"Gray divorce" — when couples split after age 65 — has been steadily rising over the past few decades.
These are tax-intensive situations, because property in a marital estate is generally concentrated in retirement accounts, the marital home and sometimes a closely held business, said Phillip Zagotti, founder of North Star Law Firm in Houston.
"Because the parties are within a decade of required minimum distributions, the post-divorce financial reality for everyone may not look like the joint picture they planned on for the last 30 or 40 years," he said.
In his experience, George Dimov, founder and CEO of Dimov Tax in New York City, said that the biggest mistake that people make when they divorce later in life is not about how much money they have to give their spouse. It is about how they split their retirement money, he said.
A 401(k) can be split easily with a qualified domestic relations order, said Dimov.
"This way there is no tax and no penalty and the money just gets moved to the spouse's account," he said.
An individual retirement account is different, though, said Dimov, as it does not use such an order.
"Instead, the divorce papers need to have words that say the money is being transferred because of the divorce," he said.
Christopher Hensley, president of Houston First Financial Group in Bellaire, Texas, said he works with many state employees approaching or already in retirement, and gray divorce is something he's seeing more often. One area that gets frequently overlooked, he said, is Social Security tied to prior marriages.
"I always ask about former spouses," Hensley said.
If someone was married for at least 10 years and does not remarry, they may be entitled to a benefit worth up to 50% of the amount their ex-spouse would collect at full retirement age. (The ex-spouse's payout is not affected.)
"For many of the educators I work with, especially those in public schools or junior colleges who rely on a state pension and may have limited Social Security, this can be a game changer," he said.
Another major problem in gray divorce, Dimov said, is the sale of a home. When a married couple sells, they do not have to pay tax on the first $500,000 they make from the sale. But when single people sell, they get to exclude only $250,000.
"After living in the house for 30 years, that $250,000 difference is a lot of money," he said. "So, it is better to sell the house while you are still married if you know you are going to sell it."
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