Diana Clement 's Opinion

Your Money and careers writer for the NZ Herald

Diana Clement: Second time round raises new problems

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Financial rules for blended families can get tricky as retirement looms.

Careful planning is required to make sure the money goes where you want it 
to go. Photo / Getty Images
Careful planning is required to make sure the money goes where you want it to go. Photo / Getty Images

Blended families are common in New Zealand. They come with their own set of financial rules that can be a minefield to navigate, especially when it comes to retirement.

You've kept your accounts separate, but now you're on NZ Superannuation. When the wage and salary stop coming in, one member of a couple finds him or herself at a distinct financial disadvantage to the other.

That creates dilemmas such as if your partner has no savings, do you pay for him or her to take a cruise down the Danube? What would the children think of that?

It's now common for second-time-around couples to have a contracting out agreement - also known as a "prenuptial".

Such an agreement contracts the couple out of the Property (Relationships) Act and determines what each will get financially if the couple split.

But second-time couples who got together 10, 20 or even 30 years ago and are now reaching retirement may not have a prenuptial.

And couples who marry in retirement - after their respective spouses have died - are not necessarily of the generation that thinks "prenuptial" before they've even washed the first set of sheets.

The dilemma of how blended families cope with the changes to their financial status in retirement isn't all about the law, says Steve Morris, financial adviser at SW Morris Associates. "It's about common sense and reaching common agreement."

There are questions blended couples have to ask themselves and review from time to time. One of those milestones is at retirement.

Retirement, for example, raises the issue of whether assets and income should be combined - partially or fully, says Moneymax financial planner Liz Koh. It becomes tricky if there is a significant disparity in wealth.

New couples may start off with individual bank accounts. Sooner or later, the one with the resources gives the other some cash or an eftpos card and their finances slowly start to merge.

It's not the black-and-white situation lawyers might want to see. "There is a lot of emotion around that 'I love you and want to be with you for the rest of my life'," says Morris.

Koh sees couples where one has the money to enjoy him or herself and the other doesn't. But it's not going to be much fun taking a camper van around the US if your partner has been left behind eating baked beans and other staples that NZ Super allows.

Couples don't leave their partners behind, says Morris. People who have re-partnered do so because they love their new partner and naturally want to share their resources.

Morris has a client who has just taken his new wife on a cruise, even though she reached retirement with no money reserves. The client wouldn't want it any other way.

One of the questions these couples need to ask, Koh says, is whether investment accounts should continue to be managed separately.

The answer will depend on individual circumstances.

"These are difficult questions which must be confronted at retirement as they will have a significant effect on how assets and income will be managed as part of a retirement plan."

There is no easy answer to most of these questions. It's a matter of working through different scenarios such as what happens if the wife dies. What do you want to happen and vice versa?

Morris and Koh say it's important to make sure that you have all the legal pitfalls covered. If the relationship fails after your working life has ended there is little possibility of rebuilding capital.

Also the kids could prove problematic - and the last thing you want is your spouse and the kids squabbling in court over your grave.

The prenuptial agreement or setting up of a trust doesn't mean it's all sorted. Legal agreements are living documents and need updating. What was appropriate at age 45 may not be at 65.

In other words it's time for a serious planning exercise, which might end up with the previous rulebook for the family being thrown out.

Auckland barrister John Brown says asset planning arrangements should be regularly reviewed, rather than leaving it until a person comes to a specific point, such as retirement.

"You would find that those issues were latent in the relationship and retirement merely brought them to the surface," he says.

"It may not necessarily be retirement that exposes an out-of-date contracting-out agreement and renders it largely useless."

Trusts also date, says lawyer David Stone. People's requirements change. In their working life they may have needed trusts to protect their private assets from business creditors. In retirement the trust's role may be more about ensuring that loved ones are looked after when you die.

Clients worry about trust cost, says Stone, "but the blended relationship is a key reason to keep the trust".

If it has been set up and managed correctly it handles the issues of relationship property and takes away the risk of wills being contested, he says. "You can get a fair and just result."

Another reason to keep a trust, says Morris, is for the KiwiSaver and/or superannuation when they mature. It's common to use these to pay off a mortgage.

But the cash immediately becomes relationship property when that happens. If you have a family trust, says Morris, pay the money into that and the trust lends the money to pay off the mortgage. It protects it for the next generation, if nothing else.

It's important in a blended family to have a carefully drafted will or trust. If not, your hard-earned savings could be passed down to your spouse's children, not your own.

It is important to consider what rights the surviving partner has to stay in the family home on the death of the other partner, says Koh.

Usually, says Morris, second-time-around couples are focused on their own happiness ahead of the kids. But children can be a problem.

"Most people enter into a relationship because they want to share (life's) experiences with someone else."

They want to take the proverbial cruise together even if one member of the couple has contributed more financially than the other.

"Where a problem can arise," says Morris, "is when there are children in the background who think 'you are spending my inheritance on a bird or a bloke we don't even like, who we don't want to sit around the dinner table with and we don't want to spend Christmas with'."

Lawyers see only a snapshot of the problem, says Stone. Human nature plays a big part in how people resolve the problems of blended family finances in retirement.

But there are legal pitfalls. A husband dies and leaves his estate to his wife. When she dies she naturally passes it to her children.

By not planning and leaving a lifetime interest to the second wife the husband has disinherited his own children.

Children can, of course, challenge a will. But that gets messy.

Brown says several asset-planning tools are available to second-time couples.

"For example, a life-interest will, where the home is not already in trust, could be one way in which a person could leave their spouse the right to live in the deceased's share in the home, or a replacement home, for the spouse's lifetime and then the capital interest could go to children of either the first or second relationship, or both."

Another possible tool to deal with this dilemma, says Brown, would be a life insurance policy.

"The person, on taking the life insurance, could request that the life insurance company issue the policy pursuant to section 75A of the Life Insurance Act 1908 for the benefit of the named children, or spouse.

"This would create a trust under which the policy and its proceeds would be held for the named beneficiaries. The arrangement gives the policy and the claim proceeds certain statutory protections."

- NZ Herald

Diana Clement

Your Money and careers writer for the NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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