Older Age Divorce
Retirement planning was done assuming they couple would enjoy retirement as a married couple. Now their primary earning years are behind them and less time exists to exists to build the divided retirement funds back up. Both spouses may have to work, and/or work longer. A financial projection should be done estimating the funds that will be available from wages, retirement savings and investments and comparing this to estimated living expenses post-divorce. To be accurate, however, the use of proper interest rate, discount rate and inflation rate assumptions must be used or else misleading results may occur. This will then indicate if they need to start working or how long they will need to continue working under assumptions with and without social security benefits being available in the future.
The allocation of specific assets subject to division should be heavily considered. Emotional ties to certain assets (e.g. marital residence) may cause an imbalance that will create financial disaster in years ahead. An attempt should be made to balance the assets received, including a pro-rata allocation of investment accounts. The spouse's separate risk tolerance and their age would need to be addressed to assure the portfolio is appropriate for them personally. Any proposed division should also be viewed on both a before-tax and after-tax basis to make sure it is equitable.
If assets are sufficient, retaining the marital residence can have its advantages: A reverse mortgage can be pursued to provide additional liquidity either on an annual basis or in case of emergencies (e.g. medical concerns); the mortgage interest deduction can offset taxes on other income; and the exclusion of gain from taxes on a subsequent sale.
The form of retirement accounts is also important. Defined benefit plans (e.g. pensions) will not pay out until the employed spouse retires and there is also a risk of loss of the benefits. Foreign pensions can also be a tremendous costly headache to divide. A lump-sum buyout or value equivalent of other assets should be considered. Defined contribution plans (e.g. profit sharing) are easier to divide and commonly provide for hardship withdrawals. All retirement plan assets need to properly valued. It is important to note that employer contributions made after divorce may be subject to division if they are made based on employment prior to the divorce.
Other benefits such as stock option plans need to be properly valued and allocated, pursuant to local case law, as of the date of service. Most employers will not divide up the stock options between the parties and careful wording needs to be in the dissolution agreement because of this as well as detailed procedural language allowing the spouse to exercise their share of the options.
A separate look into maximizing social security benefits should be performed. A person's entitlement to benefits of based on the ex-spouses earnings are dependent upon whether the marriage lasted 10 years or more and whether they get remarried will determine whether they are entitled to 50% or 100% of the ex-spouses benefits. Recent law changes also provide different spousal benefit rules based on whether they were born before or after January 1, 1954. A strategy, based on when to file for social security benefits as an ex-spouse, is available to those born before January 1, 1954 to increase spousal benefits.
Annuities can provide a steady cash flow or have serious implications depending on the terms of the contract. They present a lack of flexibility for timing of distributions and large penalties can be involved. Contracts should be reviewed thoroughly.
If considering re-marriage, pre-nuptials are more important at a later age. Both spouses will likely be coming into the marriage with notable sole and separate assets and provisions should be made as to where ongoing expenses are to be paid from first and where larger expenses, such as children's education and caretaking are to be paid from as they arise.
These are just some of the reasons a trusted CPA should be involved both before and after the divorce process for your clients who are age 50 plus to add to the value of services you provide.
CPA/PFS/CFF, MST, EnCe