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Estate and retirement plans should be tweaked after a divorce

Even when going through a divorce, it’s not premature to consider revising one’s retirement or estate planning. The two are related, since an individual needs to estimate his or her liquidity in retirement, plan for medical emergencies or the possibility of incapacity, and potentially protect eligibility for Medicaid through the use of smart estate-planning instruments.

In our last post, we profiled the example of a teacher who divorced in her late 40s. Pursuant to the divorce, the teacher split her joint savings and assets with her former husband. Her full-time teaching job made her eligible for a pension, and she opened a retirement account. She also receives an annual share from her ex-husband’s annuity. Yet even those combined income streams may not be sufficient to support a decision to retire because she is still paying off the home’s $140,000 mortgage.

If she retires when she reaches age 65, the teacher will receive some income from her pension, as well as from Social Security. When combined with her former husband’s annuity, the total income might require her to cut her expenditures by 15 to 20 percent. Is that a realistic target? Possibly, to the extent that retirement provides the opportunity for other lifestyle changes.

For example, the teacher could downsize after she retires, moving into a house with a lower mortgage payment. She could defer her Social Security from age 66 until age 70, which would amount to a monthly increase from around $1,500 to about $2,140. Another option might be to consider planning for assisted living arrangements.

Regarding Medicaid eligibility, transfers made immediately before one applies for assistance might not be honored by a court of law. However, proactive planning can avoid this dilemma. For example, placing assets in an income-only irrevocable trust might be a solution. Our family law firm can answer questions not only about divorce, but also in related areas of estate and elder law

Source: Washington Post, “She revamped her retirement plan after a divorce. Is she on track?” Jonnelle Marte, June 9, 2016

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