Divorce rates among those age 50 and older more than doubled between 1990 and 2008, according to researchers at Bowling Green State University. These older couples now account for one-quarter of all US divorces. Splitting up after age 50 can be particularly problematic for those with limited assets and limited time to recover financially. And those who divorce after age 50 but before Medicare eligibility kicks in at age 65 may struggle to obtain affordable health insurance. Here’s what you or someone close to you might need to know to get the best possible settlement in a divorce after age 50…
Watch out for the Big Traps
An IRA ar a 401(k) might be in the name of just one spouse, but the other spouse has a legal right to claim a share in a divorce. In community property states, both partners are considered joint owners of these accounts. In non-community property states, these assets will be divided according to the divorce agreement. A divorce decree can include language that spells out how the retirement plan’s sponsors should divide the benefits. It’s crucial that older divorcees obtain a fair share of this money – retirement savings often are an older couple’s most valuable asset. Four things that older people should consider before agreeing to a division of retirement plan assets…
- Taxes. Divorce attorneys tend to pay little attention to future taxation of retirement plan withdrawals. Remind your attorney that these taxes must be taken into account when dividing assets. Exception: Money can be withdrawn tax-free from Roth IRA accounts in retirement.
- Fluctuating Asset Values. It typically takes months for a divorce to be finalized. If the divorce agreement is poorly written, a sharp swing in asset values during this time could result in an unintended and unfair division as assets. Example: a divorce agreement gives the wife $100,000 from her husband’s $400,000 401(k), plus the couple’s house. The value of that 401(k) falls by $120,000 in a market downturn before the divorce is finalized, leaving the wife with 38% of its value rather that the intended 25%, and the husband with no house and only $180,000 in savings with retirement looming. Ask your attorney to explain how the proposed division of assets would be affected if your portfolio were to rise or fall by 25% or 30% before the agreement is finalized. If the result seems unfair, suggest dividing retirement savings by a percentage rather than specifying that one partner receive a certain dollar amount.
- Pension Plan Rules. Many older Americans still have traditional defined-benefit pensions – pensions that pay a steady monthly income during retirement. Former spouses typically are entitled to a share of this money, but the rules are complicated. A divorce court can issue a “qualified domestic relations order” (QDRO) to the retirement plan’s sponsor spelling out how benefits are to be divided. If your spouse has a defined-benefit plan, obtain a copy of the summary plan description from the employer or plan administrator. Plan rules sometimes specify that an ex cannot claim benefits as an “alternate payee” until the plan member retires, even if the plan member works for many years beyond normal retirement age. If so, ask your attorney to attempt to negotiate for alimony or some other compensation to make up for your lost pension income should your ex work past normal retirement age. Also, if your former spouse’s pension pays joint and survivor benefits, scan the plan rules to determine whether the original spouse or a later spouse is considered the survivor if the plan member remarries. If it’s the new spouse, have your attorney take this into account when dividing assets. If your’re the divorcing spouse who has the pension plan and you intend to remarry, be aware that your new spouse might not receive the survivor benefits you expect – check the plan rules for details.
- Transfer of Assets. Make sure that any money shifted from your partner’s IRA or 401(k) to your IRA when assets are divided is handled as a trustee-to-trustee transfer. You could incur penalties and taxes if these assets pass through your hands.
Many older couples have been paying into life insurance policies for years, and such policies can be valuable assets. But when couples appear headed toward divorce, partners who are insured sometimes stop paying these premiums – they see little reason to pay for a policy that only benefits the soon-to-be ex. If you are the spouse who is insured, do not stop paying these premiums. This policy can be a useful bargaining chip in your divorce. Agreeing to continue funding it might let you obtain a larger share of other assets or reduce your future alimony payments. If you are the spouse who is not insured, explain to your spouse that he/she can use this policy as a bargaining chip, as discussed above, and seek an agreement that it will continue to be funded. If the relationship is too strained for such an agreement, obtain a court order to this effect. You want an agreement in place before the next premium is due – even one missed payment could forfeit the coverage. Alternative: Suggest that the policy be altered to benefit the children, not the ex.
It has become extremely difficult and expensive for people in their 50s or early 60s to obtain individual health insurance. Contact issuers immediately to find out just how expensive it will be as soon as possible. Take these costs fully into account in the settlement. Among the potential options… COBRA rules let divorcees continue to receive coverage through an ex-spouse’s employer group plan for up to 36 months. Contact the plan administrator within 60 days after the divorce is finalized. Your divorce agreement should specify whether you or your spouse is responsible for paying the COBRA premiums. Warning: Obtain an agreement – or, if necessary, a court order – from your spouse agreeing not to drop you from the employer’s group plan. The Affordable Care Act can qualify a person to receive high quality healthcare at a lower rate and you may qualify for tax credits, which can reduce your monthly premium. While open enrollment is in the Fall, a person who is divorced can obtain insurance anytime. Delay finalizing your divorce until you turn 65 and qualify for Medicare – or until you turn 62 if COBRA is available to bridge the remaining 36-month gap. Read your health insurance paln’s rules carefully before attempting this, however. Some plans require that spouses live under the same roof to qualify for coverage.
Some older divorcees decide, I just want the house…he/she can have the 401(k). That may be a bad idea, given the real estate market’s recent uncertainty. You could get stuck in a home that is larger than you need and that you cannot sell at a reasonable price. It’s wiser to seek a diversified portfolio of assets in the divorce, even if that means selling the home and splitting the proceeds. If it cannot be sold at a reasonable price or in a timely manner in this real estate market, you and your ex could agree to… Rent the house out until prices rebound. The divorce agreement should specify how this rent will divided, who will pay home-related expenses until it is sold and how the proceeds of the eventual sale will be split. Have one spouse continue to live in the home until it is sold. This spouse could pay rent to the other and pay home owner expenses.
Update the beneficiary designations in your investment accounts and estate plan as soon as divorce seems inevitable. Ex-spouses are automatically removed as beneficiaries in some states, but this won’t occur until the divorce is finalized. Exception: Some states issue automatic restraining orders preventing the alteration of beneficiary designations until the details of the divorce are agreed upon. In other states, attorneys might obtain restraining orders preventing this.
Older couples often move to different states or even different countries when they retire. If you suspect that your marriage could be headed for divorce, speak with a family law attorney before relocating. Divorce laws in the new state or country might be less advantageous to you than the laws where you currently reside. If so, it might make sense to postpone or refuse relocation.
Download our Divorce Intake Form for your free consultation.