Solo After 50: Navigating a “Gray Divorce”

Bill and Melinda Gates weren’t a typical couple. Neither were Jeff and MacKenzie Bezos. But they are all part of an increasingly common trend: divorce among people over the age of 50.

These “gray divorces” among older and (usually) long-married couples have been on the rise for some time. Indeed, while the divorce rate is falling among younger Americans, the rate among those age 50 and older has doubled since the 1990s—and has more than doubled for those over age 65.

Addressing the challenges

As you might imagine, divorcing in middle age or beyond can potentially have a massive impact on your current financial security and your prospects for a comfortable financial future. Consider these sobering findings:

• People who get separated after age 50 can reasonably expect their wealth to plummet by an astounding 77 percent, according to a study in the Journal of Sociology.
• After a gray divorce, women experienced a 45 percent drop in their standard of living (based on income-to-needs ratio) and men experienced a 21 percent reduction.

Clearly, both spouses stand to lose in a gray divorce. One spouse may not have worked for a significant period of time in order to spend time raising children. That nonworking spouse may find it tough to reenter the workforce in a meaningful way with the right skills at this stage of life—and as a result might expect significant financial support. Meanwhile, the working spouse may be about to pay out spousal or child support close to the time when he or she planned to cut back at work or retire altogether.

To mitigate some of that damage, it’s important for 50-plus divorcing couples to recognize the specific financial (and other) challenges they’ll face and try to tackle them head-on. Some of the key issues that older divorcing couples should consider include the following:

1. Estate planning

Long-married couples with significant assets generally have estate plans in place that might include trusts, family limited partnerships or other complex structures. When couples separate, their goals often change or even diverge when it comes to providing for heirs and how to fund those objectives. Trusts, partnerships and other agreements should be revisited to determine whether changes need to be made (or even can be made) in terms of specific goals, tax mitigation or other factors due to the divorce.

2. The home

A family home is often an important and very emotionally charged asset in a divorce. When deciding who will keep it, the ability of either person to afford costs like the mortgage payment, property taxes and maintenance need to be considered. What’s more, a long-married couple’s primary residence may have appreciated significantly in value over time. If so, a decision should be made about whether to sell the house while still married or wait until after the divorce—as the choice could generate more or less capital gains taxes for the couple, depending on the route taken.

For example, as of this writing, a married couple has a capital gains exclusion of up to $500,000 when they sell their principal residence within a certain amount of time; the same is true with ex-spouses who still co-own the property. But sole owners can exclude just $250,000. So you may be able to be in better shape, taxwise, if you sell the house as part of the divorce settlement instead of keeping it and then selling after you’re divorced.

3. Rental or commercial property

On top of tax concerns, couple-owned rental or commercial property comes with decisions to make about post-divorce management and control. Depending on how they co-own one or more properties, a divorced couple could potentially need to make multiple decisions together for years—and therefore never really “split up” fully. In some instances, it can make sense to allocate some properties completely to one spouse and allocate different properties fully to the other.

4. Retirement/pension plans

As noted, the impact of a late-in-life divorce on retirement income security can be significant, in part because people have less time to recover losses they may face before the divorce. The division of many types of retirement accounts will depend largely on whether the couple lives in a community property state. But understanding what benefits are available, and how they can be distributed, is a key step in planning for each person’s separate future. The benefits packages of one or both spouses need to be carefully examined in a gray divorce—particularly if relatively complex benefits are involved (such as restricted stock, stock options, phantom stock and so on) and if the accounts hold large sums.

5. A family-owned business

While older couples often don’t have young children to fight over, there can be a bloody “custody battle” situation if they co-own a business—which we commonly see among wealthy families. Issues around who keeps the company (or how co-ownership is determined) and the different roles that each will have under the new arrangement can create tension that is both uncomfortable and potentially harmful to the financial health of the business itself. Clients and suppliers can jump ship if they worry about the firm’s longevity—even if everything is just fine below the surface tension.

If the couple decides to sell the company in part or entirely, appraisals will have to be done and—the sticky part—valuations agreed on by both parties. Unfortunately, divorcing couples often doubt financial assumptions used to assess their company’s value. While a spouse who is selling his or her position may be worried about a valuation that is far too low, the spouse maintaining ownership may balk at valuations he or she sees as far too high.

Note: If only one spouse owns the business, his or her ex-partner might be entitled to a share of it—even if the non-owner had no involvement in the company at all.

6. Social Security

Several factors determine whether an ex-husband or ex-wife can and will get a percentage of the other’s Social Security benefits—including when the divorce occurs, the number of years the couple was married before the divorce and whether the ex-spouse seeking benefits is remarried. Although Social Security may not constitute a large part of affluent families’ income, it is an issue that can and should be addressed—especially given how much wealth many older couples tend to lose in a divorce.

Similarly, life insurance policies may need to be disentangled or canceled. That said, buying new policies at older ages can become expensive fast.

8. Inheritances

In most states, inheritances are not considered to be marital property but rather as separate property owned by the person who received the inheritance. As a result, inheritance assets that remain separated from marital assets typically are not divided between divorcing spouses. That said, this is not the case in some states.

9. Cognitive factors

Older men and women face increased risk of cognitive decline that can impact their ability to work and make sound financial decisions. Existing or potential (based on family history) cognitive impairments should be considered when coming up with the terms of a gray divorce—and guardrails (such as conservatorships) should be discussed if necessary.

Moving forward

As noted, the rules and regulations in terms of what happens to various types of property and assets in a gray divorce will depend on numerous factors—including the state in which a couple gets divorced. That’s why it’s imperative for couples who are 50-plus and considering separating to consult with trusted professionals who understand both their specific financial situations and the laws governing their possible divorce.

With luck, a clear-eyed look at what a gray divorce may mean to a couple’s future could prompt them to keep trying to work things out. If not, it’s good to have a plan in place to navigate the intricacies of a truly tough process.