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Don’t Ruin Your Retirement – Avoid These Gray Divorce Mistakes

The Micklin Law Group- Don't Ruin Your Retirement – Avoid These Gray Divorce Mistakes

So what do you need to know about gray divorces and avoiding mistakes? There’s a lot of information.

Dividing Assets

First, you’ll have to consider how to divide up your assets you’ve accumulated, especially if they are substantial. In order to do that in New Jersey, you have to understand something called equitable distribution. The criteria of equitable distribution is plentiful. The first will be the most important, and that is the length of your marriage or civil union. Next will be the age and physical and emotional health of the spouses. Next is the income or property that either of you brought into your marriage. It’s also important to consider the standard of living that you’ve established. Another thing that I always tell my clients to consider is any agreement made by the parties before during the marriage. After any written agreements, the courts will look at the economic circumstances at the time that you are dividing property or getting divorced. That includes the income earning capacities, educational background, employment skills, work experience, absence from the job market, responsibility for the children, and time necessary to increase education or training to rise to the level to be self-supporting at the standard of living. The courts will also look at the contribution of one party to the other in their acquisition of higher levels of education.

Obviously equitable distribution in a gray divorce is going to be a significant topic because more often than in shorter term marriages or marriages of younger individuals, the couple may have acquired a wealth and complexity of assets. That leads into the next point of equitable distribution criteria, which is the contribution of each to the acquisition, appreciation, and preservation of the value of the marital property. When talking about appreciation, that also includes depreciation. If one spouse has done something to substantially decrease the value of an asset, whether it’s by business decisions or trading decisions or poor spending decisions, that should be considered.

During a divorce, it’s important to consider the tax consequences of the proposed distribution. There are generally no tax consequences to the transfer of your assets into a divorce between spouses, but there will be future tax consequences that need to be considered.

Courts will also look into custody issues: which parent has physical custody? Is there a need for the spouse and the children to remain in the residence? Is a residence a pure marital asset or are there other issues like premarital contributions? For the purposes of equitable distribution and custody arrangements, this will also be something that the court should consider

The courts will also look at what future issues the spouses may have with regard to medical and educational costs of either the spouse or the children, especially if there are special needs for the children. Courts can consider whether or not there was any deferred career goal. For example, did one parent stay home to take care of a child?

And then of course there’s the vague question, are there any other factors that the court may deem relevant? It’s kind of a catchall. Not everybody’s circumstances are going to be the same, so the courts will generally have something like that so that any unique situation and unique facts can be considered in the distribution of your assets.

When you’re talking about equitable distribution, it’s important to remember it’s called equitable, not equal. More often than not in New Jersey, it will be equal. And most professionals come from a position that it is going to be equal. But there may be a reason that it should be unequal. And I always caution people to speak to an attorney and find out before you go in, because again, most people are going to presume it’s equal until you give reason, otherwise they will not consider it. Conversely, people will often come to me asking to get an unequal distribution because they’ve been paying grayer contributions to mortgages or to the upkeep of the house. I generally tell people that unfortunately you cannot reconsider bad decisions when you’re married. So if you were paying a mortgage and you allowed your spouse to spend his or her paycheck as he or she wished, and now you think you should get more of the house because you paid more into it, usually it’s not going to be the case. Generally speaking, the courts can’t reconsider every bad decision that people make because everybody wants to reconsider them. It’s sort of like you acquiesced to this arrangement for a significant period of time. You can’t go back and now ask the courts to reverse what you did. But if there’s something uncommon to your situation, that is something that a court can take into account that may not be in these specific statutory criteria.

Addressing Shared Real Estate

Inside of equitable distribution, many families, especially in a gray divorce, will have real estate and marital residents. And then the main decision is do we keep it, or do we sell it? How do we divide it? And obviously there are going to be a lot of concerns – and not just between you and your spouse, but also with the market and the other economics of your situation. The first thing I always tell clients when you’re talking about selling the house, is to consider the real estate market.

If there is going to be a consideration of keeping the house or one person buying the other person out, you obviously need to consider the circumstances for that buyout. More often than not, especially when interest rates are on the rise, it’s much more challenging for one party to buy out the other party because you typically qualify for the mortgage with the two incomes in the household. Now it’s going to be one income in that household, so it’s going to be difficult.

Along those lines, if you are the person that’s going to be bought out, meaning you’re leaving the house and your spouse is staying in the house, you want to carefully negotiate the provisions regarding the buyout: what will or won’t happen, what the time frames are required to be.

For instance, the spouse must sign the deed in 60 days or vacate the residence and you reclaim possession or it automatically goes up for sale without need to file a motion. Because what will happen a lot of times is you’ll have a 90 day provision for a buyout, the 90 days comes and goes, and nothing happens. Well, you can’t just lock the door or change the locks or take over the house more often, now you have to file a motion with the court, which will be heard 30, 60, maybe even 90 days later. Now you’re 90 or 180 days out in some cases, sometimes the mortgage isn’t being paid and it’s in your name, and it’s destroying your credit. So you have to think about these things in advance and build them into an agreement if you’re settling your case. But even if you’re going to a divorce trial, you need to bring these points to a judge and ask that the judge address them.

You and your spouse may also consider whether there’s a need to stay in the house for the purpose of the children. Um, even in gray divorces, we do see younger children or high schoolers, and the possible need for continuity in education can be significant. Something that you might want to consider when you consider the housing conditions, is that you may keep it for a period of time. So, for example, that period of time could be until the youngest finishes high school. That would also allow you to contemplate changes in the market condition that may occur over those years to sort of maximize the return on the value of the house if you’re selling it years later.

When discussing the house, you need to determine early on in the process if you’re going to need to appraise it and what date you should appraise it from. Typically it’s going to be appraised both at the date of filing as well as at the date of your divorce. This goes to the difference between active and passive assets, which we’ll talk about briefly, but I won’t go into deeply.

You also want to consider what other assets may generate income. If you’re getting taxable interest from an investment, or if you’re getting rental income from commercial property, obviously these are should be factored into not only your distribution considerations for assets, but also to the loan considerations that we’ll talk about in a few minutes.

Now when you’re talking about keeping or selling a house in a gray divorce, there is the issue of whether or not there’s an interest in downsizing. More often than not, your kids are grown most of the time, many times at least they’re out of the house. You might want to look into a retirement community if you are 55 or older as a way to reduce your housing costs and maximize the return on the assets that you’re distributing in your divorce case. This is just something that you need to consider.

Again, none of these specific issues are going to be required to be considered, but I recommend that you consider all of them so that you get the best distribution, not just for you but for your spouse. In New Jersey, it’s not like one person gets everything and the other person loses out – it is going to be based on fairness. So in order for you to get a good, fair outcome, you’ll need to make sure that you, your spouse, and the kids are taken care of.

Investments and Retirement Accounts

After the house, the next thing you need to consider usually is how to navigate your investment and retirement accounts. Again, in gray divorces, this will largely or often be very large and numerous types of investment and retirement accounts. Some examples are pensions, 401ks, IRAs, back account stocks, mutual funds, and other investment accounts. Remember, the number one thing to consider is usually the tax consequence to the transfer.

One of the issues often in a gray divorce is one or more of your retirement accounts may be in pay status. If so, first of all, now it’s an income that may be counted towards alimony, but it also may be a marital asset because you may have acquired the pension before pay status while you were married. So now it’s a marital asset that might be subject to distribution and there’s an income stream that might be subject to distribution onto income. So you need to just get a hold of these issues when you are deciding how to divide up the accounts.

Defining Marital Property

Another consideration for gray divorces is what is marital property when you may have married late in life. Usually gray divorces are people in their fifties and beyond, but that does not mean that you got married later in life. It may mean that you’ve been married for a long time. Either way you need to consider what is and isn’t marital property, but there are going to be different concerns based on the ages that you married and the length of your marriage. So let’s take a look at some of the criteria courts will consider.

First is going to be the marriage date and the date of your complaint – sort of the starting and ending dates. Those will determine whether or not you have an active or a passive asset. So simply put, an active asset is one that changes value because of the contributions or efforts of the parties. So, for example, if you start a business and you are putting in money to keep the business running, your spouse may be taking care of the children at the same time. So that’s an active asset. A passive asset is an asset that changes simply because of the passing of time or market conditions. So like an IRA or a stock account that’s not actively being traded changes value high and low because the market swings.

Now currently most judges tell me they believe they consider houses to be a passive asset, which I disagree with because I think the fact that you’re making mortgage payments, you’re putting a roof on or capital improvements, you are raising a family, I think that all means active, but they consider it passive. And I think that’s generally because it allows the house to be valued at the time of the divorce, not at the time of separation. So if you file for divorce in 2023 but you don’t get the final divorce until 2025, the value of the asset will change and maybe substantially. And I think because more often than not homes are a substantial asset of the marriage, that they’ve chosen to look at it this way. So for you to be prepared, expected to be considered passive and gets valued at the date of your divorce.

The concept that’s important for active assets is what’s called marital momentum. That basically is saying that even though you may have had a premarital asset like real estate or a business that you’ll argue you started before you were married so that there’s no reason there should be a marital component to the value. But the other argument is that the momentum through the marriage is what created substantial volume or value. So let’s say you opened a business, you know, a year before you got married and you had put in a couple dollars and it was you running your shop and then over a 10 year marriage, the business grew, you got more clients, you hired staff, and you bought assets. Well that clearly is a marital momentum result because you started with very little and you had very little premarital time or premarital momentum. Now contrast that with a business that you may open 10 years before you get married. You started it with no money in working out of your shop and when you get married you have a commercial building, 10 employees, a lot of goodwill on a customer list. Well, you get married five years later, it’s going to be much more difficult to determine, did the marital momentum contribute to the increase in the value, or was it simply the premarital momentum? So that’s something very important to take in consideration

One thing to consider, even when we’re talking about an active and passive asset, is that there is a rebuttable presumption that both parties contributed to the acquisition and to the increase in value. So while I’m telling you to consider all these things and that the court will realize that you’re going against the presumption that there was an unequal contribution, that goes back to what I said earlier about where people like to argue, well, I paid more into the mortgage so I should get more back. It’s just not the case. And if you are trying to take that position, the burden is on you to prove either unequal contribution or premarital exemptions.

Now let’s look at inheritance. That’s a common issue when talking about gray divorces. You know, people in their late fifties will often have aging or deceased parents, so inheritance becomes a very significant topic. The things to know about inheritance, the simple versions: one is that it is an exempt asset. So if you receive an inheritance, it’s exempt unless you commingle it or some other way add it to a marital asset. So if you put the spouse’s name on it, if you buy a house and the spouse is on the title, these are all value issues of commingling. You may lose the distinction of the exemption.

I also recommend especially in a gray divorce that you update your estate plan whether or not you have received an inheritance, but you should also be planning for how you want to leave your own inheritance. So let’s look at some other marital property criteria that are exempt: gifts, except for between the spouses, are exempt. So if you get a family gift, same with inheritance, you have to keep it separate and not commingle it. There is an argument sometimes that it was done for convenience, but it’s not a good argument and I wouldn’t rely on that. If you want to keep property separate, then don’t commingle it.

Prenuptial and Postnuptial Agreements

As I mentioned before, you can consider a pre or post-nuptial agreement. Prenuptial agreements are often thought of negatively, and they shouldn’t be. And post-nup are usually thought of positively, and they should be considered negatively. I’ll explain briefly why. So a prenup, if it’s done right and it’s enforced, not only will your rights be determined by the prenup, but you’ll save yourself a lot of time, money and stress when getting divorced. Now a postnup, which I’m personally a big fan of, is generally not favored by divorce judges; they consider it coercive. It’s sort of like, sign this or I’m leaving you because a postnup is often called a, a reconciliation  or a mid marriage agreement. So it’s like where you’re trying not to get divorced so you sign it. I think it’s a noble attempt, but again, the judges disagree with me, so know that they are not favored. Be familiar with the requirements of both a prenup if you have one or if you’re getting one, and a postnup if you’re going to draft one.

Social Security

Another big issue in a gray divorce is social security. You need to know what to expect if you are retiring or plan to retire and you will have social security issues. The main thing about social security when you’re married, and again this more commonly relevant in a gray divorce, but can be any divorce of over 10 years, is that you’re each automatically entitled to the other’s social security after 10 years of marriage and generally you’ll be opting for whomever’s social security is the larger of the two. So whomever was the higher wage owner during the marriage will likely have the higher social security, and then the other spouse can opt to take a portion of their social security as opposed to his or her own social security.

And the fortunate thing for those receiving it, but what’s unfortunate to the system overall, is that it doesn’t impact the benefit. So if your social security is higher than your spouse’s, your spouse can opt to share or your spouse can opt to get social security based on your social security, but it doesn’t reduce your social security. So they just get more, which is partly why the system is failing. But right now it’s in place and these are the rules. So plan accordingly for them. You both must be at least 62 before you can start to receive these benefits.

Spousal Support

So let’s talk about spousal support in a gray divorce and specifically the alimony factors. And here I’m going to just zip through them quickly because there’s a bunch of them. They are, like I said before, very similar to the equitable distribution.

So you have:

  • the need and ability to pay
  • the duration of the marriage
  • the age, physical and emotional health of the parties, and
  • standard of living earning capacities.

These are the main ones. There are 14, but I think the first four are the most important. Additional factors are the length of absence from the job market. Generally, if a spouse either stayed home to raise children or was disabled or for whatever reason just may not have been working, that will be important. Parental responsibility for children – if they currently have parental responsibility, or as we said before, if they lost time in the market because of that, any training that is needed to help the lower earning spouse reenter the market or raise to a level to be self-supportive.

Courts will look significantly to the history of financial and non-financial contributions. They say non-financial so that spouses who raise children don’t get to be homeless because they didn’t contribute to the mortgage payments. So obviously raising children is that kind of contribution. The courts may also consider the equitable distribution of your property, but I don’t find courts do that because assets and alimony are usually separate. But in some cases, whether substantial assets or substantial income that’s going to be derived from these assets, it will have an impact. And as I just mentioned, income available through assets will be considered.

The tax treatment also of alimony is important. Simply put, it currently is not the tax deduction on the federal level, but it is on the state level, and most people, even most lawyers, miss that point. So make sure that if you’re making an agreement that has alimony, that you build these pieces into it or these considerations into it.

The courts will consider any pendente lite support, which is support that’s paid during the course of your marriage. One of the most important things is alimony generally can’t be longer than the term of your marriage unless your marriage was over 20 years. And if you are receiving support during the marriage by court order, which is important, that gets subtracted from the final term. So if you’re married for 19 years, let’s say, it’s unlikely you’re going to have alimony beyond 19 years. If you were getting temporary support for a year or two in your divorce, now you’re only going to get a maximum of 17 years.

Hiring Experts

Now that you have the main considerations, you need to look at some of the less significant but compelling issues in gray divorce. The first is going to be, do you need to retain employability or other experts for your spouse’s earning capacity. A longer duration marriage is more likely to have the traditional setup where one spouse was out earning and one spouse was staying home with the children. So you may need to have an employability expert so you can talk about the lower earning spouse’s ability to earn. Now, you may need an expert also for lifestyle analysis and levels.

The alimony statute was revised to remove the phrase “permanent alimony.” They also added in modifications for retirement and cohabitation. So again, when you’re looking at the discussion of whether you need employability or other experts, you want to look at the different types of alimony: open duration, limit duration, rehabilitative reimbursement to determine what may apply to your case.

Going back to considerations about experts, in some cases you need a forensic expert, if there’s a business or a spouse is self-employed. Even if it’s someone who is a 1099 contractor or consultant, you may need to know revenue, whether their personal expenses are being covered as business expenses, you may need to look at goodwill and how much value they have. So even a small business will need an evaluation.

Retirement and Retirement Planning

Another big issue with gray divorce is going to be retirement and planning for that. Fortunately the alimony statute was revised in 2014, so it now contemplates a good faith retirement at federal age of retirement. So let’s first look at the provision and then we’ll talk a little bit about it.

So there’s a rebuttable presumption that alimony terminates when you attain full retirement age. Arrears do not. Now, that’s important because the full retirement age doesn’t necessarily mean 65 or 67. That’s more often than not what is being considered, but people like police officers, firemen, you know, they, they’re in for 20 years. If they started when they were 20 or 22, they’re retiring at 40, 42, you know, 45 sometimes. So you can retire prematurely, but you will then have the burden of proving that it’s a good faith retirement. If you retire at the full retirement age, then you’re presumed to be doing so in good faith and the burden is on the other party to show otherwise.

So how do you overcome that presumption? There are certain factors that the court will look to. Again, they’ll look at the age of the party at the time of this application for retirement. They’ll look at the age of the parties at the time of the marriage and at the time of the alimony award. They’ll also look at the length of the economic dependency. How long was one spouse earning less or out of the workforce, and did that impact the retirement age of either party? Had they relinquished other rights of properties in exchange for longer alimony? So if one spouse, for instance, gave up a pension and got alimony or gave up interest in the house for alimony and then the other person retires prematurely, or even at full retirement age, the court still can’t consider if there was an agreement to get more alimony to give up something, it might be considered unfair to terminate alimony under the, the rebuttal presumption.

Obviously they’ll look at the duration of alimony already paid, the reason for alimony, health of the parties, the assets, whether the recipients for retirement age, sources of income, ability for the recipient to have saved, which is important, and any other factors the court requires or deems relevant. One important thing here is the ability for the recipient to have saved adequately for retirement. That’s going to be important. Both if that person is trying to make a rebuttable presumption overturned and say that retirement full age is not appropriate. I think it’s also going to be relevant if you are the one who retired prematurely and you’re trying to have the court find that it’s a good faith retirement at a younger age, I think the courts are still going to look at whether or not the recipient did have sufficient time to save. Now, depending on where you are in that argument, depends on how impactful it’ll be. If you’re at good faith retirement at full retirement age, and the recipient has had sufficient time in the plan and has not, it won’t hurt. But if you’re retiring prematurely and you’re robbing the recipient of many years to save for retirement, that will count against you.

So how do you handle these issues? This is important with any agreement, but especially with alimony: you want to be specific in your agreement. So you need to build these things in if you’re going to be retiring prematurely or you’re in the kind of profession that typically one does, you want to mention the year that you’re going to retire. You want to put in what triggers and what proofs are required and whether there’s a process, do we have to file a motion or not?

Just like I said, when it comes to selling the house, don’t, don’t rely, and this is important, don’t rely on the fact that the statutes say A, B, and C. Because if you make an agreement and your agreement doesn’t say A, B, and C, the statutes may not apply. So you’re not going to be bound by the same laws if you don’t either cite to the statute and say it’s included or specifically indicate that all those provisions are included.

Another thing to launch out is what I call double dipping. When there’s issues of retirement accounts or or interest income, real estate, or producing income pensions, this is very important. If you are getting a pension that’s in pay status and they’re considering it for alimony, but you’re dividing a pension as an asset, you need to make sure first of all, that the difference will be accounted for because when you divide, the pension income will go down, but you also don’t want to have them count both the income from the asset as an asset and the income from it as part of alimony calculations. It’s a complicated issue, so it is something you need to be mindful of and you do need to either talk to an attorney or do quite a bit of research if you have that issue in your case.

Cohabitation and Alimony/Social Security

Another couple things to think about when we’re talking about alimony and retirement is, is there going to be cohabitation? Now with the reform of alimony, the cohabitation clause was also modified, so it can be suspended or terminated if there’s cohabitation. Cohabitation is defined as a mutually supportive, intimate personal relationship in which a couple has undertaken privileges and duties commonly associated with marriage. So what does that really mean? If you are going to be asserting cohabitation, the things that you want to show to a court include intertwined finances like joint bank accounts, joint debts, credit cards, payment of bills, and shared responsibility for these living expenses, which is challenging because it’s hard to get into banking and prove who’s paying what. Absolutely a private investigator can help with some discovery, but that’s a different process. Also helpful is the recognition of the relationship in social and family circles, including social media. The frequency of contact, the nature of the relationship, how often they are together, whether they’re living together or not, how much time do they spend together when they are together, are they sharing household chores? Is one taking out the garbage? Is somebody painting the roof?

So how do you put all this together? The court’s going to consider all these factors even if they don’t live together on a full-time basis. Proving how much time together usually requires either testimony or a private investigator, but it doesn’t have to be seven days a week. It doesn’t have to be every weekend, but it doesn’t need to be a sort of regular pattern to suggest that there’s an ongoing relationship. Now, what I usually recommend is agreeing to a clause that says what is cohabitation and whether it ends or modifies support. Because what happens under the law is first, it can be reinstated if the cohabitation ends. So you could go through all this, prove your spouse is cohabitating, terminate your alimony, and then the spouse terminates living with that person and seeks to have alimony reinstated. I’ve never seen it actually happen, but the law allows for it. So you might want to pro, you may want to put a provision that says if there’s cohabitation, alimony is terminated. If it’s terminated, it cannot be reinstated. You can deviate in your agreement from what the statute says.

There are even more considerations in a gray divorce, like insurance needs, life insurance, paying for college for shared children, and more. Clearly this is a complicated situation for men in New Jersey, so it pays to speak to a family law attorney for men who can help consider all the options. If you’re a man going through a gray divorce in New Jersey, contact our team at The Micklin Law Group, and we would be happy to help.

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