While uncommon, “Gray” or “Silver” divorce, which referrers to when a couple divorces in their 60s, 70s and beyond, presents different issues than a divorce earlier in life. Child custody and support are no longer an issue, but dividing up a lifetime of assets, while planning for long-term care in the midst of a divorce, can create its own complications, according to a recent article titled “How Silver Divorce adds a Wrinkle to your Estate Plan” from Westchester Business News.
Dividing Assets. With more assets, but 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. Spouses with pensions need to investigate the rules for survivor benefits. 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.
Couples in their senior years are more likely to have comingled assets, including inheritances. This can create an issue, especially if the inherited assets have high value.
Taxing Matters. 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.
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?
Reference: Westchester Business Journal (Oct. 4, 2021) “How Silver Divorce adds a Wrinkle to your Estate Plan”