After rising steadily for decades, the total divorce rate in the United States hit a 50-year low in 2019. As marriage advocates celebrate the decline of broken unions, their joy may be short-lived.
The divorce rate is expected to rise again in the wake of the pandemic. After spending 24 hours a day together — with little outside social contact coupled with the financial, emotional and physical stress of the pandemic — some couples are looking critically at their marriages. For certain empty nesters, the pandemic was a preview of what retirement with their spouse could look like, and they didn’t like what they saw.
Recently, several of our financial advisors have reported a noticeable rise in phone calls regarding the financial implications of divorce. Many of those calls are from customers in their 50s and older. These later divorces, like the much-discussed split by Bill and Melinda French Gates, are known as “gray divorces” and are on the rise.
Read: What you need to know about ending a long marriage
Since the 1990s, the divorce rate for adults age 50 and older has roughly doubled in the U.S., according to findings from the Pew Research Center. In fact, the divorce rate for adults 65 and older is tripled over the same period and is even worse for remarriage.
Demographics, social changes and the pandemic have all contributed to the trend. People are living longer, women have more financial options and the stigma of divorce has been reduced. A healthy 65-year-old can expect to live another 20 years, and women typically live an additional five years. Many look ahead and decide that this is a long time to spend in an unhappy marriage.
However, divorce later in life is complicated and requires careful financial planning. As with the Gates divorce, decades of wealth building and family creation make it more challenging to distribute assets in a mutually agreed and equitable manner. For most divorcing couples, it makes sense to hire an experienced attorney to represent and protect the interests of each individual, especially since divorce and insurance laws vary from state to state.
When thinking about financial considerations, there are three points to consider:
1. Tackling the Big Questions
If there is no prenup, there are several big questions that immediately come up. If a couple can agree on these areas, it will help expedite the case and save attorney fees.
If children are in the picture, what are your wishes with regard to guardianship, visits, child benefits, care and education financing?
Do you have adult children who expect support at weddings or help with the purchase of a first home? How are funds allocated for these types of pledges?
Do you earn enough to support yourself or do you have to take alimony into account?
What and where are all financial assets and what are they called? Which possessions do you want and which do you want to keep with your spouse? Make sure you have an inventory of assets and understand the value of each asset.
Are There Retirement Plans for Every Spouse?
Is there enough money to pay any outstanding debts on the assets you hold?
What do you think of the family home? Do you feel strong to live there, or should it be sold or assigned to your spouse?
Are there separate or personal assets of each spouse, including trust funds and inheritances? How does state law affect the impact of segregated or inherited wealth in determining alimony or division of property?
2. Clear do’s and don’ts
Divorce is an emotional, highly charged life transition that often leads to hasty and unwise decisions. Here are some clear dos and don’ts when it comes to your finances:
Create a financial plan and budget to guide you until your divorce is final
Check monthly bank and financial statements and make copies for your lawyer
Review all tax returns filed jointly or separately and ensure all taxes have been paid to date
Get help from a financial advisor, especially if you don’t currently have the skills and energy to do it on your own
Don’t make big purchases or create extra debt that could cause financial problems later
Don’t quit your job or leave home until you’ve consulted your financial advisor and lawyer
Do not transfer or give away assets that are jointly owned
3. Sometimes Overlooked (Financial Considerations)
With a gray divorce, there are often additional financial considerations that can be overlooked. If you are aware of these considerations, you can think carefully about your settlement.
Almost every financial decision you make and every asset you receive comes with a tax bill. It’s important to understand the tax implications, so be sure to consult an accountant or tax advisor to determine what makes the most sense for your situation before dividing assets. Also remember that alimony is no longer deductible for the spouse paying it, and it is not taxable for the person receiving it. Child support payments are also not taxable.
Life insurance often plays a key role, especially if there was a financially dependent spouse. It may be necessary to name your ex-spouse as a beneficiary as part of your divorce. Since alimony ends upon the death of the payer, life insurance can be used as a tool to ensure a stream of income if the alimony paying spouse dies. The divorce decision often requires life insurance from the person paying alimony and/or child support in the event of death. Disability and long-term care insurance are also emergency considerations after a divorce and should be covered in the divorce settlement if necessary.
Retirement assets built up over 25 years can represent a significant portion of a couple’s wealth. Splitting retirement assets involves some special considerations — and often a second step. A Qualified Order for Domestic Relations, or QDRO, is typically used to apportion certain employer retirement and pension plans. A QDRO recognizes joint war interests in the pension assets, giving the ex-spouse a portion of those assets.
If you have been married for more than 10 years and you are getting a divorce, you are generally entitled to half of your spouse’s social security, provided that the benefit is higher than you would have been eligible for and that you remain unmarried. You must be 62 years of age or older and if you are applying before Full Retirement Age (FRA); you receive reduced benefits for tapping Social Security before your FRA.
If you qualify for your own social security, but the amount is lower, you will receive an extra amount up to 50% partner’s pension. If your ex-spouse has passed away, you will be eligible for the same survivor benefits as current spouses, meaning you can receive the full amount of your ex’s benefits. Keep in mind that your ex-spouse doesn’t have to collect his or her retirement benefits yet to be able to claim ex-spouse benefits. If this is the case, however, the divorce must be at least two years old.
Stock options for employers
If either spouse works for a company, there may be incentives to the employer’s stock that require additional analysis before these assets can be divided. Valuing stock options is complex, as they typically have vesting periods, have unique tax considerations, and carry a variety of risks, including market and employment risk. Often, business leaders are given full access to their options upon retirement, which is another point to consider. Since the value of the stock or option typically fluctuates over time, it is important to understand the risk, reward and tradeoffs when determining value.
During the divorce, your spouse has certain rights. Make sure you comply with your legal obligations and exercise as much control over your assets as possible. There are a few things you can do prior to divorce, but you should update your estate plan as soon as possible. For example, you may want to update your health care power of attorney, power of attorney, and will, change beneficiaries on your retirement accounts and life insurance policies, retitle assets, and change your trust. Estate planning is also necessary before remarrying to protect and preserve wealth for your children and grandchildren.
Financial consequences for women
Women face unique financial headwinds. They often earn less than men and retire with smaller savings and lower Social Security benefits, leaving them in a particularly precarious position after divorce. Coupled with divorce later in life, the financial outcome can be disastrous, especially for women who were the primary caretakers of the children.
According to a report by the U.S. Government Accountability Office, women’s household income fell by 41% after a divorce or divorce after age 50, while men’s only had a 23% drop. Because women live longer than men, this drop in income can have serious consequences. Because divorce is such an emotionally and financially challenging time with many important decisions to make, easing the burden with reliable legal and financial advice will help you approach this important life transition in a comprehensive way and feel more confident about your life. future.
Angie O’Leary is Head of Wealth Planning at RBC Wealth Management-US.
RBC Wealth Management, a division of RBC Capital Markets, LLC, a member of NYSE/FINRA/SIPC.