Gray Divorce Checklist: What to Do Before You Sign Anything

WHAT IS A GRAY DIVORCE – AND WHY DOES IT REQUIRE SPECIAL PLANNING?

Divorce is almost always challenging, emotionally, practically and financially. But getting divorced when you’re over the age of 50 – popularly known as “gray divorce” – adds another layer of complexity.

You may be ending a decades-long marriage and not even remember a time when you were on your own. Or perhaps this is a second or third marriage, and there are multiple sets of heirs that will be impacted.

In any case, age often comes with a more complicated financial situation – multiple, potentially large retirement accounts, an expensive home (or two), estate plans that need to be revisited and retirement plans that may only work when supported by two sets of income.

We’re here to help. If you find yourself facing divorce at 50+, here’s how to prepare.

FINANCIAL CHECKLIST FOR GRAY DIVORCE

1. GATHER ALL FINANCIAL DOCUMENTS

The first thing you should do is make sure you have a complete picture of your marriage’s financial situation. Right now, you don’t have to understand how it all fits together – just gather these documents and give them to your attorney.

Do your best but don’t stress about it if you can’t find something right away – the documents will likely have to be produced during the legal process.

• Bank statements (individual and joint)
• Retirement account statements and pension plan information
• Life insurance policies
• Brokerage account statements
• Debt information, including mortgages, car loans, credit cards, college loans
• Tax returns
• Financial information on any businesses and properties you and/or your spouse own
• Income information

2. ASSESS RETIREMENT ACCOUNTS AND PENSION RIGHTS

Absent a prenuptial agreement, state law typically dictates how retirement assets will be divided during a divorce. While not all states are the same, you can generally expect the court to divide retirement money either 50-50 or otherwise equitably depending on state law, which may mean splitting up the accounts. Your attorney can tell you what to expect.

If you’re awarded a portion of your ex-spouse's employer retirement account (like a 401k or pension), the court will issue a (QDRO) qualified domestic relations order that you’ll need to submit to the retirement administrator to get the money.

For an IRA, you won’t need a (QDRO) qualified domestic relations order, but you will probably need to send a copy of the divorce decree to the investment company. If you’re the one transferring your IRA to your ex-spouse under a court order and you’re not at least age 59½, make sure the transfer is done directly (as opposed to withdrawing money from your IRA and then your ex-spouse rolling it over). If it’s not a direct transfer (including having the owner changed directly to your ex-spouse), you may owe a 10% penalty for early withdrawals.

3. DECIDE HOW AND WHEN TO DIVIDE ASSETS

During the divorce process, you’ll negotiate (or a court will order) how assets are to be divided. This includes:

• Your home and other property
• Any business interests you own
• Financial accounts

Don’t just consider the dollar value of each asset. A $1 million home is practically very different than a $1 million business; you can live in one while you have to run the other. Even a retirement account is different than a brokerage account despite being the same size, because one may have a much lower tax burden than the other.

4. ANALYZE TAX IMPLICATIONS BEFORE FINALIZING

Speaking of taxes, make sure you understand the tax position your asset split leaves you in. Here are some things to remember.

YOUR HOME

With housing values having risen dramatically over the past few years, keeping your primary home could have a major tax implication.

You can currently exclude up to $250k from the capital gain on your home when you sell as a single tax filer. So, if your home was $300k when you bought and eventually is $750k when you sell, you’ll owe tax on at least $200k of gain (the $450k gain minus the $250k exclusion if you qualify for the full amount).

Note, however, that any money you spent on improvements you made to the house while you and/or your spouse owned it (along with some other kinds of costs) can be deducted from the amount of your gain as long as you have records. They become part of the house’s “cost basis.”

INVESTMENTS

You should also find out the cost basis of any other non-retirement investment assets, because that will tell you how much of a tax burden they have built in. Generally, when you sell stocks, bonds or other investments, you’ll owe capital gains on the sales price minus the cost basis.

RETIREMENT ACCOUNTS

As far as retirement accounts, you can generally expect that the full value of money in a traditional account will be taxed as income when you take it out. On the other hand, money in Roth accounts won’t be taxed at all if you meet the requirements when you withdraw it.

While you may have to pay taxes on withdrawals, the usual 10% penalty on withdrawals under the age of 59½ doesn’t apply to money rolled over as the result of a divorce.

FEDERAL TAX DEPENDENTS

While minor children are less common in a gray divorce, you certainly may have them. Generally, the parent that the child spends most nights with has the right to claim them on federal taxes, unless agreed otherwise. Claiming dependents also allows that parent to file as head of household with a larger standard deduction.

ALIMONY AND CHILD SUPPORT

While alimony used to be considered income (and deductible by the payer), that’s no longer the case. Child support also is not considered as income and not deductible for the parent paying it.

5. REVISIT ESTATE PLANNING DOCUMENTS

Hopefully, you have a documented estate plan, and you’ll probably need to update it. If not, it’s time to get one.

Make sure these elements of your estate plan account for the dissolution of your marriage:

• Your Last Will and Testament
• Any revocable trusts in your name (marital trusts will be handled during the legal process of the divorce, and irrevocable trusts can’t be changed once they’re established)
• Beneficiaries that are listed on your retirement accounts and insurance policies (note that you may be required by the divorce decree to have your ex-spouse as a beneficiary)
• Any documented powers of attorney

6. BUILD A POST-DIVORCE BUDGET

While the divorce is in process, start thinking about your future and how your financial situation may change. For example:

• What will your income situation be? If you haven’t been doing paid work, you may need to plan to start, and you might need to consider additional education, training or certifications. Your attorney should also be able to give you a sense of what you can expect for alimony or child support, if anything (and note that you may be the one paying it, not receiving it).
• How will you get health insurance if you were previously covered by your spouse’s plan? Health insurance should be considered as part of the divorce settlement. You may be able to use COBRA for a period of time after the divorce, but it can be costly. If you plan to get coverage through your own job, the divorce will trigger a special enrollment period during which you can sign up. And, of course, you’ll be eligible for Medicare at age 65.
• What will happen as you age? While it can feel morbid to think about, your spouse was likely a big part of your plan for long-term care. You may want to consider buying long-term care insurance if you don’t have other family that could reliably care for you and you don’t have the assets to pay for assisted living or nursing over a long period of time.
• Does the divorce change your plans for Social Security? It doesn’t have to – as a divorced spouse, you can still claim Social Security on your own record or your ex-spouse's, if it gives you a higher amount (as long as you were married for at least 10 years and you don’t remarry). Note that if your ex-spouse hasn’t started collecting Social Security yet, you’ll have to be divorced for two years before you can start claiming on their record.

7. CONSULT A FINANCIAL ADVISOR –  NOT JUST A DIVORCE ATTORNEY

Your divorce attorney will work to get you in the best financial position coming out of the divorce. But a divorce attorney can’t:

• Tell you how to invest any lump sums you were awarded in the divorce
• Help you create a budget for your new single life
• Guide you on new long-term care or other insurance needs
• Tell you what to expect from a tax perspective given your new situation or guide you on ways to keep your taxes lower
• Help you develop a plan for a solo retirement that maximizes your chances of your money lasting

A financial advisor can help with all of these. And they’ll build a long-term relationship with you that will continue years and even decades after the divorce.

MISTAKES TO AVOID DURING A GRAY DIVORCE

The biggest mistake you can make during any divorce is rushing to get it over with and figuring you’ll make a plan once you get through it.

Without the right strategies and guidance, you could:

• Saddle yourself with a big tax bill you didn’t expect
• Leave yourself without money or assets that you’ll need and were entitled to
• Overlook hidden or future costs that will damage your financial security
• Jeopardize your ability to have a secure retirement or any retirement at all

WHEN SHOULD YOU INVOLVE A FINANCIAL ADVISOR IN A GRAY DIVORCE?

More than likely, a financial advisor is a good idea during a gray divorce. Finances when you’re close to or in retirement tend to be complex and involve lots of assets and property.

The best time to hire a financial advisor is before you agree to anything or sign the papers. But don’t rush in this decision – you want a person you can trust that you’ll feel comfortable working with going forward, especially if you haven’t traditionally handled your family’s finances.

In addition to your personal comfort with a potential advisor, make sure you look for one who’s willing to work with your divorce attorney, estate attorney, tax professional and other experts to guide you.

YOUR PRE-DIVORCE FINANCIAL ACTION PLAN

To wrap up, here’s what to do before divorce:

1. Understand and document your financial situation
2. Hire the right team that will look out for your interests, including a divorce attorney and financial advisor
3. Make sure you know the implications of what you’re being awarded in the divorce
4. Be ready to update your estate plan to account for the divorce
5. Develop a new budget and retirement plan

In the middle of this emotional time, you’re probably not focused on money first, nor should you be. But it’s important to protect yourself and take steps now that can have a big impact on your retirement plans, tax burden and potential heirs later.

You don’t have to figure it out alone – professionals can step in to guide you, leaving you the space to focus on healing, family and self-care.