Journal of Financial Planning: May 2022
Angie M. Stephenson, CFP®, CPA/PFS, is partner, senior wealth adviser, and COO at Domani Wealth.
Divorce today is less common for adults younger than 50. However, “gray divorces” are on the rise. An analysis of American Community Survey data, conducted by Pew Research Center, shows divorces involving couples 50 and older have increased by 50 percent since the 1990s (Stepler 2017). The divorce rate among couples ages 65 and older has more than tripled. The hardest group hit? Those divorcing from a second or third marriage.
Financial planners are needed more than ever to assist individuals with the multitude of questions and decisions an individual either close to or already in retirement must consider when going through a late-life divorce. Divorces at a more advanced age are much different from those for an individual who is 35 years old with two young children.
Assisting as Financial Planners
What are some of the financial planning steps that should be considered when advising clients? Ideally, the financial planner will be involved during the divorce negotiations before the final divorce and asset division agreements are signed.
Advisers need to assist the client in bridging the gap from what their financial life looked like as a married couple to what it will need to be as a single individual. It is time for your client to think through what is important going forward and to gain clarity on their spending and financial priorities.
Experienced financial planners play a crucial part in this level of divorce. As someone who understands tax laws, you can evaluate what the property and asset settlement may look like not just based on total dollars but based on single-taxpayer status and income.
Challenges to Navigate
Keep in mind that most individuals going through this type of divorce may have been married in excess of 30 to 40 years. It can be emotional, and they may not remember having goals as a single individual since the vast majority of their adult life has been spent as part of a married couple.
It is important to assess what role the client had in financial decisions in the marriage. A financial adviser may find that one spouse was very actively involved in the financial management of their assets and spending, while the other had no involvement. If you are working with the spouse with no or very limited financial knowledge, this will shape how you move the engagement forward. This scenario may be more about education first of financial terms and spending before you move on to recommendations. They need to fully understand how the decisions they make will impact the last chapters of their lives.
Also consider that these late-life divorces will most likely include individuals who will not return to work, and their current assets need to carry their financial goals for the balance of their lives.
Considerations
Assets and liabilities. Review the assets and liabilities of the couple. Assuming the divorce is amicable and there is a 50/50 split, consider the assets carefully for tax consequences before making recommendations on what assets to request as part of the divorce agreement. This part is very important as we know retirement assets such as 401(k) plans and IRAs are generally 100 percent taxable when the person withdraws funds. The personal portfolio investments are generally only taxable on the income earned annually. The capital gains in the portfolio are taxed at preferential lower tax rates. Taking all of the retirement assets and allowing one spouse to take the personal portfolio in equal dollars will generally not be an equitable divide after income taxes.
Businesses or non-liquid assets. Closely held business or illiquid assets need to be carefully considered. Do you have an independent valuation of the entities or properties that consider industry multiples, trends, shareholder agreements, etc.? This can be a large asset for a spouse not working in the business to gain value in the property division. Most closely held businesses are not liquid, so it may be a strain to come up with the liquidity to pay a spouse their share. This may require engaging professionals experienced in this kind of assessment to determine options for your client to obtain their share of the value without bankrupting the business.
Future income. Look for future income such as payments from defined benefit plans, nonqualified plans, stock plans, etc. from employers. Make certain the discovery process has properly listed these future benefits and assets that should be considered in the marital divide. This can be overlooked if the plan is not making any payments when the divorce is being filed.
Review possible adjustments to investments. As a single investor, the client may have different investment priorities and risk tolerance, which will likely affect their portfolio makeup. You may have to change the overall asset allocation. For example, if they have lost part of their retirement account balance or income stream as a result of the divorce, you’ll need to determine how to proceed with the allocation of the portfolio, including required cash payments. Where is it best to take cash flow from an economic and income tax perspective in the future? These can be major shifts for the client compared to their allocations as a married couple.
Also, remember to prompt the client to change the beneficiaries on any investment or retirement accounts to suit their new circumstances.
Update insurance policies. Remember to evaluate all coverages including home, auto, and personal property insurance to make sure they properly reflect the client’s new situation and are solely in their name. The client may not need some insurance policies they had before as they transition to single status.
All insurance policies with beneficiaries named should be revisited. It is likely the primary beneficiary is the spouse. It is probable that your client will no longer want to name their ex-spouse as a beneficiary. New forms will need to be completed and submitted to make these necessary changes.
Legal documentation. Along with beneficiaries of insurance policies, it’s important to update several major legacy documents:
- Last will and testament
- Financial power of attorney
- Medical power of attorney
- Revocable trusts
- Other trusts
- Shareholder agreements
Often, the spouse is named as the executor and trustee in estate planning matters and documents such as powers of attorney, healthcare powers, etc. Updating these documents to include individuals who are more appropriate for your client is key. Please note that these documents can be updated before the divorce is final and, in many cases, an individual may want to make some of these changes after the date of separation. Work closely with clients to help them understand these decisions, and work with their attorneys or other professionals to ensure these changes take effect.
Social Security. Divorce may impact Social Security as well. If the client was married for over 10 years, they may be entitled to receive Social Security benefits on their ex-spouse’s record, which may mean a higher benefit if he or she earned more, provided that:
- They remain unmarried.
- They are 62 or older.
- The ex-spouse, remarried or not, is entitled to Social Security retirement or disability benefits.
- The benefit your client is entitled to based on their own work record is less than the spousal benefit; if so, they qualify for the higher spousal benefit.
Additional Considerations
Here are some further steps to consider during this planning process:
- Revisit the client’s financial priorities as a single individual. What will they need to live on to be comfortable?
- Determine if there are any existing prenuptial or postnuptial agreements for the couple.
- Assist the client in determining what their spending will be after the divorce. They may need to consider some difficult changes in their lifestyle depending on the marital assets and spending in the past.
- Travel commitments, vacation homes or leisure items, or timeshares they maintain.
Reducing Expenses
There may be ways to drastically reduce ongoing expenses. A client could consider downsizing their current home if the expenses for upkeep are too significant. If they own a second home, it may make sense to keep only one residence or convert the second home to a rental or vacation rental. If country club dues and fees are a strain, perhaps they should consider eliminating or taking a social membership to reduce the costs. These changes may add liquidity into their personal finances, which can assist with ongoing living expenses.
Subscriptions. One other area of review is the subscriptions that a client had as a couple. Assist them in reviewing all of these carefully. Many times, subscriptions include entertainment that your client does not need or enjoy. For example, a cable bill may include the sports packages such as NFL and NHL with movie channels. This can add a fairly large amount to the monthly bill. Subscriptions can often include things we don’t remember signing up for or don’t pay much attention to: audiobooks, periodicals, regular deliveries of items, databases, etc.
Income taxes. Consider carefully their income tax liabilities as a single taxpayer since they will no longer be filing jointly. Your client may need to adjust their withholdings on wages or pensions and consider paying estimated taxes as a single taxpayer. If you do not have this background, it will be important to work with the client’s CPA or tax firm to assist them in understanding these changes.
Family financial support. If your client is offering support to loved ones such as adult children or grandchildren, that may need to be revisited as well. Students can access loans for college while your client may find their spending more strained if they continue with this type of support. It’s important to help clients understand what they can offer to family as financial support. This is a life event for the client and, in many cases, their families.
Healthcare. If your client is currently covered by Medicare, they may qualify for a life changing event and be allowed to reduce their premiums owed. Medicare premiums are based on the income reported on their tax return from two years prior, when they were likely paying a Medicare premium rate based on a married status and their income level before the divorce. Processing a “change in life event” with the Social Security Administration may allow them to lower that monthly premium to better match their current income.
If they are still covered on their spouse’s employer-sponsored health insurance policy, they may need to find a new plan. If they are employed, it may be best to enroll in their employer’s health plan. If that’s not an option, they can extend their existing coverage through COBRA while they look for other plans or apply for new coverage through the Affordable Care Act marketplace (Investopedia 2022). COBRA currently allows an individual who is losing employer coverage due to divorce to keep the coverage for 36 months compared to the typical 18-month timeline. This means the client may have some time to evaluate the options and to compare the costs of COBRA to an individual healthcare policy. With older divorces, this sometimes can allow a person to reach Medicare age by keeping the COBRA coverage for 36 months.
If the divorcing spouse you are working with is not yet old enough for Medicare, it will be important to determine if their coverage is adequate or if they need to purchase a supplemental policy.
Future Protection
If your client anticipates getting remarried in the future, consider a prenuptial agreement. That way, if the marriage doesn’t work out, the divorce process will be less disruptive to their life and will protect the remaining nest egg from another divorce. Many individuals opt not to remarry to minimize some of the complexities that go along with a late-life remarriage. Even without a formal marriage, state laws may also be a factor in what a new mate may be entitled to receive if the relationship does not work out. You should direct your client to their attorney to verify the state laws when they enter into a relationship after divorce.
Credentials and Partners Who Can Help
There are credentials and education available for planners to increase their knowledge base and to assist their clients going through divorces. Legal and CPA firms may request assistance from firms that have a Certified Divorce Financial Analyst (CDFA) on staff. With the increase in divorces among older clients who have accumulated more financial assets, we may see more firms looking to add these specialists to their team or support current members in obtaining these credentials. Regardless of the credential, it is important that we as financial planners learn as much as possible to properly support our clients who may go through these late-life divorces.
Bottom Line
Going through a divorce can be very draining on your client, affecting their health and emotional well-being. Being patient and helping them to understand the moving pieces and long-term effects of their decisions are very important. You will need to wear your psychology hat as you utilize your financial credentials and experience to help clients through such a significant change at this stage of their lives.
References
Investopedia. 2022, March 3. “All About COBRA Health Insurance.” www.investopedia.com/articles/insurance/11/intro-cobra-health-insurance.asp.
Stepler, Renee. 2017, March 9. “Led by Baby Boomers, Divorce Rates Climb for America’s 50+ Population.” Pew Research Center. www.pewresearch.org/fact-tank/2017/03/09/led-by-baby-boomers-divorce-rates-climb-for-americas-50-population/.
