Gray Divorce

There are some unique aspects of divorces that occur later in life – “gray divorce”. One important aspect is that people at or near the end of their working lives have less opportunity to recoup financially after divorce. The resources that they have accumulated may be all that they will have, therefore a fair division is even more important.

There are two major types of retirement plans: defined contribution and defined benefit plans. With a defined contribution plan, there is an identifiable present value of the plan as shown on the plan statement. Common examples of defined contribution plan are 401Ks and Individual Retirement Accounts (IRAs). The values for the plans are that sown on the monthly statements.

It is also important to consider the tax aspects of such plans. Tax is paid on 401K accounts when withdrawing funds. For IRAs, taxes differ based on the type of IRA. It is important to account for the difference in allocating Roth and traditional IRAs given that with Roth IRAs the withdrawals will not be taxable, whereas with traditional IRAs, they will. There are limitations on when withdrawals may be made without financial penalty. Another consideration is the scenario where distributions are available without penalty, however receipt is deferred by a party. In this event the Court can consider the deferred distributions as income.

The second type of retirement plan is a defined benefit plan. This plan type pays a monthly benefit at retirement based on a formula that averages the highest earnings of the employee for a specified term and the duration of the employment. The formula used is plan specific. If a person is receiving retirement then the monthly amount received is already known. If a person is not yet receiving retirement, the monthly amount I not know, however a percentage share of the plan can be determined by utilizing a dividing formula.

The statutory dividing formula is the Hunt Gallo time rule formula. It takes into account the years of service to the institution and the overlap of the marriage with the service to determine a percentage interest for the spouse. Note that federal and military pension calculations are determined by federal law. It is also possible to value a retirement plan with the intent to offset the plan with other assets should one party want to keep the plan. This is viable only in cases where there are substantial other assets as retirement plans are valuable.

One important aspect of retirement plans to remember as well are survivor benefits, which must be addressed in the retirement division court order or potentially lost. For ERISA as well as federal government and military plans, the spouse receives a survivor annuity unless waived. For some other plans, the benefit should be specified in the dividing order as it may not be an automatic part of retirement division and may have to be specifically elected by the retiring party.

The analysis of whether spousal maintenance is warranted may differ with couples at or near retirement. “When a party has requested maintenance in a dissolution of marriage/legal separation proceeding, prior to granting or denying the award of maintenance, the court shall make initial written or oral findings concerning: the amount of each party’s gross income; the marital property apportioned to each party; the financial resources of each party including, but not limited, to the actual and potential income from separate or marital property; and reasonable financial need as established during the marriage.” C.R.S. § 14-10-114(3)(a)(I).

Only after making these initial findings, can the court determine the amount and term of maintenance, if any, that is fair and equitable to both parties after considering the guideline amount and term of maintenance by considering additional factors set forth in C.R.S. § 14-10-114(3)(c). If a court determines that maintenance is not appropriate, then the additional factors are not evaluated.

With regards to the statutory follow on factors, there are some unique and particularly relevant aspects for gray divorce.

Age and Health and Customary Retirement Age: Increasing age and declining physical, emotional, and mental health often reduce the ability to earn. Relevant factors the increasing costs of health insurance and health care. The availability and cost of insurance after the divorce should also be considered. Sometimes a party will raise speculative concerns about a lack of ability to work, however Colorado law requires consideration of current relevant circumstances. See In re Sharp’s Marriage, 539 P.2d 1036 (Colo. App. 1975). However, even if health issues do not interfere with a person’s ability to work, they can impact the opportunity to work due to a possible preference for younger workers by employers. Keep in mind that there is a rebuttable presumption that once a party has reached customary Social Security retirement age that retirement is reasonable. C.R.S. § 14-10- 122(j)(b) states that:

“a payor spouse who income is reduced or terminated due to his or her retirement after reaching full retirement age is entitled to a rebuttable presumption that the retirement is in good faith. C.R.S. § 14-10-122(j)(c) goes on to state that, “full retirement age” means the payor’s usual or ordinary retirement age when he or she would be eligible for full United States Social Security benefits, regardless of whether he or she is ineligible for Social Security benefits for some reason other than attaining full retirement age. Full retirement age shall not mean early retirement age if early retirement is available to the payor spouse, nor shall it mean maximum benefit retirement age if additional benefits are available as a result of delayed retirement.” C.R.S. § 14-10-122(j)(b).

Strategic tip: If a party claims an inability to work or a limitation on the ability to work, a vocational assessment should be considered. Alternatively, a medical functional capacity assessment may be useful outside of a vocational assessment. Also, a Social Security disability rating is relevant as well if there is one. However courts may be skeptical if usupported claims of limtiations on work by a party.

It is also important to consider age and health factors in determining strategy as to whether an unequal distribution of property or spousal maintenance is more desirable. The analysis certainly involves some unknowns about the progression of health and any impacts on earning capacity. While it is clearcut to determine when a person will reach Social Security retirement age, it is not possible to accurratly predict the progress of a decline in health.

For example consider that once property is divided, it can not be reallocated absent rare citcumstances such as the failure to disclose a material asset. Whereas spousal maintenance is always subject to modification based on a substantial and continuing change of coircumstances making the original award unfair. As well, the court can order a nominal award of maintenance and reserve jurisdiction to determine it if there is an important future contingency, such as retirement, that should be considered. See In re Marriage of Folwell, 910 P.2d 501, (Colo. App).

Strategic Tip: it may be important to assist clients in understanding that a post-divorce lifestyle may involve a lower standard of living once resources are divided.

It is important to secure maintenance with life insurance, particularly if there are no survivor benefits. C.R.S. § 14-10-114(6) authorizes the court to secure maintenance. When entering an order the court must consider: the age and insurability of the payor spouse; the cost of the life insurance; amount and term of the maintenance; whether the parties carried life insurance during the marriage; prevailing interest rates at the time of the order; and other obligations of the payor spouse. The reality is that the older the prospective insured person is, the more expensive life insurance is. Many of the reasonably priced term policies are not even offered beyond age 65. Additionally, coverage may be denied for preexisting health conditions.

In some cases, a spouse who has been out of the workforce for a substantial period of time may not be able to actually obtain gainful employment due to age, a lack of current skills or other factors. However, in order to avoid or reduce imputation, reasonable good faith efforts to get back into the workforce should be considered.

Also, Not everyone determinates that they are able to live on a reduced retirement income at customary Social Security retirement age and some spouses continue working past that age. Some choose to consider working to better maintain their lifestyle and standard of living.

In gray divorce, income sources are often very different from those of younger couples, as it may be comprised of Social Security income, retirement income, and disability income. Social Security income is not considered property and therefore not divisible, however is considered an income source available for support if received. C.R.S. § 14-10-115(5)(P). In addition, Social Security income can be considered an economic circumstance. In re Marriage of Morehouse, 121 P.3d 264 (Colo. App. 2005), C.R.S. § 14-10-113. The age at which a person reaches customary Social Security retirement age depends on his or her year of birth. Recipients can receive reduced amounts early or can wait until past customary retirement age and receive increased amounts later. Social Security benefits can be accessed as early as age sixty-two at a reduced amount, with maximum retirement benefits not available until age seventy. There are no reported Colorado decisions addressing the appropriateness of imputation of benefits for a person of customary retirement age who has opted to defer benefits.

Additionally spousal eligibility is relevant. A divorced spouse can receive benefits based on the other spouse’s Social Security eligibility if the marriage lasted at least ten years and the spouse seeking the benefit is sixty-two or older and unmarried. The spousal benefit does not reduce the wage earner’s benefit. A former spouse can also receive spousal benefits even if the wage earner is not retired so as long as both former spouses are at least sixty-two and divorced for at least two years. Social Security retirement benefits are taxable income.

Gray divorces may be more likely to involve passive income such as rental income, interest, or dividends. All of these sources of funds are defined as income. C.R.S. § 14-10-115(5)(F); (J-K). However, the recipient of passive income can change based on asset distribution in the course of the dissolution. This invokes the potential issue of “double dipping” and as to whether an asset should be treated as property, income or both.

It is possible to receive an income producing asset as part of the division of the marital estate and then then have the income count for the purpose of calculating spousal maintenance. One important consideration is whether the asset does or does not have some intrinsic value apart from the income stream it generates. For example, a rental property may have the intrinsic value of the real estate itself, in addition to the income stream generated from rent received. By contrast, an annuity does not have any intrinsic value apart from the income stream it generates.

However, whether an asset is treated as property or income or both can be a murky area. Consider that, "Income includes pension payment and retirement benefits actually received that have not previously been divided as property in this action…" C.R.S.§ 14-10-114 (8)(c)(I)(H), and e.g. In re Marriage of Morton, 369 P.3d 800 (Colo. App. 2016).Accordingly, if the retirement benefit in pay status has been divided as an asset in the dissolution, then it is not counted again as an income stream.

Gray divorce may also be more likely to involve disability income due to the increased age of the parties. Disability income could derive from a government source such as Social Security or veteran’s disability payments.

Gray divorce is likely to involve longer marriages. When a marriage exceeds 20 years, the spousal maintenance guidelines no longer calculate a duration of maintenance and the duration becomes even more discretionary with the court. C.R.S. § 14-10-114(II)B. At 20 years, the duration of maintenance is half of the marriage, ten years. A court may use this method or may choose another method to determine duration. Indefinate maintenance is an option as well. Courts can not reduce maintenance to less than 10 years for a 20-year or more marriage without making specific findings to support the reduction. If the maintenance term appears to be too long given a pending retirement, then there is a modification process based on a substantial and continuing change that makes the original award unfair.

Although Social Security benefits are not property that can be divided, they play an important role in the financial resources of the parties. Briefly, Social Security benefits are paid to a wage earner upon retirement based on contributions to the Social Security system, or paid to the spouse of a contributor. A recipient who is eligible for both wage earner and spousal benefits will receive the higher benefit.

After a minimum of ten years of marriage, benefits may be received based on the contributions of a former spouse after divorce. The spousal benefits may be received even if the wage earner is not yet receiving benefits if the spouse is at least age 62 and the wage earner is fully insured meaning that the spouse has contributed to Social Security for at least 40 quarters. The spouse must remain unmarried to continue eleigibily for benefits based on his or her spouse’s insurance.

In addition to the areas covered above, there may be assets related to advancing age such as long-term care insurance with or without a cash value to be addressed. Long term care insurance is an economic circumstance as it reduces necessary living expenses. Further, as another example, it may not be possible to obtain life insurance to secure spousal maintenance if a party is not already insured. Retirement plans and the income flowing from them are often an important asset for older couples.