Personal Finance

How your ex can ruin your financial plans long after the divorce

Key Points
  • Experts cite family conflict as one of the top concerns for estate planning, according to a survey from TD Wealth.
  • Four out of 10 estate planners said so-called gray divorce — splits among those over age 50 — is putting a dent into boomers’ financial plans, the survey found.
  • The divorce rate for the 50-and-over crowd doubled between 1990 and 2015, according to Pew Research Center.

Your ex-spouse can continue to cause you trouble long after the ink is dry on your divorce decree.

Four out of 10 estate planners and attorneys pointed to "gray divorce" — that is, ending your marriage after age 50 — as putting a dent into boomers’ financial plans, according to a recent survey by TD Wealth.

The firm polled 112 lawyers, accountants and wealth management professionals in January.

"The issue we see with these divorces is that you have the opportunity to accumulate assets over time — you've been married 35 years, and you're saying you want to end it at age 55 or 60," said Ray Radigan, head of private trust at TD Wealth.

Indeed, the divorce rate has crept upward for adults over age 50. In 2015, 10 out of 1,000 married people in that age cohort divorced, according to an analysis from Pew Research Center. That's up from five divorcees per 1,000 in 1990.

"The more you accumulate, the more you divide in the end," Radigan said. "There's more financially at stake because of the long-term marriage."

Here are three ways that late divorce can wreck your finances.

1. Less money; longer lifespans

The financial cost of divorce
The financial cost of divorce

In 2017, Americans aged 65 had a life expectancy of 19.5 years, according to data from the National Center for Health Statistics.

The length of the marriage is just one of the factors behind calculating alimony payments, and a decades' long union could warrant lengthier payment streams, said Radigan.

That means the wealthier spouse could be giving up heftier accounts — assets that could have otherwise been used for retirement — to help provide the spousal maintenance.

Dividing household assets in half also leaves an older couple less prepared for the cost of health care once they've stopped working.

A single woman aged 65 in 2019 can expect to spend $150,000 in medical expenses through retirement, while a man of the same age will spend an estimated $135,000, according to Fidelity.

Those expenses exclude long-term care.

2. Unexpected tax consequences

Alvarez | Getty Images

Dividing your accumulated assets can also come with tax landmines.

Consider the fact that if you were to split your 401(k) plan with your ex, you'd need a qualified domestic relations order — a decree detailing the payment — to do so.

If you were to distribute the amount directly out of the 401(k) without the order, the amount transferred is subject to taxes.

How Bezos' divorce may affect Amazon shareholders
How Bezos' divorce may affect Amazon shareholders

Meanwhile, individual retirement accounts don't need a domestic order, but your divorce decree must spell out that you're splitting the IRA and doing so via a trustee-to-trustee transfer.

If you write a check to your ex, cashing out his or her portion of the IRA, you'll be subject to taxes and penalties.

Review and update the beneficiary designations on all your accounts. "For retirement accounts, the beneficiary designation trumps the will," said Steph Wagner, director of women and wealth and Northern Trust.

3. Consider a prenup


Divorcees would do well to draft a prenuptial agreement if they choose to walk down the aisle again.

A second marriage can bring children from the earlier union, and potentially they and your new spouse may be fighting over assets when the wealthy spouse dies.

"If the kids are the trustees to the new spouse, are those the right people?" asked Bruce Steiner, an estate planning attorney at Kleinberg Kaplan in New York.

You should work with a financial planner and estate attorney to revisit your estate plan.

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For instance, marital trusts, which can provide for the new spouse during their lifetime and leave assets to the heirs at the spouse's death, is one potential strategy, said Wagner.

You also need to figure out which assets are best to leave behind.

For instance, at one point it might have made sense to leave your IRA directly to your grown children.

Now that the recently enacted Secure Act is in place, this may not be a good idea.

That's because your kids will be forced to distribute the account within 10 years, instead of taking distributions based on their much longer lifetime and "stretching" the IRA's tax deferral for decades.

"Deciding which assets go where is now more complicated than it used to be, and it's more on a case by case basis," said Steiner.