The term “gray divorce” refers to the increasing rate of divorce for those over 50 years old. TD Wealth recently conducted a survey at the 54th Annual Heckerling Institute on Estate Planning in which 40% of the respondents, comprised of estate planners and attorneys, opined that gray divorce is causing a rise in family conflict—which is already a prevalent component to estate planning.
Complications and Conflict
Many couples going through a gray divorce are married for many years. Over time, each spouse has the opportunity to accumulate assets – whether it’s making regular contributions to a retirement account or periodically adding savings to an investment account. As more assets accumulate, there are more assets to divide when the marriage ultimately dissolves decades later. To further complicate matters, a lengthy marriage also may warrant the lengthy payments of alimony or spousal support, especially if the spouses had a large disparity in income. These issues may cause a potential conflict of interest between the spouses themselves.
Potential conflict can spread to the children and other extended family members, as well. To illustrate, many times, one or both spouses will start a new relationship shortly after the divorce is finalized. This means there’s a new party entering the family picture and that individual may be bringing his children with him. In the end, this gray divorce couple will face the same issues as any other blended family, but it just happens later in life. Additionally, the resulting estate plan might have to provide for a second spouse and children from a prior marriage – a potential recipe for disaster.
Be Prepared
One potential solution is to enter into a pre-nuptial agreement (preup) before the second marriage occurs. A prenup can cover several financial matters (for example, alimony, making a one-time distribution or the renunciation of any financial rights, etc.) in advance in the event of death or divorce. Marital trusts may also be appropriate when income and/or principal can go to the surviving spouse, but the deceased spouse can control the ultimate disposition of the property—including making an outright payment to the children when the trust terminates.
Effect on Retirement Planning
Interestingly, 39% of survey respondents indicated that gray divorce further complicates retirement planning and funding. First, there are spousal rights to certain retirement plans, and dividing these plans might require a qualified domestic relations order from an appropriate court.
Second, although child support might not apply in a gray divorce, planning for Social Security is more complicated because there may be spousal benefits to consider. If a couple divorces after 10 years of marriage, a non-working spouse may qualify for Social Security benefits based on the earning record of the working spouse, if certain conditions are met. The applicant must be at least 62 years old, unmarried and divorced for at least two years.
Other Threats to Planning
Another interesting finding from the TD Wealth survey revealed that family conflict is no longer the biggest sole threat to estate planning. In the 2020 survey, there was a three-way tie among family conflict (25%), tax reform (25%) and prolonged life expectance and increasing health care costs (25%).
As the survey indicates, estate planning can be a dynamic process as we react to everchanging domestic structures and demographics. While gray divorce adds an additional layer of complexity, it’s our responsibility as advisors to consistently review and discuss estate plans with clients and their families, while remaining nimble to various life events and proactively being able to identify the best advice-based solutions. It will be interesting to see what next year’s survey results may bring.