With four decades of experience practicing family law in Texas, Connatser Family Law attorney Doug Harrison has helped hundreds of affluent clients navigate the complexities of divorce involving sizeable estates, family business concerns, trusts, retirement accounts, insurance and more. We asked Doug to shed some light on the unique challenges older, wealthy couples face during divorce.
According to data analyzed by Pew Research, since 1990, the divorce rate has roughly doubled for adults ages 50 and above and tripled for those ages 65 and older. Clearly, gray divorce is on the rise, but why is this happening?
Two big contributing factors are that the baby boomer population is getting older, and they are living longer. Boomers are retiring in droves and their kids have left the nest, which means boomer couples are suddenly spending a lot more time alone together. Consequently, some couples realize all of that togetherness isn’t as great as they hoped. The disdain for extended one-on-one time – by either party or both – is exacerbated when one of the partners transitions from eight to ten hours a day in the office to 24/7 at home.
Following retirement, some couples also realize they have very different interests. Perhaps the wife is a real go-getter who loves to socialize and participate in cultural and civic endeavors, while the husband prefers to stay home and tinker around the house or play golf.
In addition, many gray divorces we see today are second or third marriages, which have a significantly higher failure rate.
While gray divorce can be complicated regardless of how much wealth is involved – learn about gray divorce and social security benefits here – affluent couples often face unique challenges, especially when divorcing later in life.
No. 1: Tax issues.
Most successful people in business try to take maximum advantage of the tax code. Consequently, couples getting divorced, when significant money, business concerns, and a long-term marriage are involved, have probably dealt with some tax issues along the way.
It also isn’t unusual for a couple to think everything is fine from a tax perspective, and then receive a notification from the IRS that they are being audited for a return from a few years back. As a result, the parties may find out there are significant taxes owed that need to be dealt with during the divorce and beyond. Caution is encouraged with respect to these types of issues.
No. 2: Estate plan changes.
Many affluent couples establish elaborate estate plans, trust agreements, and family limited partnerships to ensure family members are provided for over the long term and taxes are minimized. When a couple contemplates a gray divorce, confusion and disagreements can arise pertaining to how these components will serve family members post-divorce.
For example, when the couple created their estate plan, their goals were likely based on providing for the parties as a couple – not as individuals. Concurrently, wealthy couples often set up and contribute assets to family limited partnerships, under which both spouses, and possibly their children, own a percentage interest in that partnership. This ownership structure can result in a lower valuation of an individual’s interest in the partnership for estate tax purposes because of lack of control of the entity. This same issue would likely arise in a valuation for divorce purposes as well.
Should the couple decide to divorce, the parties often have different interests and goals. Essentially, they are now paddling the boat in different directions, as self-preservation kicks in! How the family limited partnership is valued and dispersed requires careful consideration during divorce.
Evaluating and analyzing trusts established during a marriage can also be complicated and, in some cases, frustrating. For example, many couples create irrevocable trusts that can’t be changed once put in place. However, those trusts could trigger long-lasting tax issues. While husbands and wives can leave any assets to each other without paying the estate tax, assets left to children, grandchildren and other people can trigger taxes in the future.
These are just a few of the many estate planning issues that can arise during a gray divorce. If you have similar concerns, make sure to hire a divorce attorney experienced in handling cases comparable to yours, who can recognize issues of this type and can engage appropriate tax and probate attorneys to resolve issues and problems.
No. 3: The future and value of family-owned businesses.
If a couple owns a business as part of their community estate – which happens frequently – the parties often view that business much like another child in the relationship and “custody” can become an issue.
If the parties agree to keep the business and share profits, the former spouses may disagree on what role the parties will play, how the business will be run, how financial information is disclosed to the spouse who is not in charge, what compensation will be paid to each respective spouse, as well as what direction is best for the business in the long term.
Selling the business is another option, but there can be wide disparities between appraisals of the business’ value, over which the parties may disagree. In addition, while many husbands and wives own equal parts of a family business, rarely do they participate equally in the running of that business. How should the differing levels of contribution affect the outcome of the divorce settlement as it pertains to the family business? Is there any personal goodwill attributable to the spouse who has been active in the business? Is there a date for the ultimate sale or is it open-ended?
We’ll take a deeper dive into valuing and dividing family businesses in an upcoming article. (You can also learn more about business prenups in this past post.)
No. 4: Selling the family home.
Even with wealthy couples, the family home may be a significant asset of the community estate. Couples who have a significant gain on their residence may want to consider selling the home prior to getting divorced, because they can shelter more gain on the house, as opposed to awarding the home to only one of the parties who will then sell.
If the house sells while the parties are still married, they can take advantage of a one-time $500,000 exclusion for capital gains. Conversely, if one of the parties is awarded the house in the divorce, and he or she decides to sell it afterward, that party is limited to one $250,000 exclusion of capital gains as an individual.
No. 5: Retirement and pension benefits.
When you look at the myriad of retirement plans and benefit packages made available to executives over the last 30 to 40 years – from stock options to top hat plans to phantom stock plans to restricted stock awards – those all have to be dealt with and carefully sorted out so both parties receive value and the tax implications are equitably considered in the allocation of such assets.
The vesting of certain interests is another factor to consider. Even if the party’s plan benefits aren’t fully vested, that doesn’t mean that value or a portion of such benefits can’t be allocated to the non-working spouse.
Pension plans also come up frequently in gray divorces. Some pension plans may already be in pay status with benefits currently being paid to the designated beneficiaries, and elections may have already been made that may or may not be modifiable with a change of circumstance. During the settlement process, the parties will need to consider how benefits will be paid and if there are survivor benefits that can or cannot be modified, and if not, how to compensate the non-employee spouse.
No. 6: Life and health insurance coverage.
Life insurance policies are often included in estate plans, which can lead to awkward situations. In many cases, wealthy clients purchase a “second to die” life insurance policy that insures both parties but only pays on the death of the last party. The premiums on a policy of this type are normally lower than individual policies. Frequently, these policies are used to fund trusts. This raises the issue of who will pay the premiums following the divorce. If one party says he or she wants to keep life insurance on the other’s life, that could raise suspicions (crazy or not), while others may simply view it as improper or unacceptable.
On the other hand, depending on a person’s age and station in life, he or she may not be able to purchase insurance anymore. Consequently, the party may need to hang on to that policy or find out if there is a way to place the policy into a trust where there are mutual benefits for everybody.
With health costs skyrocketing, the loss of health insurance is also a key consideration during many gray divorces. Some people can take advantage of Cobra insurance up to 36 months, which can provide the protection they need as they adjust to other insurance benefits available to them, such as Medicare. If you’re concerned about health insurance coverage, you may want to ask for compensation for coverage in the divorce settlement. Also, be aware that there are “savvy” insurance consultants who can offer sage advice.
No. 7: Social security benefits.
The timing of the entry of the Decree of Divorce can make a difference in whether a spouse can or will receive a portion of the other spouse’s social security benefits. The parties must have been married for 10 years before divorce for the non-employee spouse to receive benefits from the employee spouse’s work. A strategic approach is to carefully select the date of divorce to maximize the social security benefits for the non-employee spouse.
No. 8: Alimony.
If one party is continuing to earn a large income, contractual alimony is an excellent tool to help support the other spouse, giving a tax deduction for the working spouse and taxable income for the non-working spouse. Sometimes, this approach can actually “finance” the settlement.
Consider a collaborative gray divorce
Since 2001, the state of Texas has allowed couples to settle their marital differences across the table from one another through collaborative divorce. During the collaborative process, the divorcing parties can avoid the spotlight and contentious environment often associated with litigated divorce.
Collaborative law, while not for everybody, can be a good choice for couples with significant estates, who love and care about their families and would like to end their marriage with a sense of dignity. Collaborative law is an excellent process choice for clients who recognize and realize that they will have future encounters, business transactions and social/family relations in the future.
On the other hand, some older wealthy couples choose to stay married but live separate lives, often in separate residences. In such instances, ask your family law attorney whether a postmarital agreement makes sense for your circumstances and future financial relationships.
Are you contemplating an affluent gray divorce? Seek out expert advice
The business, property and personal complexities involved in affluent gray divorces are many. To ensure you end up with a settlement that best fits your and your family’s needs, contact a divorce attorney who has extensive experience representing wealthy clients near you.
Douglas A. Harrison is a veteran family lawyer known throughout Texas for his expert handling of complex business and property settlements in divorce. To learn more about options for gray divorce in Dallas and Collin Counties, please call (214) 617-1583 to speak confidentially with a knowledgeable and compassionate member of the Connatser Family Law team.
DISCLOSURE: The preceding is provided for informational purposes only and should not be construed as tax, financial or legal advice. Contact tax, financial and legal professionals for advice pertaining to your individual circumstances.