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Protecting Your Financial Security After a Late-Life Divorce

A growing number of people are divorcing late in life, and no matter how amicable or long-overdue, dividing up a lifetime of accumulated assets can be daunting to say the least.  For late-life divorcées, the split tends to be the largest financial transaction of their lives with the gravest financial consequences. Given the profound effect your divorce settlement or judgment will have on the remainder of your golden years, it is imperative to protect your financial security throughout and after the divorce process. Late-life divorcées have accumulated a lot of things during their marriage—and they have every right to fight to retain all they are entitled to. This is especially true when the bulk of your ‘money-making’ years is behind you.

Given the wide span of ‘divisible assets’ present in a late-life divorce, there is a lot to consider and be wary of going forward. There are savings and investment accounts, real estate and other personal and in some cases business assets to examine. An estate plan must be updated, health and other insurance replaced, power of attorney modified, retirement accounts to value and divide, and the list goes on and on. These challenges require planning and due diligence. Be prepared to spend a little more money on professional evaluators, actuaries, forensic accounts, and the like. When thousands are at stake, it is worth the extra cost to get the exact value of a significant asset correct. The bottom line: be prepared, be thorough, and don’t settle for less than your half.

Key areas of interest include:

Identifying your entire community property estate.

Before you can begin to divide your marital property, you need to know what, where and the how much. In taking inventory of your property, often times certain assets are overlooked or undervalued. Some items to consider are: pension plans from old employers, the value of a family business, an old insurance policy, and valuable personal property such as antiques and collectibles. It is recommended that you collect tax returns, pay stubs, property deeds, vehicle registrations, insurance policies, and account statements, as well as any other documents that may pertain to the split. To quantify liabilities, collect credit-card statements and loan documents, plus order a free credit report.

Tax consequences of a California divorce.

Any family law attorney worth his/her weight will advise you on the potential tax consequences of a marital settlement, especially when facing the liquidation of high dollar real estate investments, division of investment accounts, or long-term spousal support.

Real property transfers: I.R.C. § 1041 provides that no gain or loss is recognized on a transfer of property from a spouse or a former spouse to a spouse or former spouse if the transfer is incident to a divorce. However, there are certain time-limits one must be cognizant of to benefit from this exception. It is also important to keep in mind that pursuant to I.R.C. § 1041, potential tax consequences are also transferred when transferring real property between spouses. Because the tax basis is transferred from one spouse to the other spouse, built-in gain recognized by the transferee spouse upon the disposition of the property is also transferred.

IRAs: Although transferring or dividing a traditional or a Roth IRA incident to a divorce does not require a Qualified Domestic Relations Order (QDRO) and may appear to be simple, it still requires some care. If not done correctly, the account owner or transferor (not the transferee) will pay unnecessary taxes and penalties. Any transfer of an IRA to an ex-spouse should be made after the divorce is final. If the account owner transfers part or all of an IRA before the divorce is final, he/she could be taxed on the distribution and possibly incur a 10-percent early-distribution penalty.

Spousal support: Persons who pay spousal support to an ex-spouse can deduct the amount of the payment from their taxable income. However, persons who receive spousal support must report it as taxable income. This tax implication only applies to couples who have an order of dissolution of marriage. In other words, if you do not have a court order stating that you are legally separated from your spouse, spousal support payments are considered gifts for tax purposes. Gifts are neither deductible from the paying spouse's income, nor taxed as part of the receiving spouse's income. In addition, the support payment does not have to be itemized in order for the paying spouse to qualify for the deduction.

Dividing your combined retirement savings:

Dividing 401(k)s and defined-benefit pension plans can be more complex than transferring or dividing a traditional or a Roth IRA and usually require a qualified domestic relations order, “QDRO” (a state-court order that must be drafted by a lawyer, approved by the retirement-plan administrator and signed by a judge). Dividing up stock options or deferred-benefit plans can be a whole different ball of wax and may require the services of a forensic accountant.

Keeping or selling the marital residence.

Some say it is a mistake to keep the martial residence, especially if you give up other assets in exchange for the house (such as liquid assets and/or a pension that could provide lifetime income). Maintaining a large home can be expensive. It is important to consider the ‘operating expenses’ over the rest of your lifetime, to determine whether you will actually ‘need’ the space and headache of maintaing a large home. Others suggest that divorcing couples can keep the family home for a few years (but no more than six) after the divorce and still preserve the tax advantages of selling the home as a couple. Married couples can exclude from capital-gains tax the first $500,000 of gains on the sale of a primary residence, compared with $250,000 for singles.

Making sure you are adequately insured post-divorce.

During the past, the fear of being denied health coverage on the individual market caused some couples to delay or avoid divorce. The Affordable Care Act may ease health-coverage concerns for many divorcing spouses. Under the new law, insurers can no longer deny coverage or charge people more based on preexisting conditions. Divorcées who would have relied on pricey COBRA coverage in the past may also find that marketplace coverage is a cheaper option. In addition, you may be eligible for free Medicare Part A based on your ex-spouse's record if you don't have a long enough work history to be eligible for Social Security benefits. You may qualify if your marriage lasted at least ten years, you're single, and your ex is eligible for Social Security retirement or disability benefits. One major bonus: Medicare Part A pays for inpatient services.

Changing your estate plan.

When you can update or revoke an estate plan depends entirely on where you are in the divorce process.

Pre-filing: If you are contemplating divorce, haven't filed yet, and have estate planning documents in place with your current spouse, you may consider revoking and restating all of the estate planning documents prior to filing for divorce. In California, the spouse who is contemplating divorce is not mandated to notify his/her spouse of any changes with the estate planning documents, life insurance beneficiary designations or retirement account beneficiary designations. If you choose not to revoke these documents, you should at least consider updating your will, financial power of attorney and medical directive.

Post-filing but before judgment: The Automatic Temporary Restraining Order (“ARTO”), which comes into effect once you file for divorce does not permit the revocation of a trust, the changing of life insurance beneficiaries and the changing of other “non-probate” transfers, retirement plan beneficiaries, pension plans, employee benefit plans and individual retirement accounts. The intent of the ATROs is to maintain the status quo of assets and ownership interests until the division of assets is complete.  If you have already filed for divorce and are anticipating a lengthy divorce proceeding, you should update your will, financial power of attorney and medical directive, at the very least.

Recently divorced: Once you are divorced, then you are considered a “single” person again. The dispositive provisions are no different from any other single person who has never been married or who may be widowed. If you are recently divorced then you should immediately update any life insurance beneficiary designation and update your retirement plan beneficiary designation. If you have a minor child who is designated as a beneficiary, the minor’s legal guardian (possibly your surviving ex-spouse) will take over the assets on behalf of the child, unless there is a “Guardian of the Estate” designation so that the retirement plan administrator has the proper designee. You will also want to update the Trustee nominations of any living trust. It is very important to carefully draft the removal of the Trustee provisions so that the surviving parent is not empowered to file on behalf of the minor and petition to have your client’s designated Trustee removed.

Social Security Benefits:

Haven’t yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. If you have been married for ten years or more, know your spousal rights to receive benefits under your ex-spouse’s record.

Get Answers Today

Do discuss your late-life divorce during a free consultation call the Law Office of Channe G. Coles today at (805) 617-4618 or send us an email. From our law office in downtown Santa Barbara, California, we serve clients throughout the County, including Buellton, Carpinteria, Goleta, Lompoc, Solvang and Santa Maria.

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