How to Free from Your Ex Financially
By Jennifer Napper, CFP®, CDFA®
Recently I met with a couple who have been living separately for years. They admitted that they cared for one another, their children are grown and doing well, and they have moved on with their own friends and interests. They were physically and emotionally single but still married financially. They filed taxes jointly and were tied to each other’s health insurance, pension and business equity. One spouse admitted that she wanted her husband to get on with his life but feared what a financial separation might mean for her health care and retirement. They felt that in every other sense they were already ex-spouses but stuck on how to untangle the finances of a long-term marriage and fearful what it might mean for their financial wellbeing.
She asked, “How do I free myself from my ex financially without jeopardizing my own financial security?”
Although all divorces involve some division of assets and debts, a long-term marriage of couples approaching or already in retirement may have additional complexities. A popular term for this stage of life is Gray Divorce (although I prefer the terms Silver Divorce or Divorce Over 50). Here are just a few of the financial considerations when exploring how to free yourself financially.
Taxes
It is no secret that the U.S. tax tables favor a status of Married Filing Jointly over Married Filing Separately or Single. Filing Single means that the IRS receives more in taxes from two single individuals than one married couple. Not only is there the burden of allocating the couples’ income and assets to cover the additional expenses of two separate households, the IRS becomes a possibly larger beneficiary of that same pie of money.
Since the Tax Cuts & Jobs Act of 2017 for a divorce executed after December 31, 2018, a spouse paying spousal support may no longer deduct those payments from his/her taxes due. In return, the receiving spouse no longer pays taxes on support payments received. Since generally the paying spouse is in a higher tax bracket than the receiving spouse, this deduction loss means more income goes to the IRS and less to cover expenses of two households.
What can you do? When splitting assets, consider the after-tax impact of the division. Rather than split all assets 50/50, consider allocating more ordinary income assets to the lower earning spouse and more capital gains assets to the higher earner which may result in fewer taxes to the IRS and more assets for each spouse.
Health Insurance
A big challenge for couples under 65 and not yet eligible for Medicare, is how to cover health care expenses. Sometimes only one spouse is eligible for an employer health insurance plan to cover the non-employee spouse. After a divorce, the non-employee spouse will have the option of either continuing coverage of the employer plan for 36 months under the COBRA rules, applying for private insurance, or securing insurance through an exchange under the Affordable Care Act (Obamacare). Unless the non-employee spouse qualifies for State subsidized health insurance through ACA, paying full price for a COBRA or private plan can be expensive, especially if you have many years to bridge until the Medicare eligible age of 65.
What can you do? Do your homework. Explore all the options with current employers and ACA (Obamacare) to compare quotes and coverage. No one should go a day without health insurance. If your new coverage won’t be as robust as the current, get all your check-ups, vision care and dental care up-to-date before you switch plans. If you have a Health Savings Account (HSA), consider allocating that asset to the spouse with the lower coverage to help cover medical expenses tax-free.
Income
Here there are several combinations of income profiles: both spouses earn nearly equal incomes, one spouse earns significantly more, one or both spouses are retired, or one or both spouses are currently unemployed. The lower earning spouse has concerns about the dependability of receiving spousal support and for how long, and the higher earning spouse has concerns about losing ability to pay but still legally obligated to do so. Spousal support may help even out income inequities but it is usually not a permanent solution.
What can you do? Seek the advice of a financial advisor or a Social Security representative to calculate your Social Security benefit strategy. If you had been married at least ten years and not remarried, your divorced spousal Social Security benefits may be higher than your own benefits. You may be able to begin Social Security with divorced spousal benefits and then switch to your own later or vice versa. Also, explore how your current investments can generate additional income now or create lifetime income during retirement. This might include using dividend paying stocks, bonds, pensions, and annuities to increase your lifetime income.
A critical question is, “Should we get divorced now or wait?”
Timing will have an impact on eligibility for benefits and taxes owed. For instance, if one spouse expects a large bonus or equity distribution in the current year, it might benefit both parties to stay married through December 31st to file Married Filing Jointly to enjoy a lower tax bracket. Or deferring retirement for a year or two might enable the non-employee spouse to bridge health insurance until age 65. And selling a primary residence while Married, even if one spouse has not lived there for years, will enable a couple to realize the $500,000 capital gains exemption rather than one spouse selling the house as Single with only a $250,000 exemption. So strategically choosing the year of your divorce can have significant benefits or costly consequences. For these reasons, a couple might choose the timing of their divorce, or file a legal separation (if offered in their state) which enables them to divide assets but retain their Married marital status. (Be careful here as some employer plans treat a legally separated spouse not eligible for marital benefits.)
There are so many strategies to optimize and mistakes to avoid when choosing the timing of your divorce that can impact your ability to free yourself financially and protect your financial security. Working with a Certified Divorce Financial Analyst can help you carefully examine these benefits and consequences, and draw scenarios to help you compare the impact of your decisions.
***** ***** *****
Jennifer Napper, CFP®, CDFA® is Vice President, Investments with Napper Wealth Planning of Raymond James in Walnut Creek, CA. She is a Certified Divorce Financial Analyst (CDFA®), specializing in helping anyone facing divorce to protect their assets as well as plan for a brighter future. She can be reached at 925 952-5262 and Jennifer.Napper@raymondjames.com. Learn more about her at www.JenniferNapper.com.
Raymond James & Associates, Inc., member of New York Stock Exchange/SIPC
Article originally published at www.divorcemag.com
