There is a lot being written about “Grey Divorce” – divorce which occurs late in life. There are many points of view on the topic but, predominantly, it seems that the discussion is either about how a late-in-life divorce is empowering for women or is devastating (psychologically, financially and sexually) for them. In the past, I have attempted to write on this topic in a neutral fashion as it relates to the termination of a marriage for both parties (Social Security Benefits and Divorce, Spousal Support in the Golden Years, and Grey Divorce). In this blog post I focus on Grey Divorce from the perspective of the breadwinner (the higher income earner) to highlight some of the issues this party must consider in his or her Grey Divorce. Next week I will focus on the issue from the perspective of the non-breadwinner (the lower or non-income earner).
It is no secret that people are having children later in life. As a result, when people get divorced later in life, they may still have minor children to support and care for. The need to financially support children often collides with actual retirement (forced or voluntary); or, it collides with plans to aggressively fund retirement in the final years (typically with the highest income) of one’s working career. Unless the breadwinner has an extraordinarily high income (a number not defined yet by the law in the State of California), child support is formulaic based primarily upon each parent’s gross income and the time each parent spends with their minor children. Therefore, the mandated child support may derail the retirement funding. In California, child support is of primary importance in divorce, often taking legal precedence to a parent’s retirement plans. Therefore, the breadwinner may need to consider a reduction in current living expenses so that the child support obligation can be met and the retirement funding can continue. This is not an easy choice, but the breadwinner must closely evaluate the enjoyment of his or her current income versus their future retirement needs. Child support is not a choice and this is why whichever spouse is the breadwinner is left to choose between current expenditures/lifestyle and future retirement standard of living in the face of the obligation to support the minor children. When evaluating these choices, it is important to know that the payment of child support is a tax-free payment and therefore directly affects the breadwinner’s net income.
Compared to child support, spousal support is not formulaic. There are many factors which must be considered in determining spousal support, including each spouse’s expenses – which can include a history of saving (i.e. funding retirement). If there is a history of saving, the breadwinner could argue that he or she should be left with sufficient funds to continue saving even if this means the other spouse is not paid as much spousal support. This is a very dicey argument because the other spouse will argue that he or she should be paid a spousal support amount by the breadwinner that also allows him or her to save. No matter what, the breadwinner’s income is often not sufficient to support two households in the same manner as one household prior to divorce.
Also in comparison to child support, the breadwinner can take a tax deduction for the payment of spousal support. This may be a very important way to reduce taxes, depending upon other tax shelters the breadwinner can access as part of the property division (i.e., real estate or retirement funding). If the spousal support deduction is not important for the breadwinner, a non-taxable spousal support arrangement may be negotiated. This usually means paying a lower amount of support because it is tax-free, thereby making funds available to continue retirement funding or lifestyle choices.
Health Care Costs
Another difficult economic reality is that often in Grey Divorce, one or both parties have increased health care and insurance expenses. These expenses are mostly met from the breadwinner’s income. Exploring ways to mitigate these expenses is critical. Options to examine include long term care insurance, group health insurance, government-aided health insurance, disability insurance, Social Security benefits, liquidation of assets (for example, selling real property or accessing retirement plans), and reduced living expenses.
In the current economic climate, the breadwinner may find it a good idea to keep the real estate investments as part of the divorce settlement. The ability to do this may provide significant tax benefits now; however, this must be discussed with an estate planning attorney to understand how this will affect the breadwinner’s overall estate upon his or her death.
The decision to keep real estate may also impact child and spousal support and must be looked at comprehensively. The tax benefits, rental income, rental losses and phantom income which sometimes result from real estate partnerships all affect support obligations and the cash flow available to meet them. An accountant should be consulted to explain the complete tax impact of the proposed divorce settlement.
While we hear about the difficult choices the spouse of a breadwinner must make in a Grey Divorce, similar choices may need to be made by the breadwinner. The age of the breadwinner when divorce strikes can make these decisions either easier or more difficult: the closer to retirement the breadwinner is, the more difficult it will be for him or her to financially recover from the divorce; the more distant retirement is, leaving more time for the highest income-earning years, the easier it will be to establish a sounder financial footing.