For 2 years, the Browns—Martha, who is 43; and Tom, who is 46— have been a blended family with three kids, but they haven’t blended finances. They want a united view of their finances, so “we move forward together with joint financial goals instead of individually held-over goals,” Martha explains.
Blending a family’s finances takes more than opening joint accounts or combining home equity.
College: The Browns planned to dip into their home equity to foot some of the bill. Scratch that, says Julie Asti of Asti Financial Management. Her advice: Take out student loans, which have lower interest rates and a deferral period.
Martha must pay 25 percent of her daughter’s college costs by divorce decree. Tom believes that his kids can pay their own college costs. Asti suggests that the couple contribute $2,500 annually for each child’s college costs, for which they would reap a tax deduction of up to $7,500 per child. The $15,000 Martha earmarked for her child’s education, Asti says, should be put in a 529 college-savings plan to get the tax break and tax deferral.
Life insurance: Tom has a $330,000 policy earmarked for his kids by court order and a $200,000 policy that makes Martha the beneficiary. Asti says Tom should increase the latter policy to at least $500,000 and have a 30-year term policy. She says Martha needs to purchase perhaps $500,000 in insurance; her daughter will get some via beneficiary designation. If Martha dies, her life insurance proceeds can satisfy her college-payment obligations for her daughter, says Evan Shorten, who is president of Paragon Financial Partners.
Trust and will: By documenting asset allocation, the spouses can access resources and protect financial contributions, Shorten says.