Whether you're concerned about the prospect of spending down your nest egg for your spouse's end-of-life care, or are tired of having your Social Security retirement income taxed due to your working spouse's income, you may be wondering whether an "on paper" divorce can save you money. What happens if you and your spouse legally divorce but continue to live together and share finances? Read on to learn more about some common situations in which strategic divorce may be utilized, as well as what you can do if you find yourself in one of these situations.
What is strategic divorce?
A strategic divorce is generally utilized when two spouses want to remain together but would like to protect their financial assets from taxation or seizure. In these situations, a divorce is filed and granted but the spouses continue to live together, share finances, and set themselves forth to the community as a married couple. Unless your local paper publishes divorce filings or a nosy neighbor decides to go snooping through your local court docket, it's unlikely that anyone you know will ever learn of your divorce if you don't tell them.
Because some states don't permit "no fault" divorces, you may be unable to obtain a strategic divorce in these states without lying to the court about your reasons for wanting a divorce (which is never a good idea). You may also be required to live separately from your spouse for a certain period of time before your divorce can be granted, although usually simply renting another home or apartment is sufficient proof of separate residences.
When might strategic divorce be a good option?
If you live in a no fault divorce state that has no residency requirements for the filing of a divorce petition, you may want to strategically divorce for one of the following reasons:
- You or your spouse may need expensive end-of-life care soon
In this situation, you may be required to pay out of pocket for your spouse's stay in a hospital or residential facility until you've spent down enough assets to qualify for Medicaid. Once your spouse dies, you may be left impoverished. By divorcing several years before this care is needed (to avoid the look-back period), you'll be able to keep a portion of assets for your own care.
- Your or your spouse's earned income renders the other person's Social Security income taxable
For some older Americans, there is a fairly stiff marriage penalty when it comes to the taxation of Social Security benefits. If you or your spouse earns a high income and the other person earns only Social Security, divorcing could save you a substantial amount in taxes each year.
Because this is such a complicated area of law, it would be in your best interest to work with a legal firm such as Eschbacher Law to make sure that you are staying within the confines of the law.