Divorce Planning – Wealth Effects

Divorced-Spouse Social Security Benefits

September 17, 2021

8 Rules With Examples

When Social Security was first instituted in 1935, most women did not work. So in 1939, as part of a sweeping series of amendments, the system made spousal benefits available to any “wife” who either had not earned a benefit or whose benefit was less than half of her husband’s. In 1965 these benefits were made available to any “divorced wife” who had been married at least 20 years. At some point in Social Security’s chronology the word “wife” was swapped for “spouse” and the 20-year marriage requirement for divorced spouses was reduced to 10 years.

Divorce was rare back in those days, but lucky for today’s baby boomers, who have brought the notion of multiple marriages to a whole new level, wives—and husbands—can receive benefits based on a former spouse’s work record as long as certain conditions are met. The rules are not that complicated, but sometimes it can be hard to keep them all straight, especially if there have been several marriages and divorces or if an ex-spouse has died.

Many people are not aware that they can get Social Security benefits based on a former spouse’s record.

In order to qualify for a divorced-spouse benefit a person must:

Be finally divorced from the worker on whose record benefits are being claimed
Have been married over 10 years
Be currently unmarried
Be at least age 62
Not be entitled to a higher benefit on his or her own work record [Note: this rule does not apply if born before January 2, 1953 and eligible to file a restricted application.]

Here are eight facts about divorced benefits with examples:

1. Ex-spouse must be at least 62

The worker on whose record the benefit is being claimed must be at least age 62. If the divorce occurred more than two years prior, the worker does not need to have filed for his or her own retirement benefit.

Example: Michael and Maria were married over 10 years. They have been divorced over two years. Both are age 62. Maria has not remarried. Maria is eligible for a divorced-spouse benefit based on Michael’s work record, regardless of whether or not Michael has filed for his benefit.

2. 50% of primary amount

If the divorced-spouse benefit is claimed at full retirement age or later, it will be 50% of the worker’s primary insurance amount (PIA).

Example: Jim and Judy are divorced. Jim’s PIA is $2,600. Judy does not qualify for a benefit on her own record. Judy files for her divorced-spouse benefit at age 66. She will receive 50% of Jim’s PIA, or $1,300, as her divorced-spouse benefit.

3. Your own benefit comes first

If the divorced person also qualifies for a benefit on her own work record, she will be paid her own benefit first. If her PIA is less than half of his PIA, she will receive that difference in addition to her own benefit.

Example: Tom and Trudy are divorced after more than 10 years of marriage. Tom’s PIA is $2,600. Trudy’s PIA is $800. Trudy files at her FRA. She will receive her own benefit of $800 plus the difference between her PIA and one-half of Tom’s PIA ($2,600 ÷ 2 = $1,300 – $800 = $500) for a total benefit of $1,300 ($800 + $500). If Trudy had claimed prior to FRA, both her own benefit and the spousal add-on would be reduced for early claiming.

4. Restricted application

A divorced person who was born before January 2, 1954, who has not previously filed for benefits can file a restricted application for the divorced-spouse benefit at FRA and let their own benefit build delayed credits to age 70. The other spouse can do the same: two ex-spouses can each file on the other’s record at the same time (providing it’s been at least two years since the divorce).

Example: Mike and Mary are divorced. Mike’s PIA is $2,800. Mary’s PIA is $2,200. Mike’s birthdate is 10/1/53. Mary’s birthdate is 12/15/53. In October of 2019, when Mike turns 66 (FRA) he can file a restricted application for his divorced-spouse benefit and receive half of Mary’s PIA ($1,100) until he turns 70. At that time he can switch to his maximum retirement benefit of $3,696 ($2,800 x 1.32). When Mary turns FRA she can do the same. In December of 2019, when Mary turns 66 (FRA), she can file a restricted application for her divorced spouse benefit and receive half of Mike’s PIA ($1,400) until she turns 70. At that time she switches to her maximum retirement benefit of $2,904 ($2,200 x 1.32).

5. Divorced twice

A person who has been divorced twice can choose the higher of the two divorced-spouse benefits, as long as each marriage lasted at least 10 years and the applicant is currently unmarried. But remember…if she also qualifies for a benefit on her own work record she must take that benefit first (unless grandfathered for restricted application by being born before 1954). And…if she has been divorced less than two years the ex must have filed for his benefit.

Example: Susan was married to Sam for 20 years. She was married to Steve for 12 years. Susan is now single and it has been more than two years since her divorce from Steve. Sam’s PIA is $2,600. Steve’s PIA is $2,400. Susan does not qualify for a benefit on her own record. She is FRA. When she files, she can choose to receive half of Sam’s PIA since it is higher than Steve’s.

6. Ex-spouse is deceased

If an ex-spouse is deceased, a divorced person can receive a divorced-spouse survivor benefit based on the ex-spouse’s record, providing the applicant is currently unmarried or remarried after age 60.

Example: Elaine is divorced after 11 years of marriage. She was born before Jan. 2, 1954. When she turned 66 she filed a restricted application for her divorced-spouse benefit and received 50% of her ex-spouse’s PIA. One year later her ex-spouse died. She switched to the survivor benefit equal to 100% of her ex-spouse’s PIA.

7. Government pension offset

If the person applying for the divorced-spouse benefit worked in a non-Social Security-covered job, the divorced-spouse benefit will be reduced by two-thirds of the amount of her pension under the Government Pension Offset. This will likely reduce it to zero.

Example: Greta worked as a teacher in Texas, where she did not pay into Social Security. She is currently receiving a pension of $3,000 per month. She is divorced from George, to whom she was married more than 10 years. George’s PIA is $2,800. Greta’s divorced-spouse benefit of $1,400 would be reduced by $2,000 (2/3 of $3,000), which reduces the benefit to zero. If George dies, Greta will become eligible for a divorced-spouse survivor benefit. After the GPO reduction she will receive $800 ($2,800 – $2,000 = $800).

8. Married, divorced, remarried—and divorced again

If a couple has married, divorced, remarried, and divorced again, the two marriages can be added together (including the time in between) for the purpose of determining the 10 years, providing the remarriage occurred before the end of the calendar year following the divorce.

Example: Peter and Paula were married from June 2001 to September 2008 (7 years). They remarried in December 2009 and divorced in November 2012 (3 years). They meet the 10-year requirement because the remarriage took place before the end of the calendar year following the first divorce.

But wait, there is more…

Here are some additional facts to keep in mind:

The ex-spouse’s marital status is not relevant for a divorced person claiming benefits off an ex-spouse’s record. If the ex-spouse has remarried, both the divorced spouse and the current spouse may receive spousal benefits off the ex’s record (or survivor benefits if he dies).
When filing for divorced-spouse benefits, the applicant will need to provide a copy of the divorce decree showing the dates of the marriage and divorce. If a client says they were married “about 10 years” check the decree; often the final date of divorce is later than you realize. If you don’t have your divorce decree, they can get it from VitalChek.
It is helpful, but not essential, to provide SSA with the ex-spouse’s Social Security number. This can be found on an old joint tax return. If the ex-spouse’s Social Security number is not available, the worker can access the ex-spouse’s records if given sufficient identifying information (full name, birth date, address).
It may be difficult to estimate the divorced-spouse benefit until the client actually applies for the benefit. SSA usually will not give out this information due to privacy issues. If she doesn’t have her ex-spouse’s Social Security statement and doesn’t feel comfortable asking him, you may have to ballpark the estimate. If he was a maximum earner you can safely estimate his PIA to be about $2,800. Otherwise use $2,000 as a broad ballpark estimate.
Like spousal benefits, divorced-spouse benefits are based on the worker’s PIA. The age at which the worker claimed his benefit is not relevant. That is, the divorced-spouse benefit will be the same regardless of whether the worker’s own benefit is reduced for early claiming or includes delayed credits for claiming after FRA. Also like spousal benefits, if the worker is subject to the Windfall Elimination Provision because he is receiving a pension from a job not covered by Social Security, the divorced-spouse benefit will be based on the WEP-adjusted PIA.
If a person receiving divorced-spouse benefits remarries, the person must notify SSA and the divorced-spouse benefits will stop. The exception is if the new spouse is also receiving divorced-spouse or survivor benefits, in which case both benefits may continue.
Remember the rule on remarriage: If the ex-spouse is still alive, remarriage at any age will stop entitlement to divorced-spouse benefits. If the ex-spouse is deceased, divorced-spouse survivor benefits may be paid if remarriage took place after age 60. If the remarriage took place before age 60, no divorced-spouse survivor benefits may be paid unless that marriage ends.

Source: The Horsesmouth

Divorce Planning

Happily Never After

September 16, 2021

Keep your financial future intact if your marital status changes

Tying the knot is something many couples spend months or even years preparing for. They rarely, however, devote as much time to planning for what to do if their happily ever after is cut short.

Losing a spouse to divorce is not a pleasant thought but it’s something married couples should be prepared for. When you consider the facts, the chances of having to go it alone at some point may be greater than you think.

For example, according to the Pew Research Center, the gray divorce rate (meaning divorce among couples aged 50 and older) doubled in the past 25 years. Getting divorced later in life often raises important questions with regard to the division of property, retirement assets and spousal support.

In light of those statistics, it’s evident that married couples may want to give serious thought to their financial future. If you’re worried about what could happen if you find yourself going from wedded bliss to single status, having the right strategy in place can help protect your wealth

Analyze your financial picture

It’s critical that couples understand where they’re at financially, in terms of their assets and liabilities. This is especially important if you’re preparing for divorce. Working with a financial advisor can help you create a more accurate reflection of your net worth.

Begin by tallying up all of your assets, including retirement accounts, taxable investment accounts, bonds, savings or money market accounts, real estate, interests in LLCs, partnerships and other businesses, vehicles, insurance policies, artwork, collectibles and jewelry. Distinguish between assets you own in your name, assets your spouse owns solely and those assets you own together.

Then, consider whether you have any liabilities. For example, if you’re still paying the mortgage on your primary residence or you have a loan for a vacation home, those would go into the liability column. Again, you’d want to separate them based on who’s responsible for repaying those obligations. Knowing who owns what can make transitioning your finances after divorce easier to navigate.

2. Organize your financial documents

Even if divorce isn’t on the horizon, you or your spouse could be left in a bind if something were to happen to one of you and your financial information isn’t easily accessible. Keeping certain key documents together in one place means one less source of stress when gathering to review your assets.

For instance, if you’ve drawn up a will or established a trust, you should have that documentation readily available. If you’ve named beneficiaries for assets outside your will, such as an Individual Retirement Account or a life insurance policy, you will need to have these handy in the event you need to update the beneficiary information.

Lastly, consider drafting a list of account numbers for things like retirement accounts, investment accounts and bank accounts. If you manage these accounts online, be sure to include the website name, as well as your login details for each one so you have all the necessary information.

As you probably know already, here at Boston Harbor Group we provide you with access to your very own online portal, WealthFX, where you can create a budget, upload all your documents to a safe place where just you and whoever you grant access to can log in. If you want to know more about this feature, call us!

3. Check your insurance coverage

Insurance can be a lifesaver when divorce becomes part of your financial reality. Disability insurance, for example, can help you to maintain a similar lifestyle if an injury or illness prevents you from working and you don’t have a spouse’s income to rely on.

A life insurance policy could cover burial costs, eliminate any remaining mortgage debt or aid with your child’s tuition after a divorce so you don’t have to tap your assets for those expenses. It’s important to review which policies you have and where there may be gaps in your coverage to ensure you are protected.

4. Consider your credit

A good credit rating can be important when a marriage comes to an end. If you’re planning to apply for a mortgage to buy a home after a divorce, for example, you’ll need a solid credit score to qualify for the best interest rates.

Credit can be a potential stumbling block for divorcees when the majority of credit lines belonged to their spouse. When you don’t have loans or credit cards in your name, it’s much more difficult to establish your credit history. Your credit history is what shapes your credit score.

Equally problematic is having joint accounts when you’re going through a divorce. As long as your name remains on a credit card or loan, you’re legally responsible for any associated debt. While your divorce decree may stipulate that your former spouse assumes the task of repaying the balances, those accounts will continue to show up on your credit report.

Removing yourself from a joint credit card typically involves closing the account altogether. With something like a mortgage or another type of loan, you’d likely have to get your spouse to refinance the loan to have your name removed. The process can be tedious but it’s necessary if you’re concerned about safeguarding your credit rating.

5. Don’t be afraid to ask for help

A professional advisor can be an invaluable source of financial advice for divorcees. For example, your advisor can run a cash flow analysis to help you determine whether your current spending habits are sustainable. They can also work with you to review your investments to help ensure your asset allocation and risk tolerance fits with your investing goals moving forward. Finally, your advisor can help you update your will or trust if necessary.

Talking financial matters over with your spouse before divorce becomes an issue is a wise move but it’s not always possible. To help you prepare for the unexpected, or if sudden life changes have thrown your plans off-course, contact your financial advisor.

Source: BMO

Divorce Planning