Legal separation or divorce: Which is better financially?

By Jeff Landers

We’re all familiar with couples that decide to live separately for a while before actually getting divorced. And typically, these couples use this “trial separation” to decide whether or not they want to pursue formal legal action.

These days, however, more and more couples are deciding to remain separated, rather than divorce – even after they know their marriages are fractured beyond repair. Why would a woman make this choice? What reasons could there possibly be to live apart from a spouse, and yet remain married?

In many cases, it boils down to money. You see, sometimes opting for legal separation rather than divorce is a good financial decision.

But, before I discuss the possible financial benefits of a legal separation, let me clarify a few basic points.

What is a legal separation agreement?

As a divorce financial expert, I often recommend that if you are going to live apart from your husband beyond a reasonable trial period, you obtain a legal separation agreement – which is a legally binding agreement between you and your husband to resolve issues such as the division of assets and debt, alimony/spousal support, child support and visitation.

Some people remain separated for months or even years, so it’s essential that you protect yourself upfront and have all the necessary issues settled and agreed to in writing. In order to move forward, you need to know who gets which assets, who is responsible for debts, how much alimony is to be paid and for how long, etc. The legal separation agreement helps settle these issues, and if you ultimately decide to divorce, it can easily become your divorce settlement agreement.

Does my state recognize legal separation agreements?

Divorce laws vary from state to state, so it’s no surprise that regulations governing legal separation vary from state to state too. In general terms, each state falls into one of three broad categories:

• Some states require a legal separation before you can file for a divorce.
• Other states recognize a legal separation, but do not require it.
• A few states neither require nor recognize legal separation.

Obviously, it’s important to get the advice of a divorce attorney in your state to determine if a legal separation agreement is a viable option for you.

When might a legal separation be a better financial choice than divorce?

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 to social security benefits. 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.

Receive health insurance benefits under your husband’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. In other words, whether or not you are considered married or unmarried will depend upon complicated laws at both the state and federal level. 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. Similar to social security benefits, military pension benefits also have a 10 year marriage requirement for ex-spouses to be eligible to collect. In addition, there is a 20 year marriage requirement for an ex-spouse to retain PX and Commissary shopping privileges after divorce.

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 considered one 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.

Not everyone opts for a legal separation based solely on financial reasons. In some cases, other considerations come into play. For example, some couples remain separated for religious reasons. One spouse, or both, may come from a religious background that frowns upon divorce. Separating, but not divorcing, may be the ideal solution for them. Other couples may find that they still love each other, but just can’t live together. Separation may be the optimal choice for them too.

As you can see, the decision to legally separate rather than divorce can be quite complex. Weigh your options carefully. Consult with qualified divorce professionals so you can make smart choices that will help keep you financially secure both short- and long-term.

Jeff Landers is the President and Founder of Bedrock Divorce Advisors, a divorce financial strategy firm which exclusively advises affluent women throughout the United States before, during and after divorce. Jeff is the author of the book Divorce: Think Financially, Not Emotionally – What Women Need To Know About Securing Their Financial Future Before, During, And After Divorce, which provides women going through the crisis of divorce with the tools they need to secure their financial future. He is donating 50% of all book profits to Bedrock Divorce Fund for Abused Women, Inc. Get your free article on Understanding How Assets Get Divided in A Divorce.

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