Seven years ago, my friend Tom came out as gay to his wife, Debra, so they separated. He’s been dating a guy named Terrell for the past year. There’s just one little twist: he and Debra never divorced. So what exactly does this mean for their finances?
Permanent and long-term separations are more common than you may think. Kate Spade, Anthony Bourdain, Warren Buffet – all separated from their spouses, but never divorced. Apparently, more than 10% of marital separations go on for more than 10 years, and sometimes last forever. 1 Each spouse may choose to get their own home and start dating, but choose to keep the marital link for a number of personal and financial reasons.
Reasons to Wait
The personal reasons for delaying or avoiding divorce proceedings will vary. Some couples just fear the process itself (time consuming and emotionally challenging). Sometimes, it’s a desire to keep the formal family alive for the benefit of the kids (sorry, but as a child of a rough divorce, I struggle with that one – it would have just confused me more). The list goes on. More often than not, the reasons are financial in nature. Here are three that come to mind.
1. Income taxes – A couple can easily check to see how their tax bill would change if they divorced (consult with CPA). There is often a large tax savings when one spouse earns a high level of income and the other spouse doesn’t work, or is in a very low tax bracket. The total combined tax savings could be worth thousands of dollars per year.
2. Social security – An ex-spouse will have the option of eventually claiming a spousal social security benefit as long as the marriage lasted at least 10 years. So if a couple separates after, say, 8 years, waiting until the 10-year mark might be greatly beneficial to a spouse who might not otherwise receive a social security benefit of his or her own later in life.
3. Health insurance – While married, as long as one spouse has coverage in a group plan through work, the other spouse can usually be included in that plan. An ex-spouse might lose this coverage option and be forced to buy a much more expensive policy for the years between the divorce and age 65 (that’s when most people are eligible to receive coverage through Medicare).
Tom and Debra never formalized their separation through a court. It was just a handshake deal that he would help out with some of her costs (she was a full-time mom). If either of them decides it’s time to trigger divorce proceedings, they will have to agree on what the date of separation was, then figure out if one of them is entitled to some of the other’s wealth since that date.
Tom continues to work and save to his 401(k) plan. Since California is a community property state, each of them owns 50% of the other person’s wealth as long as they are married. Debra hasn’t been working so she’s not likely adding money to her own nest egg. But in Tom’s mind, he’s saving for the future as if all of his wealth can be used for his own retirement.
And what if something happens to Tom? If things get serious with Terrell, he will probably want Terrell to be in charge of running the household if he gets seriously hurt, and for Terrell to be able to visit him in the hospital. He might even want Terrell to inherit some of his wealth or to be in charge of handling the estate and the funeral. Many of these rights are granted to a spouse by default, unless there’s documentation stating otherwise. He’s even shared that he’d be open to marrying again. So, unless there are good financial reasons for staying married, Tom should talk to an attorney to better understand the possible consequences of his arrangement so he can better prepare for his own retirement. And how does Terrell feel about all of this? Maybe he and Debra meet and become good friends and they’ll all live happily ever after. It is the era of the modern family after all.