Becoming a stepparent is a major emotional commitment — and it’s also a financial one. Just as you’ll be looking out for the physical and mental well-being of your new additions, you’ll have to watch out for their financial security too. How you handle this act of mutuality will affect your relationship with your stepchild, your new spouse, and your biological children (if any).
Some financial steps you need to take when you become a stepparent, like getting life insurance, are similar to steps you need to take when becoming a biological parent. Others are different because laws are structured to put spouses and biological family first. Stepparents must go out of their way to make sure the people they care about, who fall outside those categories, will be taken care of in their absence.
New stepparents need to do four main things:
- Decide how you and your new spouse will manage household finances.
- Update beneficiaries on insurance policies, bank accounts, and brokerage accounts.
- Secure or revise life and disability income insurance policies, if needed.
- Learn how your changed situation will affect your taxes.
Managing household finances as a stepfamily
It’s normal for each partner to bring financial baggage from a previous relationship into a new marriage. Money issues such as debt, overspending, unemployment, and unequal contributions to the household might have played a role in an old relationship falling apart. These issues, as well as financial responsibilities to ex-spouses and biological children from a previous marriage, will affect the blended family’s finances. The situation can be tricky, so it’s important not to ignore it or hope things will just fall into place, but to tackle it head-on.
Morghan Richardson, a family law partner at Davidoff Hutcher & Citron LLP in New York City, advises working with your incoming spouse to establish a budget early in the marriage.
“Talk to a financial professional so that you can get the best handle on your new combined finances,” she suggested. “Try to equalize spending and savings so that every child in the house feels equally important and both partners are prioritizing the kids.”
New spouses might be reluctant to combine their finances because of what happened in a prior relationship. But logistically, it’s usually easier when all expenses flow into and out of a single pot of money than when you’re constantly negotiating who should pay for what, especially when it comes to children’s and stepchildren’s expenses. (Related: Protecting your finances in a second marriage)
A prenuptial or postnuptial agreement can provide reassurance that assets will be divided fairly if the marriage doesn’t work out, while allowing the new couple to move forward with confidence. It can also allow a couple with children from previous marriages to pass property to their children after death.
Updating beneficiary designations
Setting things up so your assets and insurance policies are divided as you wish after your death is an important step to take as soon as possible. Otherwise, an ex-spouse and biological children might be provided for while your current spouse and stepchildren might not be. (Related: Common beneficiary mistakes)
“A new marriage creates new rights in your spouse that impact your kids,” Richardson said in an interview. “By virtue of your new marriage, your new spouse will be entitled to inherit first—before your kids from any prior marriage. Make sure you update beneficiaries in all of your bank accounts, annuities, and life insurance plans. Talk to an attorney about creating a will or maybe even a trust for the benefit of your kids.” (Learn more: Will and estate planning basics)
In some cases, courts may require an ex-spouse to maintain life insurance to provide alimony or child support. It’s important not to change the beneficiaries of court-ordered policies. You may need to purchase additional insurance to provide for your new family. (Learn more: Divorce and life insurance: Considerations)
Your stepchildren will not be considered heirs for intestacy purposes unless you legally adopt them. And often, stepparents will not adopt their stepchildren because doing so requires the biological parent to relinquish custody.
Morris Armstrong, an enrolled agent and investment professional in Cheshire, Connecticut, said that if you wish for stepchildren to receive anything, then they should be named in a will or beneficiary designation. He also noted that if you want your previous spouse to be a beneficiary, it’s best to sign and date a new form naming them so your intention is clear. If you want to do this with a retirement plan, your new spouse must waive, in writing, their right to be the beneficiary.
Transfer on Death (TOD) forms, available from your financial institutions, provide an easy way to direct a particular bank or brokerage account’s assets to a particular person or persons without going through probate or establishing a trust. If you’ve filled out such forms for your accounts previously, you’ll want to update them. If not, consider filling out new ones to direct your assets to your new family. Each spouse should complete these forms for any separately held accounts and complete them together for any joint accounts. (Learn more: Probate: What it is, why people fear it)
Updating insurance coverage
As a parent or stepparent, you should carry both long-term disability income insurance and life insurance to protect your family in case you become unable to provide for them.
- Disability income insurance will replace a portion of your income if you become too sick or injured to work for several months or more. A disability policy can provide a more generous safety net than Social Security disability income to help keep your family afloat and pay your medical bills. (Calculator)
- Life insurance can help cover the costs of raising your children and even the costs of sending them to college and beyond. Try using this calculator to see how much life insurance you might want to purchase for yourself to cover each of your children and stepchildren.
The national average cost to raise a child born in 2015 from birth through age 17 is $310,605, according to a Brookings Institution analysis.
“If your child wants to attend college, add another $100,000 to that number,” Richardson advised. Also consider how much your new spouse would need to survive should your contribution unexpectedly end. “Get insurance for the most possible so that your children and your spouse won't struggle if something happened to you,” she said.
When thinking about supporting a surviving spouse, think not just about replacing your income but also about replacing your household contributions to raising the children and maintaining the home. Don’t forget about replacing the value of benefits you currently receive from work that might be more expensive to buy on the open market, such as health insurance, plus money to cover your final expenses and to pay off any debts.
“It is more important to obtain the correct amount of insurance than anything else,” Armstrong said, noting that, usually, a term life insurance policy is quite affordable.
Work with your insurance agent or financial planner to carefully designate the beneficiaries of your life insurance policy. As mentioned earlier, stepchildren are not presumed heirs by law, so you need to make special provisions for them. (Need a financial professional? Let us know)
Recalculating tax liabilities
When you remarry, you’ll have to determine whether it’s more advantageous to file your taxes jointly or separately.
Couples should take into account that by choosing the married filing jointly status, each party is responsible for the accuracy of the return and the tax due, Armstrong said in an interview. “Most people do not realize that married filing separate is the default, and the joint return is the option,” he added. (Related: Blended family finances)
Filing jointly often results in a lower tax bill and allows you to claim more credits and deductions. Tax software can help you calculate whether you’d be better off financially in the short term choosing the married filing jointly or married filing separately status; make sure you do the math for both your federal and state returns. But for legal and other implications, you’re better off consulting a tax expert or financial planner.
You’ll also have to figure out who gets to claim the tax credits for the children. That’s a conversation to be had with both the ex-spouse, should there be children from that union, and the new spouse. Basically, you can’t have more than one tax return claiming a tax credit for the same child. (Related: Tax breaks for parents)
The big credit is the $2,000 child tax credit, which goes to the custodial parent, Armstrong explained. The child must be under 17 at the end of the year, and custody is determined by which parent the child spends 183 nights or more with, if the child is moving back and forth between households. For tax purposes, it does not matter which parent the court has given primary custody to. What matters is which parent the child actually lives with the majority of the year.
If you choose the married filing separately status when you file your return, be aware that the child tax credit begins to phase out at $200,000 in adjusted gross income (AGI) and disappears completely at $240,000. If you file jointly, you can claim the full credit up to $400,000 AGI.
When doing your tax planning, make sure to account for any alimony paid or received. Currently, alimony is deductible for the payer and taxable for the receiver, but for divorce or separation agreements executed after December 31, 2018, the deduction for alimony payments is eliminated. Child support is neither deductible nor taxable, however.
There’s no question that the financial considerations for stepparents can be more complex than the ones for biological parents. While the law may in certain instances recognize your new spouse as a beneficiary and an heir, it will not do the same for your stepchildren. It’s imperative that you update beneficiaries on bank accounts and insurance policies, secure additional insurance if needed, and create a tax and financial plan with your new spouse to make sure your new household will run smoothly, even in your absence.
After all, you are growing your blended family. Looking out for them is an act of mutuality, recognizing love can go beyond biological bonds.
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This article was originally published in October, 2018. It has been updated.