The divorce rate among older Americans is rising, leading to complex planning challenges for financial advisors and their clients.

There are five financial areas of divorce that advisors need to know about to serve their clients, said Carol Lee Roberts, president of the Institute for Divorce Financial Analysts in “Five Financial Pitfalls of Gray Divorce,” an Invest In Women conference webcast hosted by Financial Advisor magazine.

If a client is divorcing their spouse, she said advisors should focus on these five potental pitfalls:

• Division of property

• The marital home

• Retirement plans

• Insurance

• Post-divorce planning

Division of Property
The first is the division of property, said Roberts. Division of property is subject to negotiation between the divorcing parties, but a court will intervene if the parties can’t reach a settlement on their own.

“Any marriage going through a divorce will likely have some division of property, and the first step in dividing that property is determining what is going to be divided,” she said. “Marital property is everything acquired during the marriage, regardless of which spouse holds the property. It also includes the increase in value of any separately held property brought into the marriage or owned prior to the marriage.”

In addition, it includes property inherited prior to or during the marriage, and can include some gifts, said Roberts. And just as assets are divided, so are debts, which may place divorcing clients’ credit rating at risk.

In states with community property distribution rules, courts default to dividing property evenly, but Roberts points out that “a 50-50 split is not always equitable.” Parties could receive assets of equal value, but with differing cost basis and tax treatment. States without community property tend to go with a policy of “equitable distribution” which doesn’t always divide property by its value.

The Marital Home
Acccording to Roberts, there are only three things that can be done with a marital home.

“You can sell it and split the equity, whether positive or negative,” she said. “You can continue to jointly own the marital residence, but only have one of the spouses live in the residence, or one spouse can buy out the other's interest in the home.”

Advisors need to be aware that their clients can shield some of their capital gains taxes from the sale of the home or their interest in the home if they were a primary resident of the house in two of the past five years, said Roberts. Reverse mortgages can also be used to purchase one party’s interest in the home.

Retirement Plans
Retirement plans are usually a couple’s second-largest asset after their house, according to Roberts. With 401(k)s and 403(b)s, the value of the plan is reported at least on a quarterly basis, but advisors need to account for the vesting schedule of the plan and also any outstanding loans and adjust the value of the plan accordingly.

“With defined benefit or pension plans, we recommend you find the current cash value to do the division,” she said. “Another way to do it is a percentage of the benefits, especially in the case where someone is two to three years away from retirement, you can specify that the soon-to-be-ex-spouse will get a percentage of the pension payout in retirement.”

For non-IRA qualified accounts, a qualified domestic relations order, or QDRO, should be used to divide accounts, but advisors should avoid drafting QDROs themselves. Plan administrators could reject an incorrectly drafted order, which would require the QDRO to be redrafted and cause a significant delay in a client receiving their assets.

Insurance
If a divorcing client has relied on their ex-spouse’s employer health coverage, they will need to address their insurance needs. One expensive option is to remain on the ex-spouse’s coverage via a COBRA plan, which allows an individual to retain coverage for up to 36 months in the case of divorce.

“When you are being covered by COBRA, you not only have to pay the employee portion of the premium, but also the employer portion of the premium plus a 2% administrative fee,” said Roberts. Insurance can often be found cheaper on public exchanges.

Another insurance consideration involves child or spousal support. Given that it’s usually important that child or spousal support is a guaranteed income stream, an insurance policy could be used in a divorce settlement to generate that income, said Rogers, but “the recipient of the support should be the owner of the insurance."

They should be able to access the policy so that they know if it lapses due to non-payment, she added.

Long-term care insurance for either party is best purchased before a divorce is finalized, as premiums are less for married couples, said Rogers.

Post-Divorce Planning
Rogers said that advisors should also help their clients ensure that all of their documents, accounts and policies are revisited and updated post-divorce.

Many individuals fall into nightmare scenarios because they fail to take the crucial step of post-divorce planning, she said. “Individuals will go through the entire divorce process but then never do any of the follow-up work. They don’t change beneficiaries on their insurance or workplace retirement plans. They don’t have their wills re-executed, so that if they die their ex-spouse won’t suddenly become the executor of their will.”

Some states have automatic revocation statutes—which means beneficiary designations to ex-spouses will automatically be revoked by a divorce—but those statutes don’t apply to ERISA plans.

A Wave Of Gray Divorce
A person getting married today has nearly a one-in-three chance of experiencing divorce, said Roberts. That number skews slightly higher for people age 50 and above.

“Age differences are also a factor,” she said. “Marriages with significant differences in age are at twice the risk for divorce” than those where both parties are close in age. College graduates and above-median earners are also less likely to divorce.

Multiple marriages are also a risk factor for divorce, said Roberts. Second marriages are approximately 250% as likely to end in divorce than first marriages, and third marriages are 73% more likely to end in divorce than first marriages.

Divorce risk factors don’t always coincide with conventional wisdom. Take smoking, for example. A marriage in which both parties are smokers is more than twice as likely to end in divorce than a marriage with one smoking and one non-smoking spouse, said Roberts.

Social media is also a risk factor—a 20% increase in Facebook usage correlates to a 2.3% increase in divorce rates, said Roberts. “Half of today’s divorces mention Facebook, and one-third of divorces mention online affairs.”

But age has increased in influence as a risk factor for divorce, and is the only age demographic in which the rate of divorce is increasing is among people over age 50. Roberts explained three reasons for the rise of “gray divorce.”

“One is previous marital history, because we know second and third marriages are more likely to end in divorce,” she said. “The second factor is longevity. It sounds harsh, but a generation ago if you were 50 or 60 years old and unhappily married, chances were that you would just wait it out. Divorce was not as accepted, and life expectancies were not as long. Today, at age 50, your reasonable life expectancy is another 30 years.”

A third reason is that society’s expectations around marriage have changed, said Roberts, and for the most part Americans do not consider divorce as “a personal failure or something shameful.”

The Impact Of Gray Divorce
Divorce rates for people over age 50 have doubled since 1990, said Roberts, and advisors should be aware of the psychological and physical impacts on their clients. For example, divorce is associated with weight gain and higher blood pressure over time, especially for men, and can lead to depression.

Men and women also experience declines in their standard of living due to divorce, but the impact is three times higher for women: A 45% decline in standard of living for women versus a 15% decline for men.

“Women 63 and older who go through gray divorce have a poverty rate of 27%. That's more than any other group at age 63, including widows and women who may never have married,” said Roberts.

And divorce isn’t cheap. Roberts said the average divorce in the U.S. costs about $16,000, with $13,000 of that average going to the attorney.

“A litigated divorce is more expensive, almost $20,000 on average, with attorney fees closer to $16,000,” she said. “It also takes significantly longer.” It's 11 months for non-litigated divorces and 18 months for litigated divorces.

However, Roberts notes that these are national averages. Attorney fees in some parts of the country may be significantly lower than others.

How Common Is Divorce?
One issue that analysts like Roberts encounter when researching divorce is the accuracy of how the divorce rate is calculated. In the past, the divorce rate was calculated by taking the number of divorces in any given year and comparing it to the number of marriages in a given year. That results in a crude figure that has become less relevant as the rate of marriages has declined.

Another method was to look across the entire population to determine what percentage of adults had been divorced at any point in their lives, which resulted in a measurement of 22%, said Roberts, who added that is inaccurate because someone divorced multiple times would only be counted once. Similarly, a measurement looking at the number of divorces per 10,000 marriages is also inaccurate for the same reason.

Today, a more “sophisticated” estimation of the likelihood of divorce comes from a “cohort measured rate” that is calculated by looking at a particular cohort of people related to general life tables, said Roberts. Based on that, there’s a 32% chance that a marriage results in divorce.