How Silver Divorce adds a Wrinkle to your Estate Plan
By: Lauren C. Enea, Esq.
A divorce almost always comes with emotional, personal and financial complications. However, a divorce late in life also adds a level of complexity to your estate and tax plan. Here are a few consequences to consider:
- Division of Assets
Dividing marital assets during a divorce is common, and often difficult, but for older adults, who have an assortment of financial assets and real property from varied sources and a retirement plan(s) in place, divorce can have the added negative effect of costing money at a time where future earning capacity is limited. It is important to discuss how assets will be divided and how retirement assets will be allocated between the spouses. Maintenance may need to be paid, or perhaps a spouse will need to remain the beneficiary on a retirement account or a life insurance policy. For example, spouses with pensions may want to financially protect themselves by ensuring that survivor benefits will extend to former partners. Additionally, couples in their 50s and 60s are more likely to have inherited property from their parents or other relatives and may have comingled these assets into marital property. This can create an issue during a divorce when the assets each individual has inherited have not been kept separate.
- Tax Issues
From an income tax perspective, transitioning from filing jointly to filing single can have an effect on your annual income tax filing, and will also impact the personal residence exclusion. The personal residence exclusion provides a tax exclusion from the sale or exchange of a principal residence of up to $250,000 for individuals filing single and $500,000 for filing jointly.
In Gray Divorce, often one of the largest assets the couple has is their home. This home may have been purchased 30 or 40 years ago at a significantly lower cost than what it is worth today. If the property is transferred to one of the spouses pursuant to the divorce, this can negatively impact the potential for a capital gains tax if the property is later sold, as the personal residence exclusion for a couple of $500,000 will be reduced to the single individual personal residency exclusion of $250,000.
Additionally, if the couple has a large estate over the New York Estate Tax Exemption (currently 5.93 Million Dollars for 2021) or over the Federal Estate Tax Exemption (currently 11.73 Million Dollars for 2021), a divorce can significantly impact the tax planning options available, as the couple would be losing the unlimited marital deduction, portability elections and the ability to utilize Disclaimer and /or Credit Shelter Trusts so as to utilize necessary estate tax exemption amounts.
- Long Term Care Planning
Typically, a couple in their 60s-70s may be engaging in long term care planning techniques that include transferring assets out of their names in order to start what is known as the “five year look back period” for nursing home Medicaid to protect assets from the cost of long term care. As such, if divorce is contemplated, it may be important to engage in long term care planning as part of the divorce settlement. This planning may include transferring marital assets to adult children or to an Irrevocable Medicaid Asset Protection Trust.
Additionally, in New York, a married spouse can execute a “Spousal Refusal” so that the other spouse can receive Medicaid benefits. If one is single, this option is no longer available.
- Estate Planning
In New York, the entry of a final judgment of divorce automatically revokes all provisions and bequests in a Last Will and Testament to a former spouse. It also revokes any appointments of the former spouse as agent under a health care proxy or agent under a power of attorney. Because of this, it is extremely important to have new estate planning documents drawn up during the pendency of a divorce and possibly after the divorce is finalized as well. Additionally, in certain circumstances, such as an amicable divorce, the spouses may still want to act as each other’s agents, and having the law automatically revoke these documents can cause serious consequences in the event of a health emergency or incapacity of a spouse.
As Silver Divorce becomes more common place, it is more important than ever for divorce attorneys to consult with financial advisors, estate planning attorneys, elder law attorneys and other professionals to ensure their clients’ estate plan and financial future is as secure as possible.
Lauren C. Enea, Associate, Enea, Scanlan & Sirignano, LLP