Maryse Allen’s recent article from the Senior Lawyers Conference (Virginia State Bar)

maryse-allens-recent-article-from-the-senior-lawyers-conference-virginia-state-bar

Maryse Allen’s recent article from the Senior Lawyers Conference (Virginia State Bar)

Key Divorce Issues In The Golden Years
by Maryse C. Allen, Esquire

When a potential client approaching retirement age or who has been a homemaker married for forty years or more first meets with their lawyer for a divorce consultation, that consultation tends to be more fraught than usual. Leaving or being left by a partner of many years at a time in life when it is not easy to make up ground financially before retirement presents a legal challenge. Will there be enough for this person in their old age? Will counsel be able to negotiate a settlement or obtain rulings that will take care of them in the future? Does your potential client have the will to stand up to his/her spouse and the ability to fund litigation? Is the marital estate substantial enough to warrant the cost of litigation?

If a married couple has planned well, they will have a financial and estate plan in place well before they retire; however, it is not uncommon for couples, close to their golden years, to have no such plans. A divorce in those years can be financially devastating for those couples, but for even those who have wisely worked to put such plans in place, divorce can make the best of financial and estate plans go sideways. Retirement income sufficient for two people residing together may be insufficient to maintain two separate households at the standard of living established during the marriage. Many tend to enrich their standard of living as their income grows; therefore, even among the affluent, both parties may struggle to maintain their standard of living.1 Consequently, the client will likely have to confront the idea of downsizing their lifestyle.

The Limitations of Spousal Support, the Importance of Pension Division, and the Relative Merits of Survivor Benefits vis -a-vis Life Insurance.
Spousal support has limitations that must be considered in planning for this client’s future. The payor may predecease the payee or simply not pay as required and be judgment proof. But even when such hurdles to collection do not arise, at some point in the “grey divorce” the payor is likely to retire and agreed upon, or court-ordered, support may terminate or decrease. The recent Virginia Court of Appeals case of Baker v. Baker, Rec. No. 1476-22-1, 2024 Va. App. LEXIS 126 (Mar. 12, 2024) provides an example of that limitation in play. The parties married in 1970 and separated forty-six years later. Their May 2018 property settlement agreement, provided in relevant part that the husband would pay the wife $1,700 per month in modifiable spousal support. Husband remarried in 2019, and his disabled sister came to live with them. In February 2022, the husband, then aged seventy, cited difficulty in meeting the physical requirements of his job, retired and moved to reduce or terminate his spousal support obligation. His only source of income was his social security benefits of $3,722 per month. His monthly expenses, including his spousal support obligation, totaled $8,272. Wife’s total monthly income was $3,089 from her part-time job, social security and spousal support.

The trial court found that the husband’s voluntary retirement was a material change in circumstances but that the husband had done “absolutely no planning for retirement and left his job with no way to provide for his living expenses, pay his creditors or satisfy his support obligation.” Id. at 5. Denying the husband’s motion to modify, the trial court imputed the husband’s pre-retirement income to him. The Virginia Court of Appeals reversed and remanded the decision noting that “retirement planning is a shared marital responsibility….” Id. at 13.

Given the inherent uncertainties of continued spousal support payments, counsel must look for all possible ways to ensure a stream of income. If there is a pension, make sure that your client gets their share of the marital portion and also that any survivor benefit is secured so that in the event the pensioner predeceases the non-member spouse, the benefits continue to be paid to the maximum extent allowed by the pension. Life insurance may appear to perform the same function; however, a survivor benefit has advantages that a life insurance policy does not. Once a survivor benefit is in place, there is typically little the member spouse can do to thwart the payment of those benefits. The premium for the survivor benefit is usually taken out of the monthly pension payment automatically by the pension authority and the member spouse will not have the power to terminate or change the survivor benefit beneficiary. In contrast, the spouse ordered to maintain life insurance may stop paying premiums resulting in the cancellation of the policy or name a subsequent spouse as beneficiary. As a non-owner of the policy, the spouse entitled to the benefit will be unaware of the change in status, leaving them with only a claim against the estate of the former spouse when expected benefits are not paid.

Considerations in the Division of Assets.
Legal counsel will need to carefully consider how to divide assets. I recall a case in which one spouse was a real estate broker who had acquired many rental properties and offered to sign over many of the properties which he had acquired relatively early in his career to the other. Although these properties enjoyed a positive stream of income, they would have required the non-broker spouse, or a management company, to manage them to keep them doing so. Also of significance was the fact that these properties had a low tax basis and upon sale would require a large payment in capital gains taxes. These considerations, as well as the knowledge that the non-broker spouse was frail and had no experience in real estate, led counsel to seek to simplify the settlement and insist on a cash payment in equitable distribution – not subject to taxes — for her interest in this real estate that could be invested and constitute an asset from which that spouse could draw income for the rest of her life.

In situations like the above example, counsel would do well to associate a certified financial planner when funds invested in the stock and bond markets will be providing a client with a stream of income sufficient, or partly sufficient, to maintain them in their golden years. A traditional rule of thumb is that 4%2 of such accounts can be withdrawn safely annually with a high probability of having their money last for thirty years.

The Hot Topic of Medical Insurance Coverage.
Medical insurance coverage tends to be a big issue in late-in-life divorce scenarios. Medical insurance plans and policies permit a party to cover family members. Upon divorce, medical insurance coverage is lost. In the case of a military spouse, if a service member served for twenty years, the marriage lasted at least 20 years, and the service and marriage over-lapped for twenty years, then Tricare for Life will be available under the so called “20-20-20 rule”. When one of the parties is a federal government employee, ‘Temporary Continuation of Coverage” of the federal health insurance plans is available for up to three years, or, if the federal pension (either CSRS or FERS) is divided the federal health plan, can continue indefinitely if the non-employee spouse received a survivor annuity or portion of the pension, was covered as a family member at some time during the 18 months before the divorce and has not remarried before age 55. For those who
will be relying on Medicare, which is not available until a party reaches the age of sixty-five, the issue will be how to secure coverage until then. But it is not as simple as ensuring that medical insurance coverage is provided or paid for until a party is sixty-five. Counsel should examine the cost of Medicare and the coverage available. Your client may be used to superior coverage and want to supplement their coverage with a private medical insurance policy.

One approach is to negotiate an agreement in which the parties delay their divorce in order to maintain existing health insurance coverage. In the case of Allen v. Allen, 66 Va. App. 586, 789 S.E.2d 787 (2016) the parties’ post-nuptial agreement provided that they would not divorce before the expiration of twenty years for this purpose. The remedy in the event the husband breached this contract was that he would be personally liable for the wife’s medical expenses during those twenty years she would have been covered under his insurance. The wife’s plea in bar based on the contract was denied and the husband’s request for divorce granted, but in the process the trial and appellate court recognized her contractual remedy at law.

Additional Practice Tips — Social Security, Estate Planning and More.
Your clients may have set aside enough to take care of themselves to the end of their days, but if not, here are a few more practice tips particularly important for counsel to keep in mind when representing a client divorcing late in life:

• Make sure your client is aware that the divorce does not impact their entitle-ment to obtain social security under higher earning spouse’s employment record.
• Talk to that client about revoking any durable powers of attorney naming their spouse and updating their will and advance medical directives as soon as feasible.
• Determine whether there is urgency in dealing with joint accounts in order to preserve assets (or at least half of the value of those assets) by getting them in your client’s control.                                • Inform them of Section 20-111.1 of the Virginia Code entitled “Revocation of death benefits by divorce or annulment” which provides that revocable beneficiary designations in
an existing written contract are automatically revoked upon divorce. This applies to life insurance policies but also to annuities, retirement arrangements, compensation agreements, or other contracts designating a beneficiary of any right, property or money, in the form of a death benefit.

Endnotes:

1. The behavioral economics research of Nobel Prize winner Daniel Kahneman and his longtime friend and collaborator Amos Tversky provides insight into the often-irrational eco-nomic decisions we make. Kahneman’s book, “Thinking Fast and Slow” presents an accessible discussion of this topic.
2. Research firm Morningstar affirmed this percentage in late 2023. In 2022 it pegged the safe withdrawal rate at 3.8% and in 2021 stated it was 3.3%. Bill Bengen, the financial planner who developed this rule in 1994 after researching historical market conditions, believes current market conditions allow a safe withdrawal rate of 4.7%.