Navigating the Financial Gray in Divorce: 10 Common Considerations

Frances Cronlund offers invaluable insights into the unique financial challenges faced by couples undergoing "gray" divorce. With divorce rates among adults aged 50 and older on the rise, understanding these crucial financial considerations becomes increasingly essential.

Gray divorce, involving spouses over 50 years old, has become increasingly common in the US in recent years. In 1990, only 8.7% of all divorces involved adults 50 and older. By 2019, that percentage had risen to 36%^[1]. Divorce at this stage in life comes with unique financial concerns, including less time to recover financially, adapting to new standards of living, and healthcare costs. Here are some common considerations when navigating this significant life transition:

1. Banking and Credit – Establishing your own bank and credit accounts is essential. If there's a significant income disparity between you and your spouse, building credit in your name might be challenging. However, marital support, or alimony, may be used as income when qualifying for credit.

2. Cash Flow Planning – At 50+, you each probably had a long career, but not necessarily the same earnings history, workplace benefits, or as many years ahead to earn more. It makes sense to consider alimony and spousal support to bridge the gap between the past and future potential earnings. What is often overlooked in that calculation are future expectations regarding supporting adult children with college, wedding expenses, grandchildren gifts, and insurance.

3. Health and Long-Term Care Insurance – Account for the cost of health insurance when negotiating marital support and asset division. If you're on your spouse's health insurance, you'll need to secure your own plan after the divorce. COBRA rules^[2] may allow you to remain on your former spouse's plan for up to 36 months, but at your own expense. For long-term care, you might have been relying on each other to provide some custodial care. If so, securing a new long-term care plan is in order.

4. Disability & Life Insurance – Address what happens if your former spouse dies or becomes disabled before alimony or support payments end. Consider owning a life insurance policy on their life, payable to you, to protect against this scenario. For example, if your spouse is paying you $150,000/year of spousal support over 10 years, then it may make sense that you own a life insurance policy insuring their life, payable to you, with up to a $1.5 million death benefit. All or a portion of the premiums may be paid by your spouse until the last support payment is made. A similar solution could work for disability insurance.

5. Personal Residence – Downsizing, relocating, or staying in your current home all have financial implications. Qualifying for a new mortgage in your name and potentially accepting a higher mortgage rate can complicate matters.

6. Taxation – Be aware of capital gains tax implications on the sale of a primary residence post-divorce. While married, up to $500,000 of profits on the sale are tax-free. As a single individual, only $250,000 is tax-free. For example, if you and your spouse paid $500,000 on a house, but sell it for $1 million, then neither of you pays capital gains tax on the $500,000 profit. However, if you are awarded the house in the divorce, then decide to sell it later as a single person, you will pay capital gains tax of $250,000 of the profits.

7. Retirement savings – At 50+, chances are you have been saving into retirement accounts for over 20 years. Dividing retirement accounts can significantly impact both parties' retirement plans. It is critical to consider the tax implications and use tax-aware calculators to divide assets effectively. Also, most retirement benefits are pre-tax, they carry less weight than after-tax accounts and assets. For example, on the tax scale, a $1 million 401k is worth less than a $1 million house.

8. Asset division – Evaluate assets such as real estate, investments, and businesses carefully to ensure fair division. It may take substantial time to adequately appraise an operating business which was acquired or grew in value during the marriage. Some assets, like inherited or pre-marital property, may be excluded from division. So long as inherited or pre-marital property is not co-mingled with your spouse, it is generally excluded from the marital estate. However, if the excluded property produced income that was shared during the marriage, then the income may be considered as part of the spousal support arrangement.

9. Social Security Benefits – Understand how divorce affects eligibility for Social Security benefits, including spousal benefits. If married for at least 10 years, you may be eligible for ex-spousal benefits. That said, if you have your own worker history and your individual benefit is higher than any spousal benefits, then your own worker benefit will supersede your spousal benefit.

10. Estate Planning – Update legal documents like wills, trusts, beneficiary designations powers of attorney and advanced directives to reflect your new circumstances.

Money matters and divorce at any age can cause profound stress, which is unique and personal to everyone. And at 50+, there are fewer years ahead of you to make up for divided assets. If you combine the three factors of money, divorce, and time constraints, it’s no surprise that more than just patience is needed to navigate the exponential complexity. It’s critical that you seek the guidance of a coordinated financial team, such as financial planners, tax advisors, and divorce mediators. As a team, we can help you navigate these complex financial concerns and plan for a secure financial future.

^[1] (Brown, S. L., & Lin, I., Journals of Gerontology: Social Sciences, Vol. 77, No. 9, 2022).
^[2] Continuation of Health Coverage (COBRA) | U.S. Department of Labor (dol.gov)

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