The “New” American Family and What It Means for Financial Planning

In 1960, 73% of households in the United States were married couples with children. Fast forward to 2014, that number has decreased to 46%¹. This means that today, over half the households in the United States do not fall under what was once known as the “traditional family.” So what makes up 54% of households? It is made up of two parents that are cohabitating together, parents that are remarried and single parents.

If you are a part of a “nontraditional” family, then your financial planning may also be “nontraditional.” Here are some things to consider if you find yourself to be within the new majority.

IF YOU ARE IN YOUR SECOND MARRIAGE

As of 2013, 40% of marriages involved at least one of the spouse’s remarrying¹.So what does that mean for your financial plans? If your new family involves children from a previous marriage, it might mean setting up a trust to ensure your assets are transferred to them the way you want. If you simply leave everything to your new spouse, they will have 100% control of how the assets are distributed after their passing, which might not include your children.

You also have to think about Social Security benefits. By remarrying, you are no longer entitled to 50% of your first spouse’s benefit, and you will now be entitled to 50% of your new spouse’s benefit, but depending on earnings, this could have a negative impact on what benefits you may receive from Social Security. Please note if you do qualify for youex spouse’s benefits, you must have been married at least 10 years.

With remarriage, you are still getting all the advantages of other married couples get. Some examples are filing taxes together, no limits on the amount of assets you can transfer between each other, and if you inherit your spouse’s IRA you can treat it as your own rather than a beneficiary IRA.

IF YOU COHABITATE WITHOUT MARRIAGE

 7% of households are made up of two people cohabitating together¹. Although this means getting to keep all your assets separate, you could potentially run into some problems. For example, if you pass away without a trust or will in place, then your assets will have to go through probate court in order to be passed onto your heirs. Generally, they go to “next of kin” (which depending on the state could be your children, parents or siblings) and not given to your partner regardless of how long you have been together.

You also have to think about other issues such as how you are not eligible for each other’s Social Security benefits, or how you are not able to be on a family health insurance plan. You are also taxed individually, which may put each of you in a higher tax bracket. When inheriting IRAs, you cannot treat them as your own. You are also subject to the $14,000 annual gifting limitations.

SINGLE PARENT HOUSEHOLDS

26% of households are single parents1. Some of these situations unfortunately bring a lot of changes to not only your family dynamic, but your finances as well. Here are some key points:

Single Parent: Even when not married, it is still important to have the proper estate plan in place. If you have children that are minors, you want to make sure you have a designated guardian for your child if something were to happen to you as well as a trust spelling out how you would like your child to receive assets. You also want to ensure the proper beneficiary designation for your retirement accounts, as generally it is unfavorable to leave these assets directly to a minor child. Life Insurance may also be important to have to ensure that your children are taken care of in the future. Just like with retirement accounts, life insurance should not be left directly to a minor.

Divorce: After getting divorced it is important to update your estate plan whether that is wills, trusts, or beneficiary designations. If kids are involved, it is important to decide which parent will claim them as a dependent on their tax return. Claiming your child(ren) as a dependent gives you an extra deduction, and you can file your taxes as “Head of Household,” which can help lower your taxes even more. Some other planning items include giving/receiving spousal support or child support as this may affect taxes. Joint debts must be settled or refinanced into one name to avoid having negative impacts to your credit score.

Widowed: If your spouse passes away, it is important to update your estate plan, such as trusts, wills, and power of attorney’s. You have the ability to still file taxes as married up to two years after your spouse has passed. If you inherit an IRA from your spouse, you can treat it as your own, which possibly means deferring the taxes. If you are caring for children under age 16, you might be eligible for Social Security Survivor’s benefits, which can help replace some of the income that you may have lost. When you reach your Social Security “Full Retirement Age”, you are entitled to 100% of your deceased spouse’s benefit unless you remarry.

As family dynamics change, so will your life plans. As this is just a brief overview on things you need to think about if you are in this situation, working with a financial advisor, attorney, and tax professional will help to ensure you have the right strategy in place.  

The opinions voiced in this material are for general information only and are not intended to be a substitute for specific individualized tax or legal advice. I suggest that you discuss your specific situation with a qualified tax or legal advisor.

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[1] Pew Research  Center: http://www.pewsocialtrends.org/2015/12/17/1-the-american-family-today/