THE DOUBLE JEOPARDIES OF BLENDED FAMILIES Remarried with kids? Sorting out yours, mine and ours is tough.
By Charles E. Cohen Reporter associate: Jane A. Berryman

(MONEY Magazine) – Theoretically, divorced or widowed parents who remarry can bring the best of two worlds to their union: two sizable incomes -- often bolstered by child- support payments from an ex-spouse -- as well as matched pairs of offspring. So much for theory. In the real world, of course, stepparents have had more than just a public relations problem ever since the brothers Grimm handled their account. Reconstituted families are often no more harmonious than traders on the floor of the Chicago Mercantile Exchange -- and the combined earnings may be no match for a deluge of expenses. Then too, in the custody roulette game, the chances are just as good that stepparents may be paying (rather than receiving) sizable alimony payments, further reducing the money available for the household. In addition to the financial strains, having to agonize over emotionally laden decisions like how to parcel out bequests to stepchildren and children can bring serious stress to otherwise happy families. Says Oliver Stafford, a certified financial planner in Oakland, Calif. whose clients include several blended families: ''Sometimes I end up being a marriage counselor instead of a financial adviser.'' Discipline and careful planning, along with an honest airing of priorities, can help resolve some problems. Here is a look at the most common plights and some ideas about tackling them. -- Getting your house in order. Financial advisers are nearly unanimous in urging blended families to spell out each spouse's financial responsibilities in a legally binding agreement. Among the most important matters to resolve: whether to share all child-care costs -- including budget-busting college bills; whether to merge assets and liabilities; and how to divvy up your estates. Exactly what you agree to is a matter of personal choice and financial circumstances. But different arrangements bring their own unique complications. If each parent opts to assume financial responsibility only for his or her progeny, for example, you will need separate budgets for everything. If you also opt to keep assets separate -- an unromantic albeit practical strategy, given the considerably higher divorce rate for second marriages than first unions -- you may need to ward against automatic commingling of property under some state laws. The best way to do this is by executing a so-called property status agreement -- either as part of a prenuptial agreement or after you're married -- spelling out who owns what and forfeiting any spousal claims to specified assets. Deciding to share and share alike may help avoid jealousy, distrust and financial inequality within the household. But it won't solve all your problems. For one thing, emotional compatibility doesn't necessarily portend similar investment temperaments. If you winced when you saw your Dutch modern dresser next to your spouse's colonial armoire, wait until you see how his hot-dog commodity fund clashes with your government securities. Even if you're of one investing mind, take a good look at your newly unified portfolio to make sure your investments are properly diversified. Chances are some rebalancing will be necessary. In setting up housekeeping, also review insurance contracts to make sure all family members are adequately covered. For example, auto policies may need to be updated, especially if your new spouse comes equipped with a teenage road devil. If both parents have access to company health plans, save on out-of- pocket costs by covering all dependents under the more economical policy. -- Keeping your house in order. Blended families, bulging with kids from two marriages, frequently find themselves hard-pressed to cover the steep child- care costs and other living expenses that accompany large households. Moreover, the two-tiered nature of many blended families -- older children from previous marriages, and perhaps younger children from the new union -- means that parents may face such expenses over many more years than other , households. That leaves little money to set aside for long-term goals, such as the kids' college tuition and the parents' retirement. Consider, for example, Scott and Cheryl Dunbar of Stone Mountain, Ga. and their household of five kids: Scott's two daughters, 16 and 14, from his first marriage; Cheryl's son, 13, from her first marriage; and the couple's own two daughters, six and four. By the time his youngest turns 18, Scott will have paid child-care costs for 30 years. Although the Dunbars earn roughly $77,000 a year -- Scott, 41, is the director of a local halfway house for drug addicts, and Cheryl, 38, is a high school teacher -- they constantly feel strapped. Says Scott: ''No matter how hard we try, we've never succeeded in getting a functioning family budget, let alone putting money aside for the kids' college education.'' If the Dunbars' dilemma sounds familiar to you, your first step should be to free some cash for savings by cutting your spending at least 5%. Small economies such as dining out less often or making do with your old winter coat for another year can make a bigger difference over time than you think. If the rate on your home mortgage is at least two percentage points higher than the recent 10.7% national average for 30-year fixed-rate loans -- not unlikely if you took out the loan during the late '70s or early '80s -- consider refinancing. But before you do, check with your lender to make sure that application fees, points and closing costs on a new loan don't outweigh what you will save on monthly payments. But even with budget tightening, some parents will still have to make difficult choices between fully funding their own retirement or bankrolling their kids' education. ''Only a parent can make this decision,'' says Kim R. Colin, president of Diversified Financial Planning in Beaverton, Ore. ''But from a financial perspective, it is much wiser to provide for your retirement. The kids will make their own way eventually if they have to.'' Rather than viewing college funding as an all-or-nothing proposition, though, consider compromising. Look at community colleges, state schools and institutions with cooperative education programs instead of private schools. And take full advantage of investments specifically designed to help parents pay for their children's college education, such as Series EE U.S. Savings Bonds. Interest earned on bonds purchased after 1989 will be exempt from federal taxes if used for the college costs of the bond's purchaser or his or ^ her immediate family. (The interest on savings bonds is already free of state and local taxes.) One hitch: the exemption begins to phase out once a family's adjusted gross income on a joint return exceeds $60,000, and disappears completely at $90,000. -- Leaving the house to others. Estate planning poses particularly delicate problems for blended-family parents who want to protect their biological offspring without neglecting or offending their spouse and stepchildren. Even if your mate has promised to provide for your kids as if they were his or her own, you may still feel uneasy. As one mother of a blended family inquired of Lafayette, Calif. investment adviser Lynn Ballou: ''If I die, how do I know for sure that my husband won't marry some bimbo who blows my kids' college money on a Mercedes?'' You can keep your legacy intact by directing your lawyer to draft a trust naming your children as beneficiaries. Upon your death, the assets you've designated will fund the trust, which is managed by a trustee of your choice. The money can then be parceled out in lump sums when the kids reach the ages you specify. If you want your husband or wife to enjoy the benefits of your wealth while he or she is still living, draft a so-called bypass trust. After your death, your spouse can receive any income thrown off by your legacy and, with the trustee's approval, withdraw part of the principal if he or she needs it to pay for important expenses like medical bills or college tuition. When your spouse dies, the assets then flow directly to your children. Also be sure to draft a will naming a guardian for your children. Be forewarned that regardless of any psychological bonds that may have developed between kids and stepparents, a biological parent will probably have a stronger claim to custody if you die.