Gray Divorce: What Financial Planners Should Know

Getting a divorce later in life can really put a crimp in your client’s retirement plans. All of the sudden, your client’s net worth may be cut in half. And no matter what the original number was, half of what your client expected to have in retirement is not as good as the whole.

Commonly referred to as a “gray divorce,” divorce rates among those 50 and older have been inching up since the 1990s for a variety of reasons including a broader social acceptance of divorce and separation, the fact that many families have two working spouses, which provides women the financial freedom to leave a marriage, and of course longer life expectancies. Further, many parents wait to divorce until their children go off to college as they want to maintain an intact family in the child’s younger years.

According to Stacy Francis, a certified divorce financial analyst with expertise in divorce finances, “Gray divorce rates are exploding. Older divorcees are more financially vulnerable as most do not have a long working career ahead to bounce back from lost assets and income from a split.”

Francis continues, “It is imperative to work with a matrimonial attorney and financial advisor that understand these unique issues facing gray divorcees. Without proper planning, divorce can destroy the finances of Americans over age 50.”

In many of these cases, one or both spouses may not have worked for a period of time in order to spend time raising children, which places a burden on both spouses:

• The working spouse may be facing the prospect of paying spousal support at a time when they most want to retire, or at the very least lessen the pressure of long workdays. And now, on top of that, you have two households to support and may have college tuition to pay.

• For the non-working spouse, there may be difficulty rejoining the work force or ramping up a career at this stage.

And, while the pandemic brought some couples and families closer together, many couples found that living together in close quarters with limited distractions to be an insurmountable burden on an already fragile relationship.

They were no longer able to dine out with friends or travel for business or even carry-on extramarital affairs. There they were, stuck at home with someone who they realized was no longer the love of their lives.

Given all of the financial issues that people face as they proceed through divorce, I find that having a client work hand-in-hand with a financial planner is extremely helpful to ensure the client is financially prepared for their next chapter.

There are three questions I am repeatedly asked that relate directly to financial planning post-divorce:

1. What will happen to my Social Security benefits? Will I lose my benefits if I divorce?

The Social Security Administration is very clear in how it describes the benefits. If you are divorced, your ex-spouse can receive benefits based on your social security contributions (even if you have remarried) if:

• Your marriage lasted 10 years or longer.

• Your ex-spouse is unmarried.

• Your ex-spouse is age 62 or older.

• The benefit that your ex-spouse is entitled to receive based on their own work is less than the benefit they would receive based on your work.

• You are entitled to Social Security retirement or disability benefits.

Short answer: If you meet the requirements, the working spouse will receive their full Social Security benefit and the non-working spouse will receive half the amount of that benefit. This means that the government will pay 1.5 times of the Social Security benefit in the case of a divorced couple.

2. Which assets constitute marital property in a divorce, and what constitutes separate property?

One of the first steps in getting a divorce is determining your assets and liabilities, with the goal of achieving an equitable division of property.

But equitable does not always mean equal, and one important aspect of this process is identifying and valuing assets that constitute marital property, which was earned/accrued during the marriage, or separate property, which was earned/accrued before the marriage, or inherited before or during the marriage.

In the event that one spouse has a separate property claim, it is critical to work with an attorney to trace and identify that separate property.

That said, pre-marital businesses are also vulnerable to claims for equitable distribution. A valid prenuptial or postnuptial agreement can help eliminate or limit the threat to a pre-marital business venture in a future divorce.

Examples of separate property, which are protected from equitable distribution in New York State may include: inheritances to the degree that the inheritance was maintained separately from marital assets, earnings from personal injury claims and separately maintained pre-marital accounts.

3. If I kept my earnings in my own account through the marriage, in my name alone, aren’t I protected from having to share these accounts with my spouse?

Likely not. If you have been depositing marital earnings into your account, the title on the account is not determinative as to distribution. In fact, if you had deposited your separate property and your marital earnings into the same account in your name alone, you may have made a huge mistake. You may have commingled your separate property with marital property, thereby losing your separate property claim.

Understanding the financial ramifications of divorce later in life is critical.

As a financial planner, working with your client’s divorce attorney will make the transition smoother for the client. And your client will benefit from having a team of professionals who are knowledgeable and collaborative and working together to their achieve the best result possible given each unique circumstance.

Original published in FA Magazine. Read the original publication here

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