Volume 14, Issue 2

Winter 2003

Senior Lawyer News

 

The Financial Impact of
Divorces for Older Clients

[Copyright The American Bar Association. All rights reserved. Originally published in Experience magazine, Volume 12, No. 2, Winter 2002, "The Financial Impact of Divorces for Older Clients" by Ellen Widen Kessler. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.]

One day in family court, the bailiff called the last case. The judge was surprised to see two very elderly people slowly approach the bar. The man wore a large hearing aid and walked with a shaky gait, clutching tightly to his cane. Behind him came a woman, using an aluminum walker, shuffling along as slowly as the man. Both were bent over and had deep wrinkles on their faces.

The judge asked them if they were husband and wife in the case called, and both shook their heads in agreement. "You people want a divorce?" the judge asked incredulously. "Yes," said both parties, nodding in unison. "How long have you been married?" the judge asked. "Sixty-three years," said the man. "No," snapped the woman. "Sixty four last June!" The parties glared at each other.

"And you want a divorce after all of this time?" The judge was angry. "You are in the twilight of your lives, and you can't have that much longer to live. After all of these years together, explain to me, why do you want a divorce now?" "Well, Your Honor," they answered together. "We wanted to wait until the children were dead!"

To family law practitioners, this is not unlikely. An increasing number of older people, whose children and grandchildren have been divorcing for decades, are understanding now that divorce is an option for them, too. Marriages of over 30 years or more—even those of 50 years—are ending in divorce with increasing frequency. Divorced spouses over 50 and 60 years of age and widows and widowers are remarrying and then divorcing with increasing frequency; statistics suggest that second marriages end in divorce even more frequently than first ones. With medical advances maintaining life, health, and even virility, senior citizens (whatever that means) are venturing into marriage or cohabitation with more enthusiasm and in greater numbers than ever before in our history. And with those marriages come ever-increasing problems that frequently end in family law courts.

Not unlike their children and grandchildren, older people who are divorcing experience the same emotional extremes and endure the inevitable mood swings that cause so many lawyers to avoid family law cases at all costs. Certain ancillary problems—court delays, legal fees, and the like—are common in all divorces, too. But the difference is that these elderly divorcees and youngsters of only 50 or so encounter problems unique to their age group, often making their divorces more difficult in financial terms than those of people far younger than they are.
This article will discuss the divorce of an older couple, with a focus on the financial concerns involved in such a divorce. This article supplements an earlier one published in The Compleat Lawyer (the former name of GPSolo magazine) titled "Domestic Issues for the Older Client" (Spring 1998, Vol. 15, No. 2 at 27). This article is complementary because it examines, in detail, some of the financial problems inherent in a divorce of an older couple.

Any two people who become divorced, regardless of their age, have situations unique to that divorce. Divorces may appear similar but, on examination, most are highly individual. The divorce of an older couple, or a divorce in which one party is older even if the other spouse is substantially younger, involves heightened financial and emotional concerns that require special care. Even when the divorce is the unusual kind called "amicable," and even when the divorcing parties have sufficient financial and emotional resources to carry them through the divorce and its aftermath, the lawyer representing a client must understand the unique circumstances presented by their financial picture.

Divorce anxiety often impedes the older clients, like younger ones, from thinking clearly about financial issues and other social aspects of divorce. A lawyer representing any client contemplating a divorce has the obligation of presenting the facts, including the financial realities, as early as possible in the process. But unlike their neighbors and children, most older people have fixed financial situations and highly limited chances to increase the financial assets. For the older client, financial security can be the most important issue, as he or she will seldom have the option of regenerating assets or earning more income to replace what is lost or divided in a divorce. Assuming that the client is competent and acting independently, a critical early step with the older client is to create and then review a realistic picture of the finances and the likely impact of divorce on those assets. Obviously, an incompetent client requires special care and likely lacks capacity to participate in such proceedings. (See "Domestic Issues for the Older Client," where these are discussed in detail.)

As in any divorce, the lawyer's information must be complete. The client must disclose all assets, liabilities, and income, and the more records and documents, the better. When it comes to money matters, an older client can often be guarded, secretive, uncertain, or ignorant—or all of the above. Nevertheless, the lawyer must have full information, and if the client refuses to produce it, a careful lawyer should consider terminating the relationship early because impaired client confidence or disclosure is a harbinger of future problems and dissatisfaction. Complete information should be received before suit is filed, if possible, or at the least before the divorce is granted. If the client doesn't have the information himself or herself, then collateral sources should be contacted; adult children, accountants, brokers, and bankers can provide this information, but it is imperative that documentary support for any assertions be in the lawyer's file. After suit is filed, discovery to the client's spouse can fill in any gaps or confirm the client's information; a court is available as the arbiter, if necessary. Regardless of the client's wealth or lack of it, a lawyer cannot do his or her job without financial information about the older client.

A client in his or her early 60s (and often one 10 years younger) generally is receiving, or shortly will receive, retirement benefits and pension payments that are not a factor for a younger person. Social Security benefits, annuity payments, pensions, and other retirement accounts fund the older client, so knowledge of the source, terms and scope of all these payments or funds is critical. Retirement plan trustees, Social Security authorities, and investment advisers managing individual retirement accounts (IRAs) must supply accurate information before decisions are made, and if the client cannot obtain these alone, the lawyer must help him or her. It is generally a good idea to have authorization forms for the client to sign early in the representation to secure this information, which plan administrators and governmental authorities are often slow to furnish.

The financial picture must also include all reasonable expectations of income, existing assets, costs and liabilities. A working spouse in his or her early 60s, for example, may be waiting eagerly to retire, but when he or she does, what will happen to health insurance coverage now paid for by or available through the employers? COBRA coverage applies only to companies with more than 20 employees and ends when the beneficiary qualifies for Medicare. But Medicare now does not include prescription medication, often an enormous expense for older Americans, so the present and future costs for these medications must be a part of the financial negotiations.

An older client may anticipate inheritance from an elderly parent or relative or may have additional expenses involved in caring for a disabled adult child or grandchild. Unexpected or contingent disabilities may exist, too; often parents are guarantors for adult children's loans, and these can have expensive and devastating consequences that affect retirement plans. Long-term health coverage may have been purchased, and the premiums will need to be paid to maintain the coverage during the postdivorce period, when that kind of care may become even more important. A divorcing party may want to purchase this coverage if he or she doesn't have it, and if that is done, the cost must be factored into his or her basic and mandatory expenses.

Tax consequences of divorce must also be examined. Middle-class people in a lengthy marriage often own a home with substantial equity. If they remain together, they have options available to them that vanish on separation or divorce. The "reverse mortgage," which allows older people to remain in their home and receive their equity during their lifetimes, generally is not an option in divorce. (If one spouse receives full ownership of the property when the marital property is divided, this option is possible, of course, but when the equity in the home is the major asset besides an annuity-like benefit, the parties will each need their share of the equity to live). Parties can exclude from taxes his or her gain from the sale of the principal residence, but if one party did not occupy the residence prior to the sale, he or she may have an unanticipated taxable gain when receiving a share of the sale proceeds. Often the best-intentioned estate planning undertaken jointly at a less unhappy time can create unanticipated and unpleasant consequences at divorce. For example, assets donated or conveyed earlier may become necessary to older spouses who, upon separation, will have two households to maintain. Frequently the donee no longer has or is unwilling or unable to return the property received, and the party who needs or was entitled originally to receive this money may not be able to get it.

Other unexpected force majeure occurrences can affect a financial picture. How many seniors recently have suffered market losses that affected their retirement income? Stockholdings can decrease precipitously in value. The adverse economic effects of September 11, 2001, will continue to impact retirees and soon-to-be retirees in their pocketbooks, an impact exacerbated by the uncertainty and fear that everyone feels as social and financial changes confound us and compound those financial losses. Unexpected family upheavals—an elderly parent's rapid consumption of assets, divorcing children who have had to use money earmarked for their parents' retirement, severe illness in a spouse, and others—quickly can drain bank accounts that only recently had promised some financial security. While one obviously cannot plan for the specific unexpected event, realistic financial planning at divorce must allow some latitude for catastrophic vicissitudes. Clients don't want to anticipate these things, but their lawyers must make them consider those possibilities.

Financial planning for divorce is an imperative for the older client. There likely are few second chances for him or her to improve his or her financial picture in the future. Generally there is little possibility for job promotion even if a 60-something (or 70-something!) client is still working. His or her Prince or Princess Charming is probably in a nursing home (or carefully guarded by a protective adult child or a spouse two decades younger), so a rags-to-riches reversal is unlikely. (It has been suggested that when young people marry each other, they marry for "better or worse." When a "May-December" marriage occurs, generally the younger spouse is marrying "better"!) Almost all of the older client's assets have been acquired already. Elderly persons who do have assets often restrict themselves to a reduced standard of living by relying on only the income and dividends; they will protect their assets zealously far more often than they will liquidate and spend any part of the principal. The emphasis for them generally is on preservation of assets, even among those who have abundant resources, rather than on using them to make life—or a divorce—easier.

All of these factors underscore the importance of understanding and documenting the estate and the income before the divorce and then attempting to create a realistic picture of the situation after the divorce. We know that two cannot live as cheaply apart as they can together; a financial situation that a couple reasonably expected to maintain them comfortably if frugally together will not stretch to afford the same comfort to them if they are divorced. In most divorces of older people who are not wealthy, the lifestyle of both parties inevitably will be reduced
if they divorce. A client must know that before he or she commits to the divorce. Sometimes that consideration, along with a history of years and children together, will convince a person to rethink plans to divorce. And sometimes a party is so intent on the divorce that he or she doesn't even care.

Take a typical situation—with spouses in their mid-60s and 40 or so years of marriage. The wife probably worked outside the home for a short time when the children were grown, at a low salary. She earned a minimal Social Security payment, of about $600. She does have an IRA of $25,000, but no employer-sponsored retirement plan. Her husband participates in a company-sponsored 401K plan and when he retires will receive $1,800 a month, and Social Security of $1,750 a month. The parties own a home valued at $110,000; they have satisfied their 30-year mortgage but have taxes and routine maintenance on their older home totaling $9,000 annually. They have bank accounts worth about $60,000, five-year old automobiles, and no responsibility to support parents or children.

When they retire, as a married couple, they can anticipate:

Income (combined):
$4,150/month, $49,800/annually
Income from $60,000:
$4,800/annually
Total Annual Income: $54,600
Net Income, After Taxes:
$47,000 ($3,916 per month)

Their fixed expenses for their home and medical care and drugs will exceed $1,700, leaving them $2,216 for food, transportation, clothing, and recreation. If they pay $300 a month for life and long-term health insurance, their net income is further reduced to $1,916.

Upon divorce, they will each be left with $958. (For these figures, I am indebted to Michael A. Tusa, LL.M., who made sure these numbers are accurate. This raises another issue: if the facts require expertise that the family lawyer lacks, do not hesitate to consult a tax expert like Michael A. Tusa, a certified public accountant, or another knowledgeable person.)

Additional cash from the sale of their house will be reduced by expenses of the sale and then separate housing. Thus, a retirement comfortable for this couple has become less comfortable if they do not live together and must divide their assets equally.

Let's increase our fictitious seniors' assets and income a bit. Suppose that the wife's salary was about $100,000 when she was working, but she delayed her entrance into the work force until the children were grown and educated, and then she curtailed her employment when the grandchildren appeared. Her retirement account therefor accrued over a limited number of years, and she has about $40,000 (after September 11) in her 401K and about $40,000 in her IRA. Her Social Security income will be about $1,600 per month and her interest income from her IRA and 401K (she refuses to spend her principal) will be no more than $600 per month ($7,200 annually). Our hypothetical husband is a lawyer about to retire. He should receive about $2,000 per month in Social Security income and another $1,500 per month over the next 5 years from a few small structured fee arrangements he has and the sale of his interest in the law practice. His 401K is about $250,000. This couple also has assets totaling about $300,000 in various accounts. Their $300,000 home is paid for, and they have no mortgage payments. They have a condo at the beach for which they paid $275,000 and even though it is mortgaged, they believe they have about $50,000 in equity in it. They owe nothing on the six-year-old automobiles they each drive.

They have good reason to expect a comfortable retirement. After all, they can expect the following monthly income as a retired couple:

Wife's Social Security ­ $1,600
Husband's Social Security ­ $2,000
Wife's interest on retirement accounts ­ $600
Husband's income from practice sale ­ $1,500
Husband's interest on 401K plan ­ $1,600
(almost 8% ann.)
7% interest on investments ­ $1,750

This totals $9,050 monthly or $108,600 annually, which sounds extremely comfortable. And even if the amount of interest calculated in this hypothetical is extraordinarily optimistic, the market is notoriously unreliable, their house has no mortgage, after all, and they can live quite easily on whatever the income actually is.

Right? But let's consider expenses first. Income taxes reduce their gross by at least 25 percent, resulting in monthly income of no more than $6,770. Maintenance and taxes on their residences and the furnishings and household items in each home cost them about $20,000 each year or $1,670 each month, reducing disposable income to $5,100. Each party needs a new car, and if they pay cash for the cars, it will cost them not only the $60,000 used in the purchase but a loss of at least $50 in interest each month; if they finance the cars, they will have a monthly obligation of around $1,000 for both cars. They have Medicare supplements and long term care insurance that costs each of them $500 each per month, or $1,000 for both. Each party has prescription medication that costs about $300 or $600 for both per month. They belong to a health club, another $150 per month, and each has a weekly massage for his or her arthritis, $500 per month. They contribute to various charities: their church, the Opera Guild, the museum association, and the like—and have pledges to those institutions for the next five years totaling $400 each month. The mortgage payment on their beach condominium, plus taxes, fees, and related costs, is $2,000 per month. They own a boat, which costs them at least $500 per month (a low estimate, as those who own boats know!), and they have been assisting their divorced daughter and her children by helping with private schools for the children, cars, house payments, and the like—at $2,500 per month or more. These fixed expenses exceed the retirement income, without even considering their expenses for food, household help, recreation, gifts and travel. The expenses noted are those which to these people, at least in the early years of their retirement, represent the continuation of the lifestyle they achieved during their working years.

Of course some of these expenses can be whittled down sizably. Inexpensive cars can be purchased and perhaps even only one car to be purchased if they are both retired and living together. The boat can be sold, the charitable pledges may be reduced, furnishings need not be replaced, and the condominium can be sold or rented for part of the year to defray some of these expenses. These people can live a comfortable, if some reduced, lifestyle if they stay together, and they can do it while still preserving most or all of the sizable assets that will remain available to them for any emergency.

But if they decide to divorce and then divide their assets, they will lose any chance of maintaining this lifestyle separately. They will be unable to live in a place or in a manner comparable to the marital home unless they are willing to liquidate their investment accounts; if they do that, their income will be greatly reduced and their security substantially eroded. Their charitable contributions would have to be dramatically slashed, and their daughter will have to receive less or no help from them. The boat and the condominium will be sold (at a loss, undoubtedly), and recreation, travel, and clothing costs would undoubtedly have to be reassessed and reduced. Yet these are the lucky people. They have options, and each would be in a position to use his or her one-half of the marital property they formerly shared to provide himself or herself with most or many of the same comforts enjoyed during the marriage after a divorce. But that comfort would come at the cost of losing the solid financial security that they may have worked their entire lives to achieve, and that cost is often too shocking for the older person. For such people, like their less affluent contemporaries, understanding of the anticipated financial impact of a divorce will make their decisions to divorce more difficult.

These hypotheticals do not consider the financial cost of the divorce for the parties. Most payor spouses (generally the husbands, who have been the primary breadwinners throughout the marriage) are at least reluctant and more frequently highly resistant to sharing the retirement pensions they earned in their working life, and the laws regulating marital property or community property do not comfort or console them. When the person realizes the impact of dividing those payments with the spouse he is divorcing or being divorced by, often the most easy-going party can become angry and difficult (a scenario that is completely gender- neutral). And resolution is often accomplished only at a high cost after litigation (and even appeals) that engender costs that reduce both spouses' assets or income or both. (See, for example, McCloskey vs. McCloskey, 359 So. 2d 494 (Fla. App. 1978)). These costs are separate from the emotional costs attendant on destruction of a way of life that has been shared for most or all of each party's adult life. (Besides, the emotional costs can translate to more financial expense: stress, depression, and anxiety, often exists in some form in most older people and commonly accompanying divorce at any age. It can cause unusual or additional medical expenses and other unanticipated expenses that continue after the case is over and the lawyer has closed his or her case.) The result is a situation that tarnishes the gold in the golden years—of both spouses.

The scenarios hypothesized are general, of course. Most retired couples have less monthly income than suggested above. When the parties have more income, their lifestyle is different; generally it, too, will be affected adversely by divorce and its attendant financial costs. We have assumed good health and manageable health costs: routine doctors' visits, generic medication, and no nursing or custodial costs. Add any of those to the hypothesis and the retirement income for the couple becomes problematic; if they divorce, it can mean poverty.
In our office is a case involving a wealthy businessman. When he was about 55, he divorced his wife of 30 years, who never worked outside the home. She received the marital home, some other assets, and $2,000 a month in alimony. (Under Louisiana law, that was a generous award for a spouse who also received community assets, as Louisiana's jurisprudence does not calculate postdivorce alimony by reference to lifestyle during the marriage. See, for example, Darbonne vs. Darbonne, 427 So. 2d 558 (La. App. 1983). More recently, Willis vs. Willis, 712 So. 2d 644 La. App. (1998).

His income at the time was about $160,000, and he received his business as his share of the community. He is now 68 and about to retire. His son is poised to take over the business, which is no longer as lucrative as before and must now support the son and his family, too. With retirement, investment, and Social Security, the former husband will receive about $5,000 a month retirement income to support himself and his second wife (to whom he has been married for 13 years) and to pay his alimony. His first wife, he has heard, has used many of the assets received as her share of the marital property. The $2,000 a month was insufficient alimony for her, as their standard of living during their marriage was much higher. Neither he nor she is especially healthy now. The former wife is unemployable. His retirement income simply will not support him and his present wife and his former wife. He is considering a suit to reduce support but because the desired results cannot be guaranteed, he is reluctant to incur legal fees and remains bitter, understandably so.

But the culprit is reality—shrinking income, increased expenses, and factors of aging. For a similar case dealing with this reality, see Kluever vs. Kluever, 656 So. 2d 887 (Ala. Civ. App. 1995).

I have represented two different women who decided that near poverty was better than continuing their 50-plusyear marriages. (One woman had been with her husband since she was in high school ‹ met when she was 15, married at 18—60 years together.) In each there were only small houses with no mortgages and moderate retirement benefits. My clients, the wives, took the homes, and the husbands took the pensions. Each wife was left with about $500 a month in income after the houses were sold and the proceeds invested. But each had family members‹siblings or children‹who helped a bit, and each reported being far happier after the divorce, even with the reduced lifestyle. I represent another woman, married more than 45 years, who has been coming to see me for the last six years, every 18 to 24 months. She wants a divorce badly, but when we discuss the financial realities of divorce, she equivocates, decides to "think it over," and then returns—about two years later. Each meeting or series of meetings, ends the same: She cannot give up her lifestyle—at least, not yet.

In all of my cases, like all cases of this kind, the client must choose whether to divorce or not. He or she must weigh the realities of divorce because he or she will live it and will suffer the consequences. The lawyer's function is to create the financial picture so that those consequences will be more clear and the client's decision more intelligent. And this function, while the same as in any divorce representation, has added importance when the parties are older.

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