This is a five part blog series focused on the finan­cial aspects of hav­ing chil­dren.  Specif­i­cal­ly, the issues one should con­sid­er pri­or to bring­ing a child into a fam­i­ly.  This is the fifth and final part, Becom­ing a Step-Par­ent. To read the first, Hav­ing the “Seri­ous” Talk, click here.  To read the sec­ond, Bud­get­ing for a Baby, click here. To read the third, Are You Going Back to Work? click here. To read part four, Finan­cial Plan­ning Issues for Adop­tive Par­ents.

 

Mar­ry­ing some­one with chil­dren means that your finances will become a lot more com­pli­cat­ed as you take into account the needs of your spouse and any chil­dren who join your house­hold. Many of the issues you con­front will be the same issues that any cou­ple mar­ry­ing will face, includ­ing bud­get­ing, insur­ance, and inte­grat­ing your employ­ee ben­e­fits. In addi­tion, you’ll need to con­sid­er issues relat­ed to rear­ing the chil­dren of some­one else, such as pro­vid­ing for the chil­dren now and in the future, con­sid­er­ing the impact of child sup­port on your finances, and deter­min­ing the tax implications.

 

Money issues

 

How will your finances change?

Before get­ting mar­ried, sit down with your part­ner to dis­cuss what assets, lia­bil­i­ties, and respon­si­bil­i­ties each part­ner is bring­ing to the mar­riage. Although your  joint income may be sub­stan­tial, if you and/or your spouse have chil­dren from a pre­vi­ous mar­riage or rela­tion­ship, your mon­ey will need to stretch fur­ther than it used to. You’ll need to set up a new bud­get to accom­mo­date the needs of your grow­ing fam­i­ly and con­sid­er what new expens­es you’ll have. You may need to bud­get for both every­day expens­es, such as food, cloth­ing, and child care, and future expens­es if you deter­mine that you’ll need to save for a larg­er car or move to a larg­er home.

 

Does it matter who pays for what?

When you and your part­ner get mar­ried, you should con­sid­er whether to keep your finances sep­a­rate or com­bine them. Like many indi­vid­u­als who remar­ry, you may want to keep your cred­it, bank accounts, and prop­er­ty sep­a­rate if you or your spouse have past cred­it prob­lems or if you want to pro­tect your­self in the event that you divorce in the future. You may decide that it’s fair that your spouse pay for the expens­es of his or her child (such as child care or a col­lege edu­ca­tion), while you pay only for gen­er­al house­hold expenses.

How­ev­er, you may feel that com­bin­ing finances will solid­i­fy your fam­i­ly and make your finances less com­pli­cat­ed. Like many step­par­ents, you may want to con­tribute a cer­tain amount toward your stepchild’s expens­es or even pay all of his or her expens­es. Usu­al­ly, this caus­es no prob­lems, but you also need to con­sid­er what will hap­pen in the event that you and your spouse divorce. Will you want to con­tin­ue sup­port­ing the child finan­cial­ly? In gen­er­al, even if you have been pay­ing the expens­es of your spouse’s child, your spouse can’t force you to pay child sup­port if you haven’t adopt­ed the child. Because your respon­si­bil­i­ties to him or her are vol­un­tary, you most like­ly won’t be held respon­si­ble to pay for your stepchild’s expenses.

 

How will child support or alimony payments affect your finances?

If your prospec­tive spouse has been divorced and is receiv­ing alimo­ny or child sup­port, you’ll need to decide whether this mon­ey will be put into a sep­a­rate account or will be used by you as a cou­ple in order to sup­port your com­bined fam­i­ly. How­ev­er, it’s best not to count on alimo­ny or child sup­port pay­ments to off­set your increased liv­ing expens­es. Depend­ing on the terms of the divorce, your spouse may stop receiv­ing alimo­ny when he or she remar­ries, or alimo­ny pay­ments may be reduced. Although child sup­port pay­ments will like­ly con­tin­ue for a spec­i­fied peri­od (often until the child reach­es age 18), there’s no guar­an­tee that the amount of the child sup­port pay­ment will remain the same. If your spouse’s ex los­es his or her job, for exam­ple, he or she can peti­tion the court to reduce the amount of the child sup­port payment.

blended familiesHow­ev­er, if you’re mar­ry­ing some­one who’s oblig­at­ed to pay child sup­port, you should under­stand what your spouse’s oblig­a­tion is and real­ize that it could increase in the future. It’s even pos­si­ble that your spouse’s ex can go to court and ask that child sup­port be increased because your spouse has remar­ried and you’re con­tribut­ing to the house­hold income, thus leav­ing your spouse more income to pay child support.

 

Other issues

 

Should you consider a prenuptial agreement?

If you and/or your part­ner have chil­dren, you should con­sid­er exe­cut­ing a prenup­tial agree­ment (i.e., a con­tract that will spell out each part­ner’s rights, duties, and oblig­a­tions dur­ing mar­riage) to deter­mine what will hap­pen in the event you and your part­ner sep­a­rate or divorce, or if one of you dies. You may find that a prenup­tial agree­ment is use­ful when chil­dren are involved because it can elim­i­nate con­flicts over estates and ensure both par­ties that their legal rights and the legal rights of any chil­dren will be pro­tect­ed. Even if you have a will, con­sid­er exe­cut­ing a prenup­tial agree­ment as well. Unlike a will, a prenup­tial can’t be changed unless both par­ties agree, giv­ing you added peace of mind.

 

Should you consider adopting your spouse’s child?

You may want to adopt your spouse’s child for emo­tion­al and legal rea­sons. If you love the child, you may nat­u­ral­ly want to become the child’s legal moth­er or father. In addi­tion, it may pro­tect your rights in the event that your spouse dies and you want to con­tin­ue rais­ing the child, and it may pro­tect your right to make deci­sions on behalf of the child. How­ev­er, adopt­ing your spouse’s child may mean that if you divorce, you can be ordered to pay child sup­port, even though your rela­tion­ship with the child may be sev­ered. If you decide you do want to adopt your spouse’s child, you’ll have to seek your spouse’s for­mer hus­band or wife for his or her per­mis­sion to adopt the child, assum­ing your spouse’s ex is alive.  If he or she refus­es, you may not be able to adopt the child, unless the par­en­t’s rights are ter­mi­nat­ed because he or she aban­doned the child or is con­sid­ered an unfit parent.

 

Why is estate planning particularly important when you marry someone with children?

When you mar­ry some­one who has minor chil­dren, you’ll want to con­sid­er what will hap­pen to those chil­dren in the event you or your spouse dies. Do you want to pro­vide for the chil­dren in the event that you die? If your spouse dies, will the chil­dren live with you or with their oth­er par­ent or fam­i­ly mem­ber? Because child cus­tody issues can be com­pli­cat­ed when the per­son who wants cus­tody isn’t bio­log­i­cal­ly relat­ed to the child, you’ll want to make sure that you get advice from an attor­ney on this issue. If either of you brings sub­stan­tial assets into your rela­tion­ship, you may also want to make sure that your chil­dren retain the right to those assets in the event that you and your spouse divorce.

Adult chil­dren from a for­mer mar­riage or rela­tion­ship can pose spe­cial prob­lems. Don’t assume that your spouse’s chil­dren will love you as much as your spouse does. They may see you instead as a com­peti­tor or a vil­lain, tak­ing their place in your spouse’s heart and in his or her will. Whether this is actu­al­ly true is irrel­e­vant. After your spouse is gone, they can make your life mis­er­able unless you both plan ahead. One way to plan ahead is to make sure that your estates are dis­trib­uted accord­ing to your wish­es. Both spous­es and any chil­dren must clear­ly under­stand what those wish­es are. For exam­ple, you and your spouse may want to set up one or more trusts for your chil­dren and/or one anoth­er, or you may want to exe­cute a prenup­tial agree­ment along with your will. You may want to agree to leave a spe­cif­ic amount to the sur­viv­ing spouse and the rest to any sur­viv­ing chil­dren, or you may want to use life insur­ance to pro­vide for your chil­dren or your spouse.

 

Income tax considerations

 

Are child support and alimony payments taxable or deductible?

Alimo­ny pay­ments must usu­al­ly be includ­ed in the gross income of the recip­i­ent but can be deduct­ed by the pay­er, although the divorce agree­ment may des­ig­nate alimo­ny as non­tax­able and nond­e­ductible. How­ev­er, child sup­port pay­ments are ordi­nar­i­ly con­sid­ered non­tax­able income and are nond­e­ductible to the payer.

 

Will you be able to claim additional dependency exemptions?

When you mar­ry some­one with chil­dren, you may or may not be able to claim the chil­dren as depen­dents on your tax return. Ordi­nar­i­ly, the par­ent who has cus­tody of the chil­dren is enti­tled to claim the exemp­tion, regard­less of who pays child sup­port. How­ev­er, the non­cus­to­di­al par­ent can claim the exemp­tion if the cus­to­di­al par­ent agrees to it in writ­ing or it is a part of the divorce agreement.

 

Will you be able to claim the child and dependent care tax credit?

The par­ent who has cus­tody of a child under 13 for the longer peri­od of the year can claim the child and depen­dent care cred­it, even if he or she does­n’t claim a depen­den­cy exemp­tion for the child, as long as he or she qual­i­fies for the credit.

 

Will you be able to deduct the child’s medical expenses?

A par­ent may be able to deduct any med­ical expens­es that you incur on behalf of his or her child, even if he or she does­n’t have cus­tody of the child or even if he or she isn’t enti­tled to claim the child as a depen­dent. Remem­ber, though, that med­ical expens­es are deductible as item­ized deduc­tions on Sched­ule A, Form 1040, only to the extent that they exceed 10 per­cent of the tax­pay­er’s adjust­ed gross income (7.5 per­cent for those age 65 and older).

 

Read Part 1 – Hav­ing the “Seri­ous” Talk 

Read Part 2 – Bud­get­ing for a Baby

Read Part 3 — Are You Going Back to Work?

Read Part 4 — Finan­cial Plan­ning for Adop­tive Parents