5 Mistakes to Avoid During a Gray Divorce

Divorce is a challenging process for anyone, but for those over the age of 50—often referred to as a "gray divorce"—it can be particularly complex. The emotional and financial implications can be profound, often necessitating a significant life adjustment. If you find yourself navigating this tough terrain, it's crucial to avoid common pitfalls that could further complicate your journey. Here are five mistakes to watch out for during your gray divorce.

#1. Overlooking the Implications of Retirement Funds

One of the most common mistakes people make during a gray divorce is disregarding the intricacies of retirement funds. These funds, built up over years or decades, are often a significant asset that needs to be distributed equitably. However, the division is not as straightforward as merely halving the fund. Different types of retirement accounts have different rules for division and withdrawal. Overlooking these details can result in substantial financial penalties and tax implications.

Here are some key points that further elaborate on the common mistakes to avoid during a gray divorce:

• 401(k) and 403(b) plans: These types of accounts require a Qualified Domestic Relations Order (QDRO) to divide the assets without incurring penalties for early withdrawal. Without a QDRO, one may be liable for a 10% early withdrawal penalty along with income tax on the amount withdrawn.
• IRA: While an IRA does not require a QDRO, it has different rules for division in a divorce. The division must be done as a "transfer incident to divorce"; otherwise, the IRS may consider it a taxable event.
• Pension plans: Pension plans are another common type of retirement account, but they have their own set of rules for division. In many cases, the non-employee spouse is entitled to a specific share of the pension when the employee spouse retires.

To ensure you navigate these complexities correctly, it's advisable to consult with a financial advisor or divorce attorney experienced in the division of retirement funds during a divorce. By doing so, you'll avoid unnecessary penalties and taxes and ensure your financial security in your post-divorce life.

#2. Underestimating the Value of Alimony

Alimony is often a crucial aspect of a gray divorce. It is a payment from one spouse to the other, after the Divorce Decree is entered, and is designed to limit any unfair economic effects of a divorce. However, its value and significance are sometimes underestimated, leading to financial hardship down the line.

It's important to understand that alimony isn't merely about addressing income disparity. It can also compensate for sacrifices one spouse made for the other during the marriage, such as putting a career on hold to raise children or support the other spouse's career. Additionally, alimony may be necessary if one party cannot achieve the standard of living established during the marriage.

When it comes to alimony there are several factors to consider:

• Duration: The duration of alimony varies based on factors such as the length of the marriage, the age, and health of the parties, and the recipient spouse's ability to become self-sufficient.
• Amount: The amount of alimony can be determined by the income and earning capacities of both parties, their standard of living, and their respective financial needs and resources.
• Tax implications: It's important to note that as of 2019, alimony payments are not tax-deductible for the payer, nor are they considered taxable income for the recipient.

Navigating the intricacies of alimony can be a daunting task. It's advised to seek legal counsel to ensure that the spousal support agreement is fair and just, given the unique circumstances of your divorce.

#3. Neglecting to Update Estate Plans

One major oversight during a gray divorce is neglecting to update estate plans. Estate planning documents, such as wills, trusts, and powers of attorney, often list the spouse as the primary beneficiary or decision-maker. Failing to update these documents after a divorce can lead to unintended consequences, including having your ex-spouse inherit your assets or make decisions on your behalf.

Most people don't want their estranged spouse to be the one calling the shots in case they become incapacitated or pass away.

To prevent this, it's crucial to revise the following documents:

• Will: Update your will to ensure your assets are distributed according to your wishes. You may want to name a new executor if your spouse was the original choice.
• Living trust: If you have a revocable living trust, consider revising it to remove your ex-spouse as a beneficiary or trustee.
• Powers of attorney: Update your powers of attorney (both financial and healthcare) to ensure that your ex-spouse is no longer the person who would make decisions for you if you were unable to do so yourself.
• Beneficiary designations: Don’t forget about life insurance policies, retirement accounts, and other assets with beneficiary designations. These designations supersede your will, so it's important to update them post-divorce.

To ensure that your estate planning documents are correctly updated, it is advisable to consult with an attorney who specializes in estate planning. They can guide you through the process and ensure that every document reflects your current wishes and circumstances. This way, you can have peace of mind knowing that your assets are protected and will be distributed as you wish.

#4. Failing to Understand the Impact on Taxes

Taxes can drastically affect your financial landscape post-divorce, and failing to understand the implications can lead to unexpected liabilities. Many people underestimate the impact a divorce may have on their tax situation. Changes in tax brackets, the loss of certain deductions, or the need to pay taxes on assets received in the divorce settlement are just a few examples of how a divorce can alter your tax obligations.

Here are a few key tax implications to consider during a gray divorce:

• Tax on alimony: As mentioned earlier, as of 2019, alimony payments are no longer tax-deductible for the payer and are not considered taxable income for the recipient. This is a significant departure from previous years when the payer could deduct alimony payments, and the recipient had to report them as income.
• Capital gains tax: If you sell your marital home and realize a significant profit, you may be liable for capital gains tax. While there is a $250,000 exclusion for an individual and a $500,000 exclusion for a couple, any profit beyond these amounts is taxable.
• Tax on retirement accounts: Depending on the type of retirement account, you may be liable for taxes upon withdrawal. For instance, distributions from traditional 401(k) accounts and IRAs are taxed as regular income, while Roth 401(k) and Roth IRA distributions aren't taxed.

To avoid potential tax pitfalls, it's crucial to work with a tax professional or a divorce attorney who understands the tax implications of divorce. They can help you make informed decisions about your settlement and develop strategies to minimize your tax liability. A clear understanding of your post-divorce tax situation can ease the financial transition and set you on a path to a secure financial future.

#5. Allowing Emotions to Cloud Financial Judgement

Gray divorces often involve a high level of emotional distress that can cloud your financial judgment. It's common for people to make financial decisions based on their emotional state—either out of guilt, anger, a desire to expedite the process, or simply because they are overwhelmed by the circumstances. Such emotionally driven decisions can have long-term financial repercussions. It's crucial to separate your emotions from your financial decisions to ensure your financial stability post-divorce.

Here are a few ways to keep your emotions in check during a gray divorce:

• Engage in self-care: Prioritize your physical and mental health during the divorce process. This can include regular exercise, a healthy diet, sufficient sleep, meditation, or therapy. When you feel better physically and psychologically, you're more equipped to make clear, rational decisions.
• Seek support: A support network can provide emotional backing and sound advice. This can include friends, family, divorce support groups, or a therapist. Sometimes, just having someone who listens can alleviate emotional tension and provide a clearer perspective.
• Work with professionals: Collaborate with financial advisors, attorneys, and therapists who can provide objective advice and guidance. They can help you navigate the complex issues of a gray divorce and make decisions that protect your financial future.

Divorce is a legal and financial process, not just an emotional one. While it's essential to acknowledge and process your emotions, don't let them dictate your financial decisions. By keeping your emotions in check, you can navigate your gray divorce with greater clarity and emerge with a solid foundation for your financial future.

How Scaringi Law Can Help

At Scaringi Law, we understand the emotional and financial complexities of a gray divorce. Our team of experienced attorneys is equipped with the knowledge and expertise to guide you through this challenging process, ensuring all aspects are handled with utmost care and precision. We take into account your unique circumstances and work diligently to protect your interest.