marriage but by adoption or co-habitation.  What may have once been considered a non-traditional family is now considered more traditional; and issues such as income tax planning, risk management and estate planning have higher stakes and require prompt and careful consideration.

INCOME TAX PLANNING
In blended families, one or more parents may be single, head of household or married and filing a single, separate or joint tax return.  One or more parents may qualify to claim the child/children and planning will avoid tax notices. The tax benefits for taxpayers with a qualifying child may include the dependency exemption, the dependent child care credit, child tax credit, earned income credit, tuition credit and/or head of household filing status (not available for married filers unless considered unmarried.) These tax benefits can add up to thousands of dollars of tax savings. Parents and guardians need to set aside differences and consider the planning opportunities that will benefit the “blended” family as a whole. Understanding your rights and planning for them ahead of time are essential and may provide additional savings that contribute to the child’s financial needs.

RISK MANAGEMENT
When we talk about risk management, we usually mean insurance in a premature death but it should include consequences relating to the state of your union or relationship.  This is especially important for blended families that may not be married but with children.  A partner does not have the same legal rights as a spouse when inheriting assets.  They may not be eligible for pension benefits or an IRA spousal rollover, allowing the stretching of benefits and corresponding tax consequences. If there are children surviving a non-married couple relationship, securing resources for the raising of that child need to be addressed.   Life insurance provides financial means that may not be available from lifetime assets, especially in a premature death or from a non-spouse relationship.  Assessing the projected financial need is imperative.

In addition, the state of your union, literally, the jurisdiction of your marriage, divorce or marriage equivalent can have an impact on your rights so consult with an attorney versed in the state laws applicable to your situation. The risk of not understanding these nuances may impact your inheritance, your filing status, your parental rights, your alimony and your transfer of assets. So, while life insurance may help manage some of the financial risks, it will not resolve all of the risks.  Asset titling is another tool to be used in managing these risks and should be part of your estate planning.

ESTATE PLANNING
The complications in estate planning for blended families cannot be under emphasized.  They include balancing the responsibility to a surviving spouse or partner, dependent step children, children from a prior marriage, children from the current marriage and children from non-married relationships.  Estate planning includes income tax planning and risk management as previously described but also managing the estate or inheritance taxes and the passing of the assets in a way that makes sense for you and your family.  A powerful tool in planning for blended families is the use of trusts whereby you can control the use of the assets to various beneficiaries.  At various aspects of the survivors’ lifetimes and situations, a trust may direct income distributions, principal distributions, outright distributions or cessation of benefits to one or more beneficiaries.  Just setting up a trust does not mean it will be funded or that your desires will be carried out.

Know how the assets are titled and to whom the assets are passing and the death tax and income tax consequence of those decisions.  A retirement account payable to a trust benefiting your surviving spouse has very different consequences than a retirement account payable to your children from a first marriage. While thinking about it may be overwhelming, doing something about it is empowering.

In summary
The most important element of planning for the blended family is to understand the balance you want to strike. Caring for the various family members, past, present and future and the financial and emotional consequences of doing so requires an open dialogue. You need to sit down with your attorney and financial advisor and “follow the threads” of your plan.

Be proactive, not reactive.  If you need help following the threads, call me. I am happy to help.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of 1. avoiding penalties under the Internal Revenue Code or 2. promoting, marketing, or recommending to another party any transaction or matter addressed herein. Valley National Financial Advisors is the marketing name for Valley National Group, Inc. and its affiliates. Securities offered through Valley National Investments, Inc member FINRA, SIPC, 1605 Valley Center Pkwy, Suite 160, Bethlehem, Pa 18017 (800) 383-8297.