One of the emerging trends in American family life is gray divorce, defined as divorce among partners over the age of 50. In fact, the divorce rate among those 50 and older has nearly doubled since 1990, according to a Bowling Green State University study. Divorce is a process that, understandably, elicits powerful emotions – and oftentimes most of the energy and effort during a divorce is spent managing those emotions. However, there are other pragmatic concerns for those getting a divorce, specifically as it pertains to personal and family finance.
Often, divorcees default to relying solely on their divorce attorneys for guidance on how to get through the process without harm. While a reliable attorney is critical to the process, it’s in the best interest of all parties involved to also have a Certified Divorce Financial Analyst in their corners. A financial advisor with expertise in navigating divorce can help people at any age, but they can be even more important for older divorcees who have much more complex financial lives. At Wescott, we’ve helped many clients deal with a number of unique situations during divorce. There are many guidelines to consider during the process, and below are a couple of the more unique lessons we’ve learned from specific cases.
Lesson #1: Consider Tax Laws When Dividing Assets
The Client: A 51-year-old female business owner was living with her husband in the family’s house while in the midst of divorce proceedings. She needed to quickly find a way to amicably divide assets with her soon-to-be-ex-husband that would reduce the impact on her finances and in turn her business.
The Solution: In these situations, it’s best for either the husband or wife to leave the marital home so that both sides can see how living separately will impact their expenses, and so they can figure out who should be paying for what. Additionally, it’s important to establish what each side wants to do with the house – sell it and split the equity, or work out another arrangement that allows one of the exes to live there – and determine when this should be settled. There are tax ramifications with splitting equity that need to be considered, but are often realized too late in the process.
After hiring an attorney and financial planner she trusted, the ex-wife created an alimony-like agreement by which she would keep THE family home and make regular payments to her ex-husband. The payments were tax efficient for both sides, as alimony is tax deductible for the payer and taxed at a lower rate to the receiver. This arrangement also allowed her to avoid the arduous task of moving, or divesting of any parts of her business.
Lesson #2: Make an Appointment to Change Your Estate Plan
The Client: A husband with a significant pension was going through a divorce and had a teenage son. With the settlement date approaching, the husband needed to change the beneficiary on his pension and life insurance policy. State law prevented him from listing his son as a beneficiary on the pension, as only a spouse can be the beneficiary of a pension if you are married.
The Solution: There are multiple issues at play here, and some of them can’t be fully resolved until the actual divorce settlement goes through. The spouse is always the beneficiary of a pension. That holds until the divorce is the final. You can change the beneficiary on a life insurance policy, or investment accounts. However, in many states, a retirement plan such as a 401K, 403B, or any IRA plans require spousal approval to name a beneficiary other than the spouse. But spouses aren’t likely to sign off on that during a divorce. The moral of the story is to do everything you can leading up to the divorce settlement, so that once the deal is final, you can protect your assets without delay. Soon-to-be-exes are also allowed to negotiate an agreement to this effect before the divorce is final. That would serve as a de facto insurance policy against an unexpected death before the beneficiaries are changed.
As for the beneficiary issue, there are ways to ensure that minor children are taken care of in the event of tragedy. Setting up a trust is a standard practice that protects the divorcee’s assets, and also allows for more control of how the assets are handled. We actually recommend that our clients create trusts for their children into their 20s. Though at that point they are of legal age, a trust protects them from their inexperience in managing their own money, of the potential of a future divorce themselves, or a future bankruptcy.
The Unexpected Truth About Divorce
Compared to other major family events, divorce is perhaps the most difficult to address. Divorce is neither guaranteed, nor inevitable. Any planning is reactive and happens on a much more compressed timeline, so it’s often difficult to balance the strong emotions associated with divorce with the actual work that needs to be done. This is especially difficult for gray divorcees because the relationships have been longer, and the financial considerations more complicated. That makes it even more important to have the right people in your corner, who have learned these lessons and helped others navigate them.