Getting divorced later in life, especially after age 50, can create devastating impacts on future planning and financial security. In fact, separating from your spouse means you can potentially double your expenses while halving your assets, but this can be especially detrimental when you have less time to rebuild at a mature age.
In all likelihood, much of the shared wealth acquired by a couple after a long marriage resides in assets, including investment accounts, annuities, retirement funds, and pension division. Precisely how those assets will be divided varies depending on where you live.
There are only nine community property states in the United States, of which California is one. These are states where the law dictates all earnings and assets acquired with those earnings during the marriage are equally split between the two parties.
Divorce is complicated and there are many different ways to approach it. Existing rules and laws are constantly evolving. Seeking professional help from your financial advisor, accountant, and an experienced attorney with strong knowledge of California divorce law makes protecting your rights to the fullest extent possible.
Assessing Assets
For older couples, retirement savings and other sources of investments often become a main focus in the division of assets, both due to the economic value they represent and the shorter timeframe in which they need them. These types of assets are often governed by their own rules regarding how they can be divided. Let’s take a look now at three kinds of assets included in a financial assessment that hold special relevance to later-in-life divorce.
1. Retirement accounts
Although 401(k)s and individual retirement accounts (IRAs) can have only a sole account holder by law, the money contributed into these accounts throughout a marriage technically belongs to both parties. Division of such accounts can be complicated and parties will want a seasoned attorney to advise them of their options.
Any 401(k) funds that need to be divided in a divorce require a qualified domestic relations order (QDRO) filing with a state-level domestic-relations court to indicate exactly how they want this done. The QDRO is handled post divorce by an Erisa Law attorney that specializes in dealing with these specialized accounts and division of same.
IRA accounts are treated differently under the law, so QDROs do not apply. It is important to note that a direct rollover from one spouse’s IRA to another spouse’s IRA for tax efficiency purposes can only happen if the divorce settlement outlines it and then it is filed with the plan custodian.
Account holders who may be worried about jeopardizing their retirement savings might instead consider relinquishing other assets to satisfy their financial obligations to the other spouse. For instance, a greater stake in other property, home equity or investments could be leveraged for equitability.
2. Pensions
A defined-benefit pension earned by one spouse during the marriage is typically identified as a shared asset too..
A qualifying spouse would be entitled to only that portion of the pension earned during the marriage, similar to an 401(k) or an IRA, yet pension plan rules, state laws, and whether a spouse has already begun receiving payments can complicate the division of pension assets more so than retirement accounts. Additionally, the state requires that the entity holding the pension be joined to the family law case for a variety of reasons.
Often pensions will have a surrender value that can be determined as of date of separation. If there is no surrender value an attorney along with a forensic accountant might be needed to look at the marital interest in the pension.
3. Social Security
Whereas retirement accounts and pensions may be subject to a lot of negotiating and compromise, the way Social Security benefits are handled in a divorce presents a stark contrast, controlled by law and rarely open to interpretation.
Couples who were married for at least 10 years prior to the date of separation have additional guidelines to contend with; the former spouse is eligible to apply for monthly benefits valued up to 50% of the higher earner’s full retirement-age benefit. However, should the lower earner re-marry they may be forced to forgo any claim to such benefits.
This ex-spousal benefit is a rare win-win for both parties since it in no way affects the benefit of the higher-earning spouse, no matter how many times they get married and divorced.
Securing Your Future
Before finalizing your divorce, it’s wise for both parties to review their financial goals with both a divorce attorney and a financial planner. Discussing these matters ahead of settling can aid in making informed decisions during negotiations, ensuring the final agreement aligns with your financial objectives.
Revisiting your financial plan to ensure you are on track to reach your retirement goals is a crucial step in a divorce. How your new circumstances impact your current and future financial health and retirement planning is key.
For legal considerations, make sure to update your beneficiary designations as soon as your divorce is finalized. Additionally, you will want to change beneficiaries and important documents such as your Will or Trust to reflect your new situation. If not done in a timely manner you risk leaving additional assets to your ex-spouse, as the state of California does not automatically nullify such designations after divorce.
Most people don’t plan for divorce, especially when they go through one later in life. Collaborating with both an experienced family law attorney and a financial advisor before, during and after your split can help protect both sides from unnecessary financial strain, enabling your journey towards financial security.