7 Key Financial Steps to Take Before You File for a Gray Divorce
Contemplating a gray divorce? Before calling in the lawyers, take time to properly understand your financial situation and the impact of dividing assets later in life.
Gray divorce refers to couples splitting after age 50, and it's more common than people think.
Pew Research Center found that the divorce rate for Americans 50 and older has roughly doubled since 1990. And it's even higher for those 65 and up.
The stakes are different when you divorce later in life. There's less time to rebuild savings and more healthcare costs to plan for. Doing your homework before you file for a gray divorce can mean the difference between a secure retirement and scrambling to make ends meet.
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Here's how to prepare.
1. Review your finances
To start with, have a clear picture of what you own and what you owe. Having clean records makes everything else easier.
Gather your financial documents:
- Tax returns for the past three years
- Pay stubs or income statements
- Bank and brokerage statements
- Retirement plan summaries
- Insurance policies
- Mortgage and HELOC statements
- Deeds and titles
- Credit card and loan statements
- Business records, if applicable
Build a net worth statement. List individual and joint assets and debts, with current balances and who's on each account. Identify separate vs marital property.
Separate property might include inheritances or pre-marital assets. However, growth and commingling can blur the lines. So, keep supporting documents handy.
Gregor Emmian, deputy chief digital growth officer at Rise, recommends reviewing key financial aspects before filing for a gray divorce. "Build a net worth statement. List individual and joint assets and debts, with current balances and who's on each account. Identify separate vs marital property."
He adds, "Separate property might include inheritances or pre-marital assets. However, growth and commingling can blur the lines. So, keep supporting documents handy."
2. Understand how divorce affects retirement
Retirement accounts are often the largest assets on the table. And the rules matter:
To split employer plans (401(k)s) and pensions without triggering taxes or penalties, you'll need a court order known as a qualified domestic relations order (QDRO).
Individual retirement accounts (IRAs) don't use QDROs. However, transfers must be structured carefully under a divorce decree to avoid taxes. See IRS Publication 504.
Social Security adds another layer of complexity. If your marriage lasted at least 10 years, and you're 62 or older, you may be eligible for a divorced-spouse benefit. If your ex-spouse dies, survivor benefits can also apply.
3. Consider what you'll do with real estate
Your home is often both a financial and emotional anchor in divorce. Selling and splitting proceeds is one path. However, it's not always the smartest option for older couples who value location or community ties.
When the time comes, there may be alternatives to selling, such as:
- Temporary co-ownership agreements
- Structured buyouts
If one spouse buys out the other, they'll be responsible for the mortgage and taxes. Transfers of property incident to divorce are generally non-taxable under IRS rules. But the cost basis and future capital gains still matter.
If you do sell a primary residence, you may be able to exclude up to $250,000 of gain per person if you meet the ownership and use tests (check IRS Publication 523 Selling Your Home). Check the numbers before you sign anything.
4. Review health insurance options
Health coverage after divorce isn't optional, and the cost can surprise people who've been on a spouse's plan for decades.
According to Fidelity, a 65-year-old may need $172,500 in after-tax savings to cover healthcare expenses in retirement.
You'll need to start researching your options at least six months before the divorce finalizes.
Continuation of health coverage (COBRA) typically provides up to 18 months of coverage after a qualifying event, such as divorce, and sometimes longer in special cases.
The special enrollment period on the Affordable Care Act marketplace can also be triggered by divorce. You can shop for plans outside the usual open enrollment window on HealthCare.gov.
If you're nearing 65, consider timing decisions around the start dates for Medicare Parts A and B. Note: HSA contribution rules change once you enroll in Medicare.
5. Know the tax impact of divorce
Taxes weave through almost every decision in a divorce, and asset division creates tax events that can persist for years.
Consider the tax basis of investments before dividing them. A stock portfolio worth the same as a retirement account today might have very different tax implications when you need to access those funds.
If you have minor children, note that alimony rules have changed since 2019. Alimony is generally not deductible for the payer or taxable to the recipient for divorces finalized after 2018. Review the current treatment in Topic No 452 Alimony and Separate Maintenance.
6. Update your estate plan
When your life changes, your estate plan should change, too. You'll need to update the following:
- Will
- Trusts
- Beneficiary designations
- Titling
Note: Retirement accounts and life insurance pass by beneficiary designation (not your will). So check those forms promptly.
Couples going through a divorce often focus on dividing current assets but forget about future contingencies.
Update your power of attorney (POA) and healthcare directives immediately, rather than waiting for the divorce to finalize.
If support payments are part of your agreement, consider life insurance to secure those obligations, and set ownership and beneficiary structures so that they protect both sides.
7. Research your financial and legal experts
Having the right team can save you from expensive mistakes. You'll need the following:
- A divorce attorney who understands later-life issues
- A Certified Divorce Financial Analyst (CDFA) to model settlements and retirement income
- A tax professional to map out near- and long-term tax effects
Before you hire a professional, ask the following:
- How many gray divorces have you handled?
- How do you structure QDROs?
- What software do you use to model cash flow and taxes?
- What's your approach to Social Security claims after divorce?
The answers will show whether they can really guide you through the financial side of gray divorce, including taxes, insurance, retirement income, housing and everyday costs, as well as healthcare and long-term medical needs.
Planning for a new chapter
Gray divorce is a major financial pivot, and preparation makes all the difference. The more groundwork you do before filing, the more control you'll have as things unfold.
Build your documents, run the numbers and lean on professionals who know the terrain.
You're building a new financial plan for the next phase of your life. Careful preparation now will lay a stronger foundation for the years ahead.
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