What are Complications of Divorcing in Retirement?

Gray Divorce
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Divorcing when in retirement can be quite messy.

Divorce is complicated at any stage of life.

Young families have to navigate co-parenting and support.

Often for the sake of the children, people choose to divorce later in life.

When people are divorcing in their 60s or 70s, this is often referred to as “gray” or “silver” divorce.

According to a recent from Westchester Business News article titled “How Silver Divorce adds a Wrinkle to your Estate Plan,” cutting ties later in life can complicate retirement significantly.

As you finalize your separation, you will need to address a number of concerns.

What are these?

Divorcing later in life is quite common.
Finances are a significant aspect of divorcing in later life.

Division of Assets.

After working for several decades, most people have already passed their peak earning years.

While many people have saved a large nest egg for retirement, they are likely to earn little in the coming years.

What you have is basically what you will have.

Negotiating how retirement assets are divided when divorcing can be daunting.

One spouse may need to be kept on the retirement accounts or life insurance policies of the other to avoid poverty.

Pension rules should be reviewed to determine whether the ex-spouse is eligible for survivor benefits.

Since people in their 60s and 70s have been married for a long time, they are more likely to have joint and commingled assets.

This includes income, inheritances, and investments.

These can be points of contention, especially if someone inherited a large sum.

All of these must be negotiated in the divorce proceedings.

Taxing Matters.

Legally divorcing a spouse results in a change of tax status.

For decades, you have filed jointly.

After your divorce, you will each shift to filing as singles.

In addition to your filing status, divorcing will change your tax situation for the sale of a primary residence.

The primary residence exclusion allows a tax exclusion for up to $500,000 for those filing jointly while only $250,000 for those filing as singles.

Because the home is often one of the largest assets belonging to a couple, the tax issues are important to consider.

This is especially true if the value has increased since its purchase.

By transferring the asset to a spouse prior to the divorce, the capital gains tax could negatively impact you or your spouse.

For estates larger than the federal or state estate tax exemption, estate planning would need to be updated to address tax planning changes.

Why?

Because the unlimited marital deduction, portability election, and disclaimer to a credit shelter trust are no longer options.

Long Term Care.

If long-term care funding was a part of your estate and retirement plan, then you will need to review your plans after the divorce.

This could impact your Medicaid eligibility plans or your long-term care savings and insurance.

Estate Planning.

When divorcing, one should prioritize reviewing and updating estate planning documents.

You likely do not want your ex to be your heir or to be in charge of your financial or medical decision if you become incapacitated.

Those divorcing later in life should address these issues sooner rather than later.

Reference: Westchester Business Journal (Oct. 4, 2021) “How Silver Divorce adds a Wrinkle to your Estate Plan”

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