The divorce rate in the United States has been dropping during the past 20 years. However, divorce among spouses over 50 years old has doubled since 1990! The surge has spawned the term “gray divorce” for these older divorcing spouses. While many of the issues divorcing seniors face are similar to their younger counterparts, there are unique issues in gray divorces including the availability of Social Security benefits, probability of open ended spousal maintenance and division of retirement assets.
Decisions that a divorcing senior must make relating to Social Security benefits are more complicated than they appear. According to SSA:
A person, age 62 or older who is unmarried, AND who was in a marriage that lasted 10 years or longer can receive benefits on their ex-spouse’s earnings record even if the ex-spouse has remarried.
The ex-spouse needs to be entitled to SSI retirement and/or disability benefits
The person will receive the larger of his or her own work benefit or the spousal benefit on the ex-spouses work record at full retirement age (FRA)
The person will receive a combination of his or her benefit and the excess spousal benefit on the ex-spouses work record if claimed prior to full retirement age (FRA)
Even if the person seeking those benefits has remarried, if that later marriage has ended by death, divorce or annulment, they are eligible.
If the ex-spouse has not applied for retirement benefits, but can qualify for them, the person can receive benefits on the ex-spouse’s earnings record if they have been divorced for at least two years.
Because of the financial impact, understanding the benefits available and the choices that need to be made are critical in a gray divorce. For example, a divorced spouse might optimize his or her Social Security by beginning their spousal benefit at full retirement age (FRA) (age 66 for those currently applying), and then switching to their own benefit at age 70. Because benefits go up by about 8% a year between the ages of 66 and 70, waiting to collect on their own benefit could mean a significantly higher payout down the road. The divorcing senior needs to recognize that if he or she decides to take the spousal benefit before they reached full retirement age (66 for those born between 1943 and 1954) their benefit will be permanently reduced even more, between 7% and 8% for each year leading up to their FRA (a full 30% reduction on the spousal benefit at age 62). Thus it often makes no economic sense to claim the benefit early.
There is a difference in survival benefits as well. For example, for a person who is 60 years old and married for 10 years or longer, he or she would be entitled to their deceased ex-spouse’s Social Security payout the same as a widow or widower. The rules regarding marital status are different with survivor benefits. The person can be married and still collect survivor benefits as long as they did not remarry until age 60.
In a gray divorce, particularly where neither spouse is working and they both must survive on fixed incomes, being able to boost income with the spousal benefit can make a real difference.
In those situations where one of the spouses in a gray divorce is still working, the non-working spouse is virtually guaranteed to be entitled to a spousal maintenance award unless the income from the assets being divided is so significant that the recipient spouse can meet his or her reasonable needs without financial assistance. One of the consequences of people working longer is that it has become more common in a gray divorce for a spouse to be entitled to spousal maintenance.
While there is no formula or guideline to govern the amount and duration of an award of spousal maintenance, where the parties have been married for at least 20 years and the person seeking maintenance is at least 50 years old, Arizona case law supports an open-ended award of spousal maintenance. An open-ended spousal maintenance award is often mischaracterized as a “lifetime award”. By statute an award of spousal maintenance ends with the death of either spouse or the remarriage of the recipient spouse. Except in those cases where the parties agree that the spousal maintenance award will be non-modifiable, an award of spousal maintenance is presumptively modifiable. In substance, this means that because every award of spousal maintenance is based on the facts and circumstances existing at the time the award is made, if there is a substantial and continuing change in circumstances, either spouse has the opportunity to seek to modify or even terminate the award. Accordingly, even when a spouse receives an open-ended award, meaning an order that requires payment of a certain amount to that spouse each month for an indefinite period of time, if there is a change in circumstances, such as the retirement or disability of the payor spouse, that spouse is sure to seek a modification or termination of the open-ended award.
Commonly an older person is reluctant to commit to an open-ended award of spousal maintenance. One of the options commonly explored in those situations is an unequal division of community assets to compensate the recipient spouse for agreeing to something other than an open-ended award of spousal maintenance. One category of assets targeted as a possibility for an unequal distribution is retirement assets.
Generally, retirement plans fall into one of two categories; defined benefit or defined contribution plans. A defined benefit plan is what is commonly referred to as a “pension”. It identifies the specific benefit that will be payable to a person at retirement and is usually based on a formula that takes into account factors such as the number of years a participant works for the employer and the participant’s salary. If all of the benefit was earned as a result of work during the marriage, it is entirely community property but that is typically not the case. More often, some portion of the benefit, either as a result of work prior to marriage or after the date of service, is considered that spouse’s separate property and a calculation must be made to determine the portion of the benefit which is community. When a periodic payment from a defined benefit plan is going to be made following a divorce, special orders are required in order for a portion of that benefit to be paid directly to the ex-spouse of the participant.
A defined contribution plan is one that guarantees an employee that their contributions from salary and usually a matching contribution from the employer are placed in a tax-free retirement account to grow until retirement. The most common of these accounts is a 401(k). The value of a defined contribution plan is the total account balance maintained for an individual under the plan as of any given date. If a person began participating in such a plan during marriage and all deposits into the plan were made from earnings during marriage then the entire account balance as of the date of the filing of the petition for dissolution will be community property. If the person began participating in the plan prior to marriage or if they continue to participate in the plan after the date the petition for dissolution is filed, some portion of the plan will be separate property and a calculation must be made to determine which portion of the plan is separate and which is community. In order to divide a defined contribution retirement plan, it is necessary for a dividing order to be entered. This is an order that is separate from the decree of dissolution and is typically not entered until after that decree is entered by the court. There are many nuances to a dividing order and divorcing seniors and counsel for divorcing seniors need to be cognizant of issues such as whether the order provides adjustments for market gains or losses in determining the sum provided to the alternate payee, the risk of agreeing on a set sum without market adjustments, implications if the plan does not have sufficient funds to pay a set sum due to market losses, the appropriate valuation date, the impact of the existence of loans taken by the participant against the benefits and surviving spouse provisions.
While there are other issues that are in gray divorces, Social Security Benefits, spousal maintenance and the division of retirement plans are the most common.