Is divorce in retirement different than for younger couples? And, if so, how?
Three of us, one divorce lawyer and two financial neutrals, sat down one day to talk about the issues involved in the typical gray divorce, marriages in which older spouses (“grey-haired”) are now splitting up. The questions are interesting, to say the least. What are the key financial issues that can arise in a gray divorce? What issues should particularly concern people? How can retired people best protect themselves?
Collaborative Divorce in the Golden Years
Sounds odd, but we realized that we’ve included the couple’s grown children in full team meetings of collaborative divorces, so that they could be there, in the room, hear the same things their parents heard, and (sometimes) later remind their parents of how their divorce played out and why they agreed to the things to which they agreed.
We’ve also had cases in which we included estate planning attorneys in order to protect the adult children when their parents really felt that they hated each other or that the new love interest, soon-to-be spouse would take what “rightfully” belonged to the kids.
And then there are the gray divorces that are happening purely so that the spouses are able to take advantage of social services….
Here is what we discussed.
Is either spouse still receiving income of any kind? That spouse might still pay alimony, even when all assets were divided equally and neither client works. Like any other divorce, the clients may look at all available resources, like investments, pensions, and retirement plans, which may be used to pay support. Additionally, if one has substantially more assets (perhaps non-marital assets) than the other, these could be considered when determining one’s ability to pay alimony to the other.
“Is this something that should be taken in to consideration when negotiating a divorce settlement? It would never be accounted for in a conventional courtroom case, but, if it’s important to the clients, then it’s critical in a collaborative divorce.”
How can the spouses invest their assets so that they are able to support themselves in retirement? Depending on the ages of your clients, they may already be close to retirement age, if they are not there already. Their investment strategy should have changed to maximize income in the long run rather than to focus on the upside potential growth you would normally expect in retirement assets in younger individuals. For example, it now may make more sense to invest in dividend-paying stocks rather than in stocks with more upside appreciation.
It is critical in these cases to ensure that both clients are aware of the changed strategies inherent to their retirement status. It is especially difficult to split a single household into two on fixed incomes in retirement. While we are all prone to opine that it is impossible to support two one-person households on the same income that one two-person household enjoyed, time and again we see that our clients don’t “get it” until it is too late. At least, when they are both still able to work harder, work more hours, get better jobs, and earn more, they can fill that gap. Once on “a fixed income,” by definition, they are stuck. And they both need to understand that to negotiate from an educated perspective.
One of the pluses is that there are no children still at home, right? But that rarely means that children are not an issue. Even though the clients are not required by law to provide funds to their adult-aged children, in many families, this is what happens, either because the children are still dependent or because they are going through their own divorce or similar issue.
Is this something that should be taken in to consideration when negotiating a divorce settlement? It would never be accounted for in a conventional courtroom case, but, if it’s important to the clients, then it’s critical in a collaborative divorce.
If both clients recognize that there are additional expenses for their adult children that one or both of them want to consider, exchanging terms of their settlement in relation to funding adult children may meet the goals of both clients.
Are there any government benefits that might be triggered by the divorce that might assist one or both of these clients? Social security benefits, for example? She could potentially use his Social Security credits as a divorced spouse, which may increase her benefits (after 10 years of marriage).
If one spouse is receiving the marital home, is there still a mortgage secured on it that must be paid? If so, is that mortgage in both clients’ names? How can we ensure that the other spouse will be able to obtain a mortgage on her new home, if she doesn’t have the funds to purchase the home any other way? Many times, the best you can do is to put in language that contemplates a refinance/best efforts or triggers a sale upon a point in time if the marital home is not refinanced.
Are the circumstances such that it’s appropriate to suggest a short sale, foreclosure, or bankruptcy to the clients? How does the entry of a final judgment of divorce affect the timing of that action and vice versa? From the financial neutral’s prospective, any discussion of short sale, foreclosure or bankruptcy must be deferred to an attorney, but it is appropriate to note here that we should always be sensitive to this possibility, and to the necessity of bringing in a specialist to deal with it at the right time and to advise the clients appropriately.
Is one spouse receiving a pension? If so, is the pension divisible and, if so, how much does the non-recipient spouse receive? Depends – first you need to determine if the pension is divisible via a QDRO or if the plan allows for division to the non-participant. The amount might be based upon the legal argument on how the benefit is determined, if that’s what the clients decide to do, and the marital portion of the benefit might be determined using a time coverture and/or contributions to the plan.
Additionally, a plan that is not divisible may be paid to the non-participant spouse via agreement through which the participant receives payment from the plan and makes the appropriate payment to the spouse, perhaps through a constructive trust.
Bottom line? Be aware of the special issues implicated when your clients are retirement age and want to be divorced.