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 doubled since 1990, according to Pew research. 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. Financial advisors 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 few of the more unique lessons we’ve learned in our years working with clients.
Lesson #1: Consider Tax Laws When Dividing Assets
The 2017 Tax Cuts and Jobs Act brought major changes to how alimony payments are taxed. Under previous laws, alimony was tax-deductible for the payer and taxed for the receiver. The new law essentially flipped the structure. For couples divorced after Dec. 31, 2018, payers do not receive a tax deduction for alimony payments, and recipients do not have to claim alimony as income.
It’s already led to more contentious divorce proceedings and has created reluctance for divorced couples whose agreements are subject to the old rules. Amending the terms of the agreement could make it subject to the new rules. These updated tax regulations have created an even greater need for trusted advisors to help steer clients through challenging negotiations while minimizing the impact of a divorce on personal finances – and even business finances if one of the divorcing partners is a business owner.
Lesson #2: Make an Appointment to Change Your Estate Plan
In most cases, a divorce spurs estate plan changes. But the timing of these changes can sometimes be complicated and require planning and foresight. Here’s an example of this situation.
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, because only a spouse can be the beneficiary of a pension if you are married.
Creating the best outcome required addressing multiple issues, some of which couldn’t be fully resolved until the actual divorce settlement was finalized. The spouse is always the beneficiary of a pension. That holds until the divorce is final. You can change the beneficiary on a life insurance policy or investment account. However, in many states, a retirement plan such as a 401(k), 403(b) 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, the potential of a future bankruptcy or the potential of a future divorce themselves.
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.