Divorce is tough no matter what stage in life it happens.
But for Americans retirement age and older, ending a marriage is particularly tough.
Dividing up a lifetime of assets while making plans for long-term health care can create its own complications. Let’s take a closer look at a “Gray” or “Silver” divorce to see how a couple divorcing in their 60s, 70s and beyond face different issues than those who divorce earlier in life.
How Should Older Couples Divide Assets?
At retirement, child custody and support are most likely no longer an issue. But with more assets, and with little or no future earning capacity for either party, there’s more at stake in a silver divorce. How will retirement accounts be allocated, and will one spouse need to receive maintenance?
A spouse may need to be kept on a life insurance or retirement account to protect them from poverty. It’s possible that a divorced spouse may not have access to survivor benefits, or one of the spouses doesn’t want the other to have access. This is all part of the negotiations. You need to investigate the rules particular to your pension plans.
Couples in their senior years are more likely to have commingled assets, including inheritances. This can create an issue, especially if the inherited assets have high value.
How Divorce After Age 65 Affects Taxes
Transitioning from filing married jointly to filing single can have a big impact on annual income tax filing. The primary residence exclusion will also be impacted. This exclusion provides a tax exclusion from the sale of a primary residence of up to $250,000 for individuals filing single and $500,000 for those filing jointly.
The primary residence is often a couple’s largest asset, and if it was purchased 40 years ago at a lower cost than its present value, tax issues must be thoroughly evaluated. If the property is transferred to one of the spouses prior to the divorce, this may have a negative impact on the capital gains tax, if the property is sold. The $500,000 exclusion will drop to $250,000.
If the couple has a large estate exceeding their state’s estate tax exemption or the federal estate exemption, tax planning needs to change. The couple would lose the unlimited marital deduction, portability elections and the ability to utilize Disclaimer and Credit Shelter Trusts.
Planning for Long-Term Care
If the couple has created a plan with their estate planning attorney for long-term care, it needs to be reviewed in light of the divorce. If the plan involved assets to be transferred to avoid the five-year look back period for Medicaid, those assets may be transferred to adult children or to an Irrevocable Medicaid Asset Protection Trust.
How Divorce Impacts Estate Planning
Depending upon the state of residence, the final judgment of a divorce may revoke provisions and bequests in a Last Will and Testament—but it may not, so an estate planning attorney needs to be consulted. The same should be considered for the health care proxy, power of attorney or any similar documents.
Another fine point to be considered: divorces almost always take longer than anticipated. If one of the spouses should die or become incapacitated during the process, what would happen to the surviving spouse?