Remarriage Finances: Planning For A Family Merger--Not A Hostile Takeover
Part 8--Getting Started As A Remarriage Couple:
Special Financial Issues To Consider Before Remarriage--
Housing, Retirement, Insurance, And Ex-Spouses
By: Joseph Warren Kniskern, Esq.
In the past two articles of our continuing series on financial issues, we have been considering general matters most couples face before remarriage begins--the "getting to know you" and financial planning stage of entering into a lifelong partnership. In the previous article, we discussed critical estate planning issues. In this installment we dig a little deeper into some more different and unique remarriage financial issues.
Housing. Will you rent an apartment or purchase a new or existing home? How will each spouse's pre-existing homes be handled? Will they be rented out as investments or sold?
Selling pre-existing homes as part of a remarriage is a major tax event. You want to make certain you receive all of the breaks and advantages that the law allows. This may mean each spouse selling his or her individual homes before remarrying. Be sure to check with tax advisors in planning out this matter. (We'll come back to this topic later in this article.)
Administration of retirement plans. Remarried couples need to review their retirements plans very carefully. Who are the beneficiaries of your plans, insurance policies, and investment accounts? Upon remarriage, you may want to add your new spouse as a beneficiary on some particular assets, such as an insurance policy, as part of your estate plan. If you have a 401(k) retirement plan, watch out--your new spouse may have an automatic claim on those assets, even if someone else is listed as a beneficiary, unless your spouse waives any claim.
Check into the differences in retirement plans. For example, an individual may contribute up to $2,000 a year ($4,000 for joint filers) (although these limits increased in 2002) to an Individual Retirement Account (IRA) and deduct that amount from his or her taxable income. You don't pay any taxes until you withdraw your money--typically after retirement, when your tax rate is lower. But what about using a Roth IRA? For individuals whose adjusted gross income is less than $95,000 ($150,000 for joint filers), the same amount of annual contributions ($2,000-single; $4,000-joint) will provide you with a fund that you can withdraw after age 59 1/2 without paying any taxes (if the account is at least five years old). There is a catch, however. Unlike the traditional IRA, you don't also receive a tax break as you put money in. Additional special tax breaks which come along at times, may allow you to switch plans. But these are the types of planning measures that remarried couples need to discuss with their financial advisors as part of putting the family financial puzzle together. [Note: Do not try to work through this complex maze of laws and regulations without first obtaining the advice of a competent estate planning lawyer!]
Each spouse should carefully compare retirement plans in order to get the most out of each plan. For instance, if both spouses contribute the same amount to his or her own plan each year, but one spouse's plan has a dollar-for-dollar match for contributions while the other plan does not, the couple may want to make some adjustments by increasing contributions to the plan with the matching benefit, while reducing contributions to the other plan.
Retirement and social security benefits. In completing your divorce, you also may have received a Qualified Domestic Relations Order (QDRO) entered in your favor which will award you a portion of your ex-spouse's retirement benefits. Under existing survivor benefit rules, the ex-spouse's current spouse at the time the ex-spouse retires, or on an earlier date of death prior to retirement, is deemed to be the ex-spouse's "surviving spouse". If your ex-spouse remarries, this could affect your benefits unless you are clearly named as the "surviving spouse" in the QDRO. It is therefore important to make sure that you do not overlook those important benefits before you remarry, since your remarriage could adversely affect your rights. Check with the attorney who obtained your QDRO for specific advice and options.
You may not be aware that your ex-spouse could be entitled to one-half of your social security benefits if: (a) you and your ex-spouse were married for 10 years prior to divorce; (b) your ex-spouse has not remarried; (c) your ex-spouse is aged 62 years or older; and (d) your ex-spouse is not entitled to his or her own social security benefits which equal or exceed one-half of your benefits. Therefore you need to plan for this contingency as well in providing for your new spouse and blending family.
Coordination of Insurance. The most critical insurance for a remarried couple to review first is health insurance. What health insurance does each spouse carry? What coverages are included? What is the applicable deductible amount? Which policies allow you to select your own doctors? How much coverage will each child receive under each plan? Does any health insurance of ex-spouses cover the children?
• Health Insurance. The least-expensive health care arrangements are to continue to have your biological children covered by a former spouse's group plan, or to switch them to your own group plan. For example, the Employee Retirement Income Security Act of 1974 (ERISA) (and as amended) was enacted to ensure that children retain health care coverage when their parents separate or divorce. A qualified medical child support order (QMCSO, or "Kiddie QDRO") may be available to require employer-provided health systems to continue providing medical insurance. In addition, "COBRA Coverage" pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) is guaranteed medical coverage following a legal separation or divorce. With this plan, spouses and children may receive continuous coverage under an ex-spouse's group plan for a limited period of time--usually eighteen to thirty-six months after a separation or divorce. If these options are unavailable, check with your current health insurance carrier to see what your legal rights are to extend and/or convert coverage maintained by your ex-spouse, prior to his or her death or your divorce.
If you plan on having more children with your remarriage partner, you may want to consider other health plan options, such as switching to a health maintenance or a preferred provider organization that covers all well-baby care. (You may need to add a new child to the plan within 30 days of birth, or risk losing coverage until the next open enrollment period.)
If a basic health insurance plan is unavailable or too expensive, don't go uninsured and put your entire family at substantial financial risk! At least check into a major medical insurance policy with a high deductible so you will be protected against any disastrous health problems.
Obviously the remarried couple needs to agree on which plan offers the best coverage for the greatest value. But health insurance should be in place and ready to use by everyone in the blending family, from the date of the wedding forward. Each spouse should have the required insurance cards in hand before signing the marriage license!
• Life Insurance. What about life insurance? The goal here is to make sure that each spouse has enough coverage to provide the surviving spouse and family with the ability to enjoy the same lifestyle after death of the insured. Life insurance also allows a spouse of modest means to generate an inheritance for his or her children. For example, the surviving spouse might inherit the decedent's interest in the marital home and all joint accounts, while the children receive the life insurance proceeds.
How much life insurance do you need? Obviously you need to discuss your own family situation with a qualified and knowledgeable insurance agent. The amount of insurance also depends on how many children you have, and how old they are. Estimate your family's expenses if either remarriage partner died, then subtract the joint assets available for the blending family. The resulting financial gap should be fully covered by life insurance. However, as a general rule of thumb, many financial planners recommend that parents of two children carry policies equal to seven to ten times the combined annual family income. Two-income couples need to divide the coverage proportionately. If one of you earns 60% of the income, he or she should carry 60% of the insurance.
In addition, remarriage partners may want to have a "widow's shock absorber"--a separate life insurance policy on each spouse's life in the amount of a year's gross salary. This ensures that the surviving spouse will be able to substantially complete his or her personal grieving process and not have the pressure of making a major financial decision for at least a year.
If premium expense is a problem, your least-expensive option is a guaranteed-level renewable term life policy. But your insurance agent can review the most economical policy options with you.
Be sure to review your divorce settlement. It may specify that your biological children are beneficiaries of your former spouse's life insurance.
Keep in mind that an insurance company will not pay proceeds directly to a minor. To avoid management by a guardian, consider using a trust for that child's benefit, with the chosen trustee named as policy beneficiary, so the insurance proceeds can be invested and used for your child.
• Disability insurance. Disability insurance also is very important. Realistically, there is a much greater risk that you will become disabled in the next few years than be deceased. Even so, too many people are uninsured or underinsured for disability. You may be covered at work or otherwise eligible for social security disability benefits, but that coverage is not unlimited. Make sure you know how much it will pay, and for how long the payments will continue. Then purchase a disability insurance policy to fill in the gap.
Title To Separate And Joint Assets. How will each remarriage partner's assets be owned--jointly, separately, or both? Obviously, these decisions directly affect tax planning, so consulting a tax advisor is critical before implementing any decisions. Perhaps each spouse entering a remarriage has sold a personal residence prior to the remarriage, with the intent of purchasing a new home together. How will you account for the funds from the prior house sales? How will you allocate the expense of the new residence? Whose name will be on the title to the new home?
If a remarried spouse and his or her children insist on staying in the same residence they lived in prior to the remarriage, what happens if that spouse refuses to add the new remarriage partner's name on the title? You can bet that the new spouse will feel like an outsider!
Cheryl and I each had personal residences that we sold before we remarried. Cheryl's home in Ohio had very little equity since she had only owned it for a couple of years, so the proceeds from the sale were quite modest. By contrast, my home in Miami had appreciated quite a bit over the 15 plus years I owned it. Since Cheryl was unable to contribute as much to purchasing our new home, I advanced all of the expense for building and decorating it as she desired. We agreed that we would both be joint owners of the property. You and your remarriage partner certainly may decide to handle your situation differently.
Subject to estate planning and tax considerations, it is probably best to title each remarriage partner's assets in the way the couple wants them to be treated upon any disability, death or divorce. Assets which the couple purchase with joint funds after remarriage probably should be titled in both spouses' names. However, be sure to check with your estate planning advisor about this matter since it may disrupt your personal estate planning considerations! If you intend to keep Premarital Assets of each spouse separate, these assets could remain titled in the individual owner-spouse's name. This makes it much easier for personal representatives and courts to determine your intent later on.
Support Sent To Ex-Spouses and Non-Custodial Children. It is not at all uncommon for alimony and spouse support payments coming in from ex-spouses in favor of one or both remarriage spouses to lapse by force of law or other reasons. Meanwhile, support obligations going out to former unremarried spouses and children may continue--a classic "Catch-22" financial bind. Less income into the new blending family account, while other expenses continue!
Sometimes a remarried husband's ex-wife brings him back into court to increase her spouse support payments. Result? The remarried couple must absorb the additional legal fees in judicial review of the request, not to mention payment of any increases in support awarded by the court. This obviously depresses the living standard for the couple's blending family. Consequently, many remarried couples find a large portion of their family income being diverted to a former spouse's family. It is not uncommon to hear the spouse of a non-custodial parent in this circumstance to say, "We have to pay child support to your ex-spouse and support your children, which keeps us from saving enough to have our own children!" This reaps a lot of bitterness and resentment among the mates of remarried partners who must honor these continuing financial obligations to his or her former spouse.
Perhaps a remarried, non-custodial husband gives his ex-wife, secretly or otherwise, even more money than his support obligation requires, because of a deep sense of guilt over the divorce, or fear of not being able to see his children. This obviously penalizes his current wife and family.
These situations bring up many tough questions for the remarried couple. Should a remarried husband's salary pay for all of the family expenses, including the additional expense of stepchildren not covered by child support from the non-custodial parent? What if his wife is not working, but she has separately owned property generating an income--should she help contribute from this income? If a remarried wife is working, should she help pay her husband's support obligations to his ex-wife or children? Should a remarried wife's son be put through college with the couple's income--especially if the non-custodial parent refuses to pay for it? Whose money will buy the first car of the remarried husband's daughter? These questions are not easy to answer, and yet they must be discussed early in the couple's relationship to avoid many misunderstandings, conflicts and heartache in later years! However, keep in mind Paul's admonition in I Timothy 5:8: "If anyone does not provide for his relatives, and especially for his immediate family, he has denied the faith and is worse than an unbeliever."
It may be very difficult to write support checks to an ex-spouse each month, but keep your focus on your overriding priority and objective: Providing for your biological children, just as if you had not divorced. Don't let an ex-spouse's greediness, lack of cooperation, or other annoying conduct distract you. Also, be generous and willing to adjust the amount periodically if your child has unusual expenses such as special sporting events or medical needs.
Support and Retirement Benefits Received From Ex-Spouses. Remarriage may terminate a divorced spouse's support benefits from a former spouse. Make sure you know how to replace this income if it is lost. Also, if a divorced spouse is living in a former marital residence, remarriage may create an obligation to sell the house and split up the proceeds with the ex-spouse. Possibilities like these need full evaluation from a financial and tax standpoint.
Child support may not be affected directly by remarriage, since those obligations usually continue after remarriage. However, according to a 1990 U.S. Census Bureau study, the reality of life is that only about 50 percent of all custodial parents actually receive the full amount due from former spouses. About 25 percent receive one-half of the amount due, with the remaining 25 percent receiving nothing at all. This is even more true, when less fortunate ex-spouses see their former mates remarry a financially secure partner--they do not want to pay as much because they feel the newly remarried couple can afford it. Wrinkles like these need to be factored into any blending family budget, rather than just assuming that you will continue to receive all child support payments on time and in the proper amount.
Governmental assistance for unpaid child support, such as the now repealed Aid to Families with Dependent Children (AFDC), is not what it once was. However, Congress realized that it could never completely shift the cost of raising children from the federal government back on parents unless child support awards were adequate to meet the costs of raising children, and payment obligations were enforced. Consequently, since 1984 the emerging public policy is to help custodial parents by beefing up laws which will require ex-spouses with delinquent child support obligations to pay up. For example, Congress enacted the Child Support Recovery Act of 1992, which for the first time criminalized the willful failure to pay child support owed to a child in another state. Then in 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), also known as the "Welfare Reform Act", which requires the states to undertake dozens of new measures that will lead to increased child support collection. These include: (1) tracking the location of those with delinquent support obligations; (2) requiring employers to withhold support sums and send the funds to a state disbursement unit within seven days after payday; (3) establishing liens for overdue support against real and personal property owned by delinquent spouses; as well as (4) withholding, suspending or restricting drivers' licenses, professional and occupational licenses, and recreational licenses of individuals owing child support. These measures are working! The Federal Department of Health and Human Services reported that, for 1998, collections of child support increased from $12 billion in 1996 to $14.4 billion in 1998--a factor of 20 percent.
The obvious point here reveals that you now have more legal tools to enforce child support obligations against your ex-spouse than ever before. It is important that he or she share financial responsibility for the expenses of your biological children. If you cannot win your ex-spouse's cooperation voluntarily, you owe it to your children, your remarriage partner, and yourself to use these laws to enforce compliance. This is not being mean or vindictive. It is the essence of using responsible "tough love."
At the same time, be willing to be fair and flexible. Absorb your fair share, providing for your biological children. If you receive more income in relation to your former spouse, consider using that income and demanding less from your ex-mate. Prayerfully seek ways to have peaceful relationships with all concerned, as long as this does not lead to any appeasement postures (which usually backfire and make matters worse).
Above all, never hold your child back from seeing his or her biological parent solely because a child support payment is late or missing. This vindictive action deeply wounds your own child more than anyone else.
Holdover Joint Debts With Ex-Spouses. Divorce courts usually split debts of a former marriage in the same manner as assets, but most lenders and the Internal Revenue Service often hold both former spouses liable. In other words, if your ex-spouse doesn't pay his or her share of debts from a former marriage for which you are jointly responsible, you could be forced to pay--no matter what your divorce decree says! Before remarrying, it is wise to see what joint debts with your former spouse remain unpaid, if any, and arrange with your former marriage partner to have the same paid, so these obligations do not come back to haunt you and your new spouse. On some debts, such as a mortgage on the former marital home, you may be able to have the lender agree to look only to the one having sole title to the residence--especially if the value of the home is significantly greater than the remaining balance on the loan.
Financial Impact of Family Relocation On Ex-Spouses. If the remarriage involves relocating the children of the former marriage to a new area, this obviously restricts the ex-spouse's access to his or her children, and increases the amount of expense everyone must absorb for such costs as airline tickets, long-distance telephone calls, out-of-town meals and similar charges. You must be sure to budget for these expenses.
College Expense of Children and Stepchildren. Although many child support obligations end when the child becomes a legal adult, and this support does not continue for college expense, many parents continue helping their biological children through college and even beyond. Future plans like these need to be discussed in detail prior to, or early in, the remarriage and the expense budgeted accordingly.
You also should be aware that the federal government and colleges determine financial-aid eligibility based on the income and assets of the custodial parent and the stepparent. Therefore, if a spouse has custody of college-age children, or marries a custodial parent with college-age children, the couple may have to pay much more in tuition than if they had waited to remarry until after the children finish college.
Next: Putting Your Remarriage Financial Plan Into Action.
Joseph Warren Kniskern is a Christian attorney, mediator, and author of "When The Vow Breaks: A Survival and Recovery Guide For Christians Facing Divorce," and "Making A NEW Vow: A Christian Guide To Remarriage And Blending Families," both available from Broadman & Holman Publishers, Inc. in Nashville, Tennessee.
1 29 U.S.C. §§1001-1461 (1993).
2 Public Law 99-272, April 7, 1986, 100 Stat. 82.
4 Pub. Law No. 104-193, 110 Stat. 2105 (1996).
5 "Child Support Recovery Has Gone Up 20 Percent," Judith Havemann, Washington Post, April 2, 1999, P. A27.