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What are the financial risks of gray divorce?

On Behalf of | Apr 13, 2022 | property division |

Although divorce usually brings to mind emotional upheaval, stress and often a profound sense of loss, for older couples there will also be a substantial impact on their finances. Divorcing couples who have accumulated wealth over a long period of time will experience greater financial risk than younger couples, as their pooled resources will be halved just as they are entering their twilight years.

Divorce rates in Michigan and across the country have been going up, but the rate of for those over age 65 has tripled in the past 25 years. For Metro Detroit residents who are entering uncharted territory, it is important to be aware of the financial aspects of divorce as well as also how it will impact adult children. Being prepared includes having informed advice on how to protect your financial reserves moving forward.

Five financial issues that need special consideration

Michigan is an equitable division state, which means that the courts will determine a fair division of marital property that is not necessarily equal. These assets include all that each partner has acquired during the marriage, including the family home, vehicles, bank accounts, life insurance policies and retirement accounts.

Both spouses must make difficult decisions about liquidating assets, IRAs, or long-term care plans and offering up cash for the value of these policies. But there are several other financial concerns that are bound to come up that need special consideration:

  • Take inventory of both marital and non-marital assets, including cash, investments, retirement accounts and life insurance policies, and consider any debts. Having an accurate valuation of assets is essential during property division.
  • Social Security will come into play, especially is one spouse will draw off the higher earner’s benefits. There are certain requirements that must be met for this to happen.
  • Health insurance for those under 65 may become problematic if one spouse was covered under the other’s policy and must have coverage until Medicare kicks in. An understanding of how COBRA benefits, individual coverage and the limits to coverage will affect this spouse is essential, as well as their potential long-term care needs.
  • Estate planning is critical when there is a major life change, so both spouses should keep all documents up to date, including beneficiary and powers of attorney designations.
  • Taxes will be an important consideration, as there will be consequences for both spouses. If alimony is part of the settlement, there will not be a tax deduction for the payor, and the payee will owe income tax on the payments. Give attention to details of property liquidation, as the IRS will view the appreciation from a real estate sale differently than a capital gains appreciation.