So your first marriage did not work out. But now you’ve found another special someone. Maybe you have kids from your previous marriage. Maybe your new partner does. Maybe you are dreaming about the bucolic life you will all live together once your families are joined through marriage – happily, peacefully, without conflict.
Time to snap out of it. Even if everyone gets along fabulously and your child-rearing philosophies are similar, it might not be so rosy. For one thing, divorce rates are higher in remarriages, reports US site SmartStepFamilies.com. Financially, blended or stepfamily dynamics are tricky: his money, her money, ex-spouses, past financial obligations and future ones, too. All in all, combining families takes a little more financial – and life – planning.
Of course, you won’t be alone on this road. About four out of 10 US marriages include at least one step-relative, according to a Pew Research Center survey. In the UK, 10% of all families are stepfamilies, according to UK charity One Plus One. In Japan, one out of four marriages is a remarriage for one or both spouses. That figure rises to one out of three marriages in New Zealand, according to The International Handbook of Stepfamilies.
Here are some tips for swimming in the blended family waters, financially and otherwise.
What it will take: Honesty. Before you become a stepfamily, sit down with your partner and discuss everything — the good, the bad, and the financial.
“That seems like obvious advice, but it is surprising how many people enter into romantic relationships thinking they are going to leave the financial, tax, and legal stuff by the wayside and it is just going to work itself out,” said Julia Chung, a financial and estate planner with Facet Advisors in Langley, British Columbia in Canada.
How long you need to prepare: If you can, you should tackle these issues with your soon-to-be spouse as far ahead of the wedding as possible, because you may find that a frank discussion reveals some material differences between the two of you.
Do it now: Consider a prenuptial, or in some countries, a relationship property agreement, before marrying. These are types of legal agreements that lay out what will happen to each person’s property, money, and children if the marriage fails.
“If they do not do this, it is common for one of the partners who came into the relationship with all the assets to have to give the other partner 50 percent of their assets if they split,” said Rod Mudgway, a financial adviser with Brackenridge Financial Solutions in Auckland, New Zealand.
Discuss money philosophies. How will you handle finances? Will you keep separate accounts or will you combine salaries? Who gets to keep the house? Will the new spouse’s name be added to the house’s title? “In France, it is not possible to add the name of a new spouse to the deeds without encountering some tax liability,” said Daphne Foulkes, a financial adviser with France’s Spectrum IFA Group. In the US, as long as you are adding a spouse to the deed, there are generally no tax consequences.
Discuss children. While not entirely financial, it’s important. You may have assumptions about how you will interact with each other’s children. You might have different ideas about pocket money, discipline, even at what age your children are allowed to have a mobile phone and who will pay for it. Make sure you are on the same page or at least understand one another’s position.
Discuss retirement. “My former spouse and I found, to our complete surprise, that our retirement plans were incredibly different,” Chung said. “I thought, ‘Oh, this is actually a really big problem’.” Today, retirement might last 20 to 30 years and your dreams for that stage reflect your values and your views on life. Find out what your partner’s plans are, and if they differ significantly from yours, figure out whether there is a middle ground. And of course, compare notes on retirement savings–how much does your partner plan to have, and how will he or she get there.
Do it later: Adjust your estate planning. If your will or policy beneficiaries involve your ex-spouse, adjust accordingly. But you should also decide how your estate will treat your new family. For instance, you now have to consider your children, your new spouse, and your spouse’s children, if any. Who will receive the life insurance proceeds? When you die, how will your estate be split? “Have specific plans when doing the estate planning that take care of your children in the previous marriage,” Mudgway said. “Some clients may have a life insurance policy with the children as beneficiaries, to make sure they are taken care of long term.” Some divorce agreements also require ex-spouses to maintain a certain level of insurance or name children as beneficiaries of investment accounts, so consult your lawyer before you make changes to accounts named in the paperwork.
One caveat: If you make or have arrangements that would exclude your new spouse from part of your estate, make sure you have a conversation about it. “I have more than one life insurance policy, and on one policy I named my child,” Chung said. “If I had not talked to my spouse about it, and the reasons for it, I think he would have had massively hurt feelings.”
A lawyer that specialises in estate-planning can help determine if there are tax issues with your new arrangement as well. In France, for instance, “the potential inheritance tax liability for stepchildren can be substantial,” said Foulkes. “They will be taxed at 60% on any assets that they inherit from their stepparent.”
A regular family meeting is also important in a stepfamily. Make sure members are able to air – and resolve –grievances, financial or otherwise, before they spiral into huge problems. “I know it is really weird in most families to have formal meetings,” Chung said. “But you have to be really stringent about keeping those lines of communication open.”
Do it smarter: If the idea of this discussion with your spouse or future spouse makes you want to run screaming down the street, consider involving a professional — or two — to help facilitate.
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