Legal Separation or Divorce: Which is Better Financially?

by Jeffrey A. Landers • Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC
Photograph: iStock

Legal separation may be a good financial option for you if you need to:

  • meet the 10-year requirement for social security benefits. If a marriage has lasted at least 10 years, a divorced spouse who has not remarried is entitled at age 62 (with various other requirements) to social security benefits equal to the greater of: 1) those based on her (assuming she is the lesser earning person) own work record or 2) 50 percent of what her ex-husband is entitled to based upon his work record. Because of this law, many people who have been married for seven or eight years will separate until they cross the 10-year threshold – then, they get divorced. (Please note: The amount of your social security benefits will be reduced if you opt to take them prior to your normal retirement date. So, although you may be eligible to start receiving benefits at age 62, depending on your circumstances, you may want to delay doing so until your normal retirement age or beyond. You can actually receive more for each year you delay post retirement age up until age 70.)
  • continue receiving health insurance benefits under yourhusband’s plan.Naturally, once a couple is divorced, most employer health plans will no longer cover the employee’s ex-spouse. Separating, but not divorcing, may solve that problem –although you’ll have to carefully check the fine print in your husband’s employment benefit package to know for sure. Some employers view a legal separation the same as a divorce and will deny benefits accordingly.
  • take advantage of potential tax benefits from filing jointly. Many couples assume they will save money by filing joint tax returns, so they separate, but do not divorce, in order to preserve that right. In addition, there also may be estate-planning implications, such as preserving the marital deduction. However, please don’t let assumptions like these lead you into trouble. Federal tax law in this area is quite complex, and then it becomes even more so because the IRS usually follows state law for determining marital status. In other words, whether or not you are considered married or unmarried will depend upon complicated laws at both the state and federal level. For example, according to tax law, an individual legally separated from his/her spouse under a decree of divorce or a decree of separate maintenance shall not be considered as married. But, not every state allows for a decree of separate maintenance; if you live in one of those states, you are still considered married until your divorce is final. You need to ask your attorney and/or tax advisor whether your current legal status meets the definition of a decree of separate maintenance.
  • retain certain military benefits.
  • pool certain resources. For some couples, maintaining two separate households is simply too expensive. Some decide to divide their home into “his” and “her” areas, so they can maintain a certain lifestyle (albeit one that’s now separate).  However, a decision to pool certain resources is not necessarily straightforward. In the case of alimony, for example, the IRS maintains that: "Spouses cannot be members of the same household. Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. A home you formerly shared is consideredone household, even if you physically separate yourselves in the home. You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment."In other words, alimony would not be tax deductible by the payor, if they are living in the same household.

Are there other reasons to remain separated rather than divorce?

First Published January 13, 2012

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