All in the (blended) family
Across Canada, about 11 million people aged 35 to 64 are in a marriage or common-law relationship. For one in four of them, it’s a second or subsequent relationship.[1] Whether children are part of the mix or not, these are blended families – and when families blend, so do their finances.
Combining finances can get complicated. However, open and honest conversations can prevent conflict and help couples achieve their goals. Here are some of the most important things to discuss. You can also consider using the Merging finances worksheet as a guide.
What are your financial objectives?
Dream big about what you want to achieve individually and together in the short, medium and long term. Perhaps you’ve been considering getting another degree or certification, or hoping to take a sabbatical away from work. Maybe your partner has been dreaming about installing a custom-designed kitchen, taking a once-in-a-lifetime trip to Antarctica or sending the kids to private school.
Think about how you want to live in retirement, as well. Whether you want to travel the world, take up an expensive hobby or live more modestly, you’ll need to plan how you’re going to fund your retirement lifestyle when the time comes.
Sharing your dreams and brainstorming some ideas for the future can be a lot of fun. It’s also an important step towards establishing your highest-priority financial objectives. At the same time, the conversation will help you understand each other’s financial values, habits and perspectives.
How will you pay for the essentials and your dreams?
Creating a household budget based on the incomes you and your partner will contribute to your joint finances is a good way to determine what’s possible.
Keep in mind that many couples steer some income towards separate savings for all kinds of reasons. For example, a separate account could fund individual (not joint) goals, provide autonomy to allow some spending without discussion and agreement, or isolate an inheritance to prevent it from becoming family property (depending on the province or territory). You’ll need to decide whether all income will flow into one joint account, if a percentage of each partner’s income will go to a joint account and the rest to individual accounts, or if there’s a better arrangement that works best for both of you.
Next, divide your expenses into two categories: needs and wants. Everyone’s criteria for what constitutes a “need” and a “want” will be a little bit different. But, in general, needs are things you can’t do without, such as food and shelter. Wants are the extras that make life more enjoyable, like entertainment, restaurant meals and travel. Among your needs, make sure you include essential financial obligations, such as debt, alimony or child support payments, as well as planned savings towards your financial goals.
If one or both partners have children, or if you’re planning to start a family together, be sure to discuss these costs in detail. Talk through how you feel about allowances, expenses for child care and various activities, and paying for post-secondary education. For instance, will you pay up to a specific amount for university, pay complete costs to the end of an undergraduate degree, or fund an advanced degree as well? Also consider how much ex-spouses will contribute to everything from Registered Education Savings Plans to other general expenses.
What’s your plan for assets and liabilities?
Your assets include all savings and investment accounts, including registered and non-registered plans, as well as real estate and property, such as cars, jewellery, collectibles and other valuables. One question to consider is whether you share a common investing style or if one of you has a higher risk tolerance than the other. If you have very different approaches to investing, it may make sense to keep investment accounts separate. If not, you can consider merging your accounts.
Here's another critical question: if you own two homes, will you sell one or keep it and rent it out? Keep in mind that, while you were single, each of you could own a principal residence. However, once you move in together, you’ll have to choose one property as your principal residence (the one you “ordinarily inhabit”). This means you’ll need to plan for any future capital gains tax on the second property if its value increases. You’ll also have to pay tax on any rental income you collect. More information on the taxation of principal and secondary properties can be found here.
On the “liability” side, list all of each partner’s debts, including the balance owed, the interest rate, the payment amount and when payments are due. Debts may include mortgages, car loans, other loans, lines of credit (secured and unsecured) and credit card balances. With a complete list, you can prioritize paying off the highest-interest debt first, consider consolidating debt at a lower interest rate and incorporate a debt repayment strategy into your household budget.
Can you save taxes as a couple?
Common-law and married couples can take advantage of several strategies to reduce taxes. For example, the higher earner can benefit from the spousal tax credit, while the lower earner can claim child care expenses. Partners can pool their charitable donations so the higher earner can claim all of them and pool their medical expenses so the lower earner can claim all of them.
In preparation for retirement, the higher earner can contribute to a spousal RRSP for the lower earner. The higher earner gets the tax deduction, and the lower earner pays the tax on withdrawals in retirement. After retirement, pension income splitting helps to even out retirement income and can reduce the household tax bill.
It helps if you can work together with a single tax professional who can get a full picture of your household’s situation and recommend all relevant tax-saving strategies.
Do you have the right protections in place?
Each partner may have existing insurance policies designed for your lives before you got together – yet now your needs may have changed.
For example, if both you and your partner have health and dental benefits at work, it might make sense for one of you to step down to a lower level of coverage at the next renewal. Think about whether you need more critical illness or disability insurance to help replace your income now that you have a new spouse who may have to take time off work to care for you if you become sick or injured. Or, if the bulk of your assets will now pass to your new spouse upon death, should you put life insurance in place to provide a sizable inheritance for children from your previous marriage?
It’s important to assess all forms of insurance, including health and dental, life, critical illness, disability, and home and car policies, and to update documentation and coverage as needed. Your advisor can help you through this process.
What do you need to change in your estate plan?
A new long-term partnership counts as one of the major life events (alongside births, deaths and divorces) that necessitate a review of both partners’ estate plans. In fact, in some provinces and territories, getting married revokes a will unless the will explicitly states it should remain valid after an upcoming marriage. Even in jurisdictions where this isn’t the case, starting a common-law or married relationship likely changes what you’d like to see happen after you die.
Discuss your wills and powers of attorney for property and personal care, as well as beneficiary designations on insurance policies, registered savings and pension plans, such as Registered Retirement Savings Plans and Tax-Free Savings Accounts. In many cases, naming a common-law or married spouse as the beneficiary or successor holder allows assets to transfer tax-free in the event of your death.
Speaking with tax and legal professionals is essential to make sure your estate plans are tax-effective and accomplish exactly what you want them to. The key for blended families is to agree on an approach that protects each partner and treats children from each family with fairness.
Speak with an advisor
Blending families can be challenging on many levels – but working with an advisor makes combining finances easier and helps avoid costly mistakes. Your advisor will encourage you to identify specific financial goals, provide guidance on merging budgets, assets and liabilities, and oversee the implementation of joint tax and estate strategies. Most importantly, your advisor will develop a financial plan that’s designed to help you achieve your personal and common dreams for the future.
Start building savings in a joint account
Even if you decide to keep some of your savings separate, it can be convenient and satisfying to establish a joint account for shared goals, such as vacations, a new car or home renovations. Look for an account that pays a high rate of interest on every dollar and gives you easy access to your money whenever you need it. Some full-featured accounts include free, unlimited banking transactions with no monthly fee.
Consider a prenup for clarity
The last thing any couple wants to talk about is what to do if the relationship breaks down. Even though it hopefully won’t happen, this is a potential scenario to plan for. Some couples arrange for a lawyer to draw up a prenuptial agreement (prenup), especially if one partner is bringing significantly more wealth into the relationship. Learn more about prenups here.
[1] Statistics Canada, “Family matters: New relationships after separation or divorce,” The Daily, May 15, 2019, catalogue no. 11-001-X, https://www150.statcan.gc.ca/n1/daily-quotidien/190515/dq190515c-eng.htm.
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