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The advantages and pitfalls of a strategic divorce

Wealthy couples in California and around the country sometimes go through what is known a strategic divorce. This is a divorce that's filed by spouses who still have a happy relationship but would be better off financially if they were single. The number of strategic divorces increased after the passage of the Tax Cuts and Jobs Act in 2018, and analysts expect another surge in strategic divorce filings if the tax plans proposed by politicians such as Senators Bernie Sanders and Elizabeth Warren are implemented. However, there are situations where spouses with more moderate means may wish to consider a strategic divorce.

A strategic divorce could make sense if one of the spouses wishes to qualify for Medicaid to cover nursing home costs or financial assistance to pay college tuition. In these situations, the divorce settlement could leave the spouse who is seeking benefits with assets that would allow them to qualify. The alternative to divorce in such a situation could be depleting savings that have taken a lifetime to accumulate.

However, there are potential drawbacks to going through a strategic divorce. Married workers are able to place up to $7,000 each year in an individual retirement account for their non-working spouses. However, divorced workers are not allowed to do this. Pension benefits are sometimes not as generous for single workers, and divorced spouses lose control over assets they give up during property division negotiations. This could be an important point if those assets involve business interests or investments.

A family law attorney could call on financial planners to explain the various financial ramifications of a strategic divorce to spouses who are considering this option. Legal counsel could also provide advice about strategic divorce alternatives, such as placing assets into a trust, for spouses who are worried about qualifying for federal benefits.

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