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How Older Divorcing Women Can Avoid the Bag Lady Blues
June 12, 2006
Older divorcing women are swelling the poverty rolls because the traditional 50/50 splitting of household assets can leave them broke, according to an article in the June 2006 issue of the Journal of Financial Planning, published monthly by the Financial Planning Association® (FPA®).
Older divorcing women with limited work history and who lack independent financial resources are especially vulnerable to the traditional splitting of assets, writes Carol Ann Wilson, CFP®, also a Certified Financial Divorce Practitioner, in her article, “How to Help Older Divorcing Women Avoid the Bag Lady Blues.” It’s difficult for older women to establish a decent-paying career, and they lack the time to rebuild the substantial assets that often accumulate during a long marriage.
Unfortunately, courts, attorneys, and divorcing women traditionally overlook the husband’s career assets during the property settlement, writes Wilson. “In creating a financially equitable settlement, it is important to remember that property is divided just once, but career assets continue to produce income regularly for years.”
The first mistake is that the woman often wants the home because of an emotional bond to it. Wilson illustrates this problem in an example: A couple has a $330,000 house, some savings, the husband’s pension, and his home-based side business in addition to a $160,000 salary from regular employment. A traditional 50/50 split might give the woman the house and some additional dollars to “equalize” the snapshot value of their assets.
The problem, says Wilson, is that the home is an illiquid asset that not only takes money to maintain, but if eventually sold could trigger a tax liability, depending on the basis of the house. Indeed, notes Wilson, “After being involved with more than 600 divorce cases, I find that the one question most overlooked by attorneys is, ‘What is the basis of the house?’ (or stocks, other real estate, or other investments in the couple’s portfolio).”
Furthermore, the woman has no career for generating income. The husband, on the other hand, has a career, a small business, and a pension that will grow in value. As Wilson illustrates, women in this situation can easily be broke within 5 to 15 years.
Pension and retirement plans are another critical area for the divorcing older woman who has accumulated little in retirement assets on her own. In Wilson’s article, she examines the valuation and division of the two types of retirement accounts.
Valuing defined-contribution accounts such as 401(k)s is straightforward because they have a current cash value that’s easy to determine. Dividing the account, however, can be tricky, says Wilson, because while the woman can transfer the funds tax-deferred, she may need some of the money to pay her lawyer or other debts. That creates a tax problem.
Valuing defined-benefit plans is more complicated. Wilson discusses two methods for dividing pension benefits: present value, in which the spouse receives a lump-sum settlement, and deferred division, where each is awarded a share of the benefits when they are paid. Which choice is appropriate will depend in part on the number of years to retirement, says Wilson.
Another area for concern is what is often interchangeably called alimony and maintenance. But alimony carries tax benefits that maintenance does not. “Making payments that qualify as alimony for tax purposes may make financial sense for both parties,” writes Wilson.
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