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.

Understanding the Concept of a Strategic Divorce

A strategic divorce refers to a calculated decision where a couple chooses to end their marriage primarily for financial reasons. Both parties may still maintain a positive relationship but determine that dissolving their marital union provides certain benefits, such as reducing tax liability or qualifying for financial assistance. For example, some married couples who file jointly might face a higher tax bracket, leading to what is known as the marriage penalty. By filing as single individuals, one or both spouses could fall into a lower tax bracket, thereby saving money on taxes. In other cases, strategic divorces allow one spouse to qualify for Medicaid or federal student aid for children, as financial eligibility for these programs may be affected by the combined household income. Consulting with an experienced law firm can help assess whether a strategic divorce fits a family’s needs, considering long-term financial security and legal ramifications.

When Does a Strategic Divorce Make Sense?

A strategic divorce may be advantageous when couples face specific financial challenges, such as qualifying for government aid or reducing their tax burden. For instance, a custodial parent may qualify for federal student aid for their child based on their lower income, as the application for federal student aid only considers the custodial parent’s financial standing. Similarly, a spouse who needs to access Medicaid for nursing home care may qualify for the program more easily if they no longer have their partner’s income or assets factored into the equation. While these financial reasons might seem compelling, careful consideration of long-term financial planning is crucial. An experienced divorce attorney can help couples weigh the pros and cons of this decision, ensuring that all aspects are addressed before proceeding.

Benefits of a Strategic Divorce

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.

Can Strategic Divorce Help You Save Money on Taxes?

In certain cases, a strategic divorce can indeed reduce tax liability. Couples filing jointly may fall into a higher tax bracket, resulting in a marriage penalty, particularly for high earners. By filing separately, both spouses could move into a lower tax bracket and take advantage of more favorable tax rates, depending on their individual incomes. However, it’s important to evaluate whether this tax-saving strategy outweighs the potential loss of other financial benefits available to married couples, such as IRA contribution options or joint deductions for health-related expenses. Consulting with an experienced attorney may help clarify whether the tax advantages of a strategic divorce are significant enough to justify ending the marriage.

Drawbacks of Strategic Divorce

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.

Financial Pitfalls to Watch Out for During a Strategic Divorce

While a strategic divorce can offer financial benefits, there are several potential pitfalls. Divorced individuals lose access to joint tax benefits, such as the ability to contribute to a spousal IRA, which is reserved for married couples. Similarly, dividing retirement savings can have significant consequences on long-term financial security, particularly when it involves joint and survivor benefits. Divorced spouses may also face higher tax liabilities as single individuals compared to the advantages of filing jointly. Additionally, health insurance premiums or retirement benefits tied to marriage may no longer be available post-divorce. Working with a law firm to carefully evaluate the division of assets and retirement benefits is essential to ensure that both parties maintain financial security after divorce.

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.

Alternatives to a Strategic Divorce: What to Consider

Before pursuing a strategic divorce, couples should explore alternative financial solutions. For instance, placing assets into a trust can help one spouse qualify for Medicaid or financial aid without dissolving the marriage. This option may allow the couple to protect their assets while still meeting eligibility requirements for government assistance programs. Financial mediation is another alternative, enabling both parties to collaborate with a financial planner or divorce attorney to assess their financial planning needs without ending the marriage. Each couple’s situation is unique, and working with a law firm to explore options like these could provide long-term solutions that don’t require divorce. A free consultation with a legal or financial professional may also clarify the most appropriate path forward.

Consulting a Family Law Attorney for a Strategic Divorce

If couples are seriously considering a strategic divorce, seeking guidance from a family law attorney is essential. A skilled attorney can help clients navigate the legal and financial complexities involved, providing advice on the potential benefits and drawbacks based on the couple’s financial and personal situation. Legal counsel can also suggest alternatives, such as setting up trusts or revising retirement plans, that may fulfill the same objectives without ending the marriage. A consultation can also clarify specific tax implications and the effect on retirement savings, pensions, and health insurance. Westover Law offers free consultations, making it easier for couples to assess their options before committing to such a significant decision.