Tips and hints for how blended families can manage their finances and avoid conflict
Most of us remember a time when divorce was a relative rarity ‒ and it was almost unheard of among those who’d been married for a long time. How times have changed. While divorce rates among the young have dropped slightly in recent years (partially due to more young people opting for common-law relationships instead of marriage), the incidence of “grey divorce” among couples over age 50 has actually been rising.
That, in turn, has seen a rise in middle-aged marriages and ‘blended families’. According to the latest statistics, about 37% of Canadians over the age of 55 are in second or subsequent unions (either married or common-law). And financially, that’s where things can get complicated.
While first marriages often start with a relatively clean financial slate ‒ both partners are usually just starting to accumulate assets and liabilities ‒ the finances of subsequent marriages can be quite a bit more complex. Coming together as partners later in life often means coming into a relationship with mortgages, pensions and retirement accounts, support responsibilities, and estate plans that can often be quite different from one another. Clearly, these complexities require some careful planning to get right ‒ and a lot of communication too.
What follows here is an overview of how blended-family spouses can navigate the most significant financial issues that they face, while avoiding the arguments, hassles and conflict that all too often accompany those issues.
What makes money challenging for blended families
Let’s face it: money and investing can be challenging topics in any relationship. But they can be especially challenging for blended families for the following reasons:
The financial “personality clash” – different financial personalities can be a source of friction in any relationship. This is even more true for partners who have ingrained habits and distinct approaches to spending, saving, investing and debt that have been developed over the years.
The asset inequality – older adults have likely spent a number of years accumulating assets such as their homes, retirement accounts, workplace pensions, a small business and the like. The inequality between those two asset pools can sometimes be a source of difficulty when it comes to spending and investing in a new relationship.
The obligation inequality – similarly, older adults often have very different levels of financial obligation such as mortgages, loans, credit card balances or other debt. The responsibilities of previous marriages can also have an impact on one partner’s finances, with ongoing spousal payments, child support, education costs and other expenses, creating legal and financial complications that partners need to account for.
The difference between “mine,” “yours” and “ours” – finding common ground regarding which assets will be separately held and which will be jointly owned is the foundation for most every financial decision in a new relationship. The same goes for expenditures; without a detailed conversation early in the relationship, the question about who picks up the tab for groceries, who pays the hydro bill, who pays for the mortgage (and in what proportion) can be the source of ongoing tension and resentment.
The estate-planning minefield – protecting a new spouse while providing for children from a previous relationship can be a delicate balancing act. Without proper planning and open communication among all parties, complications can lead to misunderstandings, strained relationships and intergenerational conflict.
A full discussion of the implications of the above challenges would take more space than we have here. But what we can do is highlight four of the most important, and suggest some practical solutions for ways in which new partners can both manage their finances and diffuse potential conflict before it begins.
Starting a dialogue and finding agreement
Honest, open communication about saving, spending, financial goals and investment priorities is a must in any relationship. But it’s doubly important in second or subsequent relationships ‒ the sheer number of financial issues to address means that there’s more possibility for assumptions, misunderstandings and conflict.
In an ideal world, such conversations should take place early in a relationship. Some ways to start the conversation and clear the air include:
What are we trying to do? – talking about retirement portfolios, chequing accounts and credit card balances is a tough way to start a financial conversation. Instead, try talking about your vision for the future: do you hope to travel extensively? Stay close to home, so that you can spend more time with family? Are you looking to provide a legacy for your heirs or a cause that you care about? Or do you want to find a ‘forever home’ ‒ in the sun, by the lake or in another part of the world ‒ and relax? Discussing such goals openly can make money matters a little less abstract, and future decisions a little clearer.
Values (not just value) – discussions about money often focus on the numbers ‒ and rightfully so. But understanding the ‘why’ behind the numbers is often just as important when it comes to building financial understanding and aligned goals. Make sure that you have a full discussion of the principles, reasons and beliefs that underlie your approach to investing, spending and any specific financial strategies which you employ to accomplish your goals. Doing so can make it much easier to find common ground and work toward compromise.
Create a financial road map together – once the conversation has taken place about goals and values, it makes sense to write them down. A simple document or one-page spreadsheet that outlines financial objectives, priorities, plans and intentions provides a useful action plan for future financial decisions, and a useful ‘touching base’ point to refer back to as financial and life circumstances change.
Focus on fairness – it’s pretty rare that both parties in a blended family come into the relationship with an equal amount of either assets or liabilities. Recognizing those differences honestly and building a plan that respects each partner’s ability to financially contribute to the relationship is almost always preferable to trying to mathematically split every asset or expense down the middle.
Prenuptial agreements – for cases in which the inequality of assets or liabilities is particularly acute (or when the potential for conflict among extended family members is extreme), it may make sense to craft a more formal agreement. Rather than signalling a lack of trust, a properly drafted prenuptial agreement can provide clarity and protection for property brought into a new relationship and help both partners enter the relationship with an “eyes wide open” understanding of expectations, responsibilities and support. Obviously, these are highly complex legal documents so, if you’re interested in exploring one, don’t try to write it yourself ‒ speak to an experienced lawyer and get it done right.
The new family home
One of the most basic decisions that any new couple faces is the decision about where to live. For blended families, there are a number of questions to resolve: will one partner move into the other’s home and, if so, which one? Should the home (or homes) be held as separate property? Or should one partner ‘buy in’ to the other’s existing residence? Or would the easiest (and fairest) decision be to jointly purchase an entirely new property?
It’s not an exaggeration to say that for many blended families, these are some of the most consequential questions which they will face ‒ not only from a financial perspective, but from an emotional perspective as well. Here are some specific issues to be aware of:
My place or yours? – there’s a difference between a house and a home, between a piece of real estate and a place where you’ve built a family and years of memories. It’s important for partners to balance practical financial needs with the emotional attachment which partners may feel toward their respective homes ‒ particularly if one home is strongly associated with a deceased or ex-spouse. It can be a tricky conversation, and one that often demands careful consideration and a good deal of empathy.
Unequal contributions – living together in a single home doesn’t always mean having equal ownership of that home. If one spouse enters the relationship with substantially more home equity than the other, it’s a good idea to document that fact, along with who will be contributing to mortgage payments, property taxes, utility bills, repairs and renovations going forward. Keeping a record can help avoid misunderstandings and protect both partners’ interests when it comes to estate planning. More on that later.
Downsizing decisions – downsizing is an important element of many retirement plans. But that’s often easier said than done in blended families. Emotional attachments to a long-time home, the need to top up retirement accounts and the considerations of adult children thinking about their inheritance make the decision to downsize fraught with potential challenges, and well worthy of a full conversation rather than a snap decision.
Who gets the house? – in many blended families, a home is the most significant financial asset in each partner’s estate. Which gives it the potential to be much-fought-over and disputed by children in the case of unclear ownership or a vague, poorly written estate plan. We’ll discuss some potential solutions for these challenges a little later.
Co-ownership agreements – a co-ownership agreement can be an effective way to formalize responsibilities and avoid arguments about who pays what when it comes to the new family home. Think about it as a formal partnership document that outlines a number of rights and issues surrounding living arrangements, including ownership and usage rights, as well as who pays for upkeep, repairs and taxes ‒ and in what proportion.
Partners in retirement
For blended families, retirement planning is more than a crunch-the-numbers exercise or a cursory portfolio review. When new partners enter retirement with different savings, different income streams and different ideas about when and how to hang up the work boots for good, things can get pretty complex pretty quickly.
The solution: approach the issue of retirement income planning in the spirit of partnership, with the intention of having an ongoing conversation about timing, preparedness and assets. Here are some specific topics to take a look at:
Retirement timelines – often, one half of a couple is ready to leave work completely, while the other may need to work for a few more years ‒ to build savings, to pay off a mortgage or other debt, or simply because they find work fulfilling. Determining the financial impact of that level of readiness (if one person is still working, should that person now shoulder more of the everyday living expenses?) is an important issue for partners to figure out.
Develop a joint retirement income plan – it’s fairly common for partners in a new relationship to enter their golden years with different sources of income: one may have a large RRSP; the other may have an income property; one may be entitled to higher CPP or OAS benefits than the other; and so on. For planning purposes, it may make sense to consider those as a “shared resource,” rather than separate income streams ‒ doing so can help both partners make informed decisions about investing, spending and tax consequences, while helping to develop a sense of financial partnership.
RRSP/RRIF withdrawal strategy – the RRSP/RRIF is a cornerstone of most retirement plans. But the exact timing of withdrawals requires careful consideration. When both partners have significant balances in their retirement accounts, the decision about when and how much to withdraw can have a big impact on annual tax bills and eligibility for government benefits. In some cases, withdrawals can also affect the proportion of a partner’s assets passed on to a spouse, versus how much is passed on to children from a previous relationship or other heirs. Definitely worth a talk.
Clarify retirement spending – will you share everyday living expenses during retirement, or keep things separate? What about big-ticket items ‒ what exactly are your priorities? Travel? A condo in the sunbelt? Support for children or grandchildren? All of the above? How do you expect those priorities to impact your ability to pay for other things? By discussing these topics early and revisiting them occasionally, you can build a shared vision for your golden years, while sidestepping some of the friction that can arise when goals aren’t entirely in sync.
Take a close look at pensions – for those fortunate enough to have a defined-benefit pension as part of their retirement income, it makes sense to take a close look at pension benefits. Designating survivorship benefits to a new spouse can sometimes reduce your monthly payment (because those benefits are based on the life expectancy of your survivor, which may be different from that of your previous beneficiary). In some cases, that trade-off is worth it. In other cases, it’s not necessary. Either way, it deserves some discussion.
The family estate
Estate planning is a complicated area of financial planning for almost anyone. But for blended families, it can often be nothing short of a minefield: a mix of complex financial-planning issues, important tax considerations and no small amount of family dynamics which, if left unresolved, can result in a legacy of legal hassles, family strife and financial catastrophe.
In a blended family, even the most straightforward decisions about who gets what can quickly bring up loaded emotional questions of responsibility, obligation and fairness. Without careful planning and clear communication, even well-intentioned estate plans can create confusion, conflict or unintended consequences for the people whom they were meant to protect. Here are some practical tips regarding how you can ensure that your estate and your family don’t fall victim to such problems:
Update the will – such an easy thing to deal with, but such a disaster if you don’t. Many partners enter into a second or subsequent partnership with an outdated will ‒ often, one which names a former spouse or children of a former relationship as the sole beneficiaries of an estate. If that will is never updated, a new spouse may find him or herself legally entitled to … well, nothing.
Check your beneficiary designations – the same goes for beneficiary designations of specific assets such as an RRSP or RRIF, a TFSA, life insurance or pension plans. In most provinces, if you’ve named beneficiaries for such assets, the bequests are legally outside of your estate (the rules are a little different in Québec), which means that designations made to previous spouses are still valid, even if you’ve updated your will. If that’s what you want, great. If it’s not, make sure to change it.
Providing for stepchildren – for the purposes of inheritance, most provinces make a distinction between biological children and stepchildren; generally, the former are entitled to a portion of the parental estate, while the latter aren’t. Perhaps that’s not a big deal if you never formally adopted your new partner’s kids, or if they’re adults themselves, or if you and your partner made an agreement that you’d provide for your respective children out of separately held assets. But it’s something to be aware of; unless you legally adopt them or make specific provisions in your will to provide for them, any stepchildren will have no automatic inheritance rights.
No surprises – the shocking “reveal” of surprising bequests, disinheritances or long-lost beneficiaries is a common trope in movies and Victorian novels. But it has no place in real life. In almost all circumstances, having a candid, explicit conversation about inheritance ‒ well before your passing ‒ about your wishes, your new partner’s needs and your heirs’ expectations is almost always a better way to avoid conflict and legal challenges.
What about the “sentimental” stuff? – sometimes, the most valuable assets in an estate have relatively little monetary value, but deep emotional meaning: heirlooms; photos and paintings; jewellery; antiques; mementos and the like. Sometimes new partners fail to completely understand the connections which children may have to such assets, making the likelihood for disinheritance and subsequent family strife even greater. Make sure to have a conversation with your partner and your children about such assets and make sure that everyone understands your intentions.
Dealing with the family home – as we mentioned above, in many blended family estates, the family home is the most significant asset and the source of the most significant squabbles. Having a clear idea of how the asset will pass to your heirs (your new partner, your children or others) is an important focus of any well-constructed estate plan. Depending on your circumstances, it may make sense to do the following:
Spousal trust – a formal legal arrangement in which the surviving partner retains the right to use the home during their lifetime, but ownership is placed into trust with the goal of eventually passing to one or more beneficiaries. Because the trust is a separate legal entity, it remains outside the estate of the surviving partner (and, therefore, shielded from creditors), while any upkeep, maintenance costs or taxes are payable by the trust itself.
Life interest – similar to a spousal trust. The surviving partner can live in the home for as long as he or she likes, at which point the asset passes to heirs. With these arrangements, it’s common for the partner living in the home to take care of repairs, taxes and similar costs.
Co-ownership – a different form of joint ownership, in which one partner’s share is distributed to his or her heirs upon death, while the other partner retains his or her original ownership interest. This is a viable option for blended families in which all parties get along.
Sell and divide the assets – perhaps the cleanest way to deal with the family home: upon the death of one partner, the home is sold and the proceeds divided among the surviving spouse and heirs.
Depending on your individual circumstances, any of these approaches can work. Keep in mind, however, that some of them require specific legal documentation. Make sure to consult with an experienced lawyer if you’re interested in pursuing them.
A final word for blended families
And that brings up an important point. The above issues and challenges are very personal, and solutions that may be exactly right for one couple may be exactly wrong for another. But whatever solutions you’re considering, there’s a good argument to be made that they’re better addressed with professional help.
By working closely with a qualified financial professional ‒ preferably one experienced in dealing with blended families ‒ you, your partner and your children and grandchildren can start meaningful dialogue, address significant financial and family challenges and build a long-term strategy that protects everyone in your family.