Bloomberg Tax
Sept. 13, 2021, 8:00 AM

Six Strategies to Reduce ‘Gray Divorce’ Financial Complexities

Eric Bond
Eric Bond
Bond Wealth Management

Doubling since the 1990s, “gray” divorce, or divorce for couples age 50 or older, is on the rise. Whether they are in the final stretch of the working years or retirement, a gray divorce happens when a couple is typically at the peak of their earning years and accumulated substantial net worth. Unfortunately, during a highly stressful and emotional life event, individuals can make poor financial decisions, impacting each spouse’s tax liability. The good news is that there are several options for couples to consider so they can divide their assets as equitably as possible while potentially reducing their tax obligations.

Qualified Domestic Relations Order

Retirement benefits become much more critical when divorcing later in life since one will have less time to contribute to their plan. One option for divorcing couples to consider is utilizing a qualified domestic relations order (QDRO), which can apply to retirement or pension accounts covered by the Employee Retirement Income Security Act (ERISA). Court-ordered QDROs grant someone the rights to a portion of their former spouse’s retirement benefits, which they earned through an employer-sponsored retirement plan. While QDROs are typically established during the divorce process, they can be filed years after a divorce.

While a QDRO will require a lawyer and other court expenses, it can benefit both parties because it allows for the early withdrawal or transfer of 401(k) funds without being penalized. So, if the plan allows it, an alternate payee can receive a lump sum or payments before they reach age 59.5 without being hit with a 10% tax penalty from the IRS. The amount can also be transferred or rolled over into an individual retirement account for the beneficiary spouse to maintain the plan’s previous status (either tax-deferred or tax-free). If the couple has equally the same amount of funds in a 401(k) and traditional IRA, they should consider one spouse taking the 401(k) and the other spouse taking the traditional IRA—eliminating attorney fees and court costs.

Another consideration when evaluating the equitable division of retirement accounts is to look at future taxes on distributions. For example, a $100,000 pretax 401(k) and a $100,000 Roth IRA may look the same on paper, but every dollar that comes out of a pretax or traditional account will be subject to income taxes, whereas qualified Roth distributions will be income tax-free. Recognizing these differences during negotiations and working with a knowledgeable advisor can help protect these tax statuses and avoid costly penalties and mistakes when moving accounts.

Section 529 Plans

529 college savings plans are traditionally used as a tax-free instrument to save for education expenses, but one relatively unknown benefit of these accounts is that they allow for tax-friendly ways to transfer wealth. Grantors, owners of the account, can contribute up to $15,000 annually (or $30,000 for married couples) before tax obligations kick in. If the grantor has the funds, they can invest five years in advance. So, rather than investing $150,000 in an interest-bearing account and paying taxes as income, by investing it into a 529 plan, the money goes into and is withdrawn tax-free for all qualified expenses.

It’s important to note that a couple who has a 529 plan established for a child’s education should split the funds in each of their names when divorcing. If they don’t, the grantor can use the 529 funds for any expense—not just their child’s education.

Lastly, 529 plans are very flexible and are a tax-free way to transfer funds. For example, if one child doesn’t go to college, parents can transfer 529 funds to another child who will use it for education expenses.

Grantor Retained Annuity Trusts

Another instrument available to couples is a grantor retained annuity trust (GRAT), which can help minimize taxes on financial gifts to family members. With a GRAT, an irrevocable trust is established for a specific time, and the individual setting up the trust pays a tax at the time of establishment. After assets are placed in the trust, an annuity is paid out, and when the trust expires, the beneficiary receives the assets tax-free. This can be particularly useful for couples going through divorce as it allows them to divide and transfer assets to beneficiaries with minimal tax impact.


If you plan on filing for divorce and know you will have a relatively “friendly” divorce, it might make sense to purchase a home before divorcing if one spouse can’t qualify to purchase a home on their own. Then, the couple can use previous tax returns to purchase the house, and the spouse with the higher income can buy out the other spouse after the divorce.

Beneficiaries Trump a Trust in Estate Planning

For divorced couples with younger children, figuring out custody and the tax claims for those dependents can often be a point of contention, but this may not be relevant for many gray divorcees, given there is a good chance their children are already legal adults. However, older couples going through a divorce can do their adult children a favor by setting up separate estates to avoid potential complications down the road.

It’s crucial that individuals update all account beneficiaries, including but not limited to retirement plans, life insurance, pensions, and other financial accounts. This is because beneficiaries always trump a trust.

After a divorce, each person should set up their living trust to ensure someone other than the ex-spouse receives the assets upon one’s death. In California, for example, someone who gets divorced and then remarries is entitled to their previous spouse’s assets if they are still listed as the beneficiary.

Prenuptial Agreement Solution

Divorce is never on a bride or groom’s mind when they say, “I do.” Neither is splitting up substantial wealth, especially if they married at a young age before they accumulated assets. As a result, conversations about divorce can be uncomfortable, but prenuptial agreements can be a solution to remove much of the emotion associated with the financial aspect of divorce that often amplifies once a divorce is in motion.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Eric W. Bond, LPL Financial Advisor, is the founder and president of Bond Wealth Management.

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