How Finances Are Split In a Gray Divorce

"Till death do us part” no longer applies to a growing number of older couples. A Bowling Green State University study found that between 1990 and 2021, the divorce rate more than doubled for those ages 55 to 64, and the rate tripled for those 65 and older.

“People are living longer, they are healthier, and divorce doesn’t have the stigma it used to have,” says Lili Vasileff, a certified financial planner and an expert on the financial aspects of divorce. But a late-in-life divorce can come with plenty of challenges.

Equal versus equitable split of assets in gray divorce

How your assets will be divided in a divorce depends on where you live, Vasileff says. If you’re in one of the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — assets acquired during your marriage will be divided equally.

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All the other states are equitable distribution, or “kitchen sink,” states in which assets acquired during your marriage are split based on the spouses’ individual incomes, Vasileff says. In that case, the lower-earning spouse may be entitled to a larger share of assets than the higher-earning spouse so that the lower earner can maintain his or her standard of living after the divorce.

Although Alaska and Florida are equitable distribution states, divorcing couples have the option of filing a community property agreement to divide assets 50-50 through a community-property trust. However, they must create the trust before divorce proceedings begin.

How are retirement account assets split in gray divorce?

The rules for splitting assets in retirement accounts depend on the type of accounts you own. Plans covered by the Employee Retirement Income Security Act (ERISA), which include 401(k) plans and pensions, must be divided through a qualified domestic relations order. A QDRO is issued by a court or state agency and recognizes a divorcing spouse’s right to receive all or a portion of the account owner’s defined-contribution plan or pension.

There are two ways to divide plan assets using a QDRO. In a separate-interest QDRO, the spouse who is the nonparticipant in the retirement plan can collect benefits even if the owner of the plan hasn’t retired, Vasileff says. In a shared-interest QDRO, the nonparticipant — known as the alternate payee — is awarded a share of the ex-spouse’s benefits after he or she retires. Under a shared-interest approach, for example, your ex-spouse would be required to wait until you retire to receive payments from your pension.

Once both parties agree to the terms, the account owner gives the document to the plan administrator, and the QDRO must be certified by the court. A few months may pass before the order is implemented. Vasileff recommends contacting the administrator of your pension or retirement plan and your divorce attorney for additional guidance on how to divide your 401(k) funds or pension with your ex-spouse.

A QDRO isn’t required to divide IRAs that you accumulated during your marriage, but you will need a divorce decree. If you agree to transfer funds from your IRA to your ex-spouse’s account (or vice versa), Vasileff recommends using a trustee-to-trustee transfer. That way, you’ll avoid incurring early-withdrawal penalties and income taxes on the withdrawals.

Once you’ve finalized your divorce, make sure to remove your ex-spouse as a beneficiary for your retirement, bank and brokerage accounts, along with your insurance policies.

How do you factor in alimony and child support in gray divorce?

Even older couples may still need to negotiate alimony and child support — and those obligations don’t necessarily end when the children are no longer minors. Andy Heller, 61, a real estate investor and author of Take the High Road: Divorce with Compassion for Yourself and Your Family, divorced in 2014 after eight years of marriage.

After Heller’s divorce, he started paying about $7,000 a month in alimony and $5,000 a month in child support for his children, Lily, 18, and Jacob, 16. But because Heller is an entrepreneur, he negotiated an agreement with his ex-wife that reflects fluctuations in his income. “If my business is suffering like it did during the Great Recession [in 2007–09], I have the right to ask that her alimony be reduced.”

Heller’s financial responsibilities for his children won’t stop when they reach 18 because he plans to help pay for their college tuition. Vasileff recommends including details on how to divide the cost of tuition and other college expenses in your divorce agreement.

How is Social Security impacted by a gray divorce?

When calculating how divorce will affect your retirement income, you’ll need to understand the amount you’ll receive in Social Security benefits. That’s particularly important if you were the lower-earning spouse, because there’s a good chance you’ll be able to receive benefits based on your ex’s earnings history. 

You (or your ex, if you were the higher earner) are eligible for up to 50% of your ex-spouse’s benefit, although the amount will be reduced if you file before you reach full retirement age (66 if you were born from 1943 to 1954, gradually increasing to 67 for those born in 1960 or later). To qualify, you must be 62 or older and currently unmarried, and your marriage to your ex must have lasted at least 10 years. 

In addition, if your ex qualifies for benefits but has yet to apply, you can still start collecting Social Security based on the ex’s record, though you must have been divorced for at least two years. Claiming benefits on your ex-spouse’s record has no effect on his or her benefits or the benefits of your ex’s new spouse.

“If your ex-husband or ex-wife gets 50% of your Social Security, you’ll still get 100% of your benefits,” Vasileff says. 

For more information about your eligibility to claim your former spouse’s benefits, contact your local Social Security office or visit www.ssa.gov.

Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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