The Better Financial Choice: Legal separation Vs. Divorce

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by derailedcapitalism
Friday, Aug 28, 2020 - 15:23

It used to be that marriages meant “To have and to hold…to death do us part”. But, in today’s complex world, it’s no longer possible for some American couples to stay married forever. There are several reasons that couples decide to divorce or separate today, including attitudes about relationships, change in sexual behavior, and a change in outlook about life-long commitments. However, one very surprising factor that many might not consider is the financial one. So, is it financially better for couples to separate or divorce?


Read on for the dollars and cents of the decision.


The statistics of unions and splits


According to 2018 statistics from the U.S. Centers for Disease Control (CDC),  the marriage rate (per 1,000 individuals in the population) was 6.5% (steadily declining from 8.2% in 2000). However, the rates of divorces and annulments steadily declined over that period too – from 4.0%/1,000 in 2000, to 2.9%/1.000 in 2018. 


Interestingly, where you live (State) has a lot to do with whether you’re likely to stay married or seek an annulment (including divorce or legal separation).  For example, the 2018 CDC statistics for Nevada indicate a 4.4%/1,000 rate (9.9% in 2000) of divorces. However, on the other end of the spectrum is Illinois, with a 1.5%/1,000 rate (3.2% in 2000).



A different view of these numbers from the U.S. Census Bureau, this time over a 10-year period from 2008 to 2018, confirms the general trend of declines in both marriages and annulments. However, the Bureau’s statistics reveal a greater decline (-2.8%) in the divorce rate, compared to that of marriages (-1.3%).         


These statistics prove beyond doubt that, while couples are less likely to enter formal (legally registered) unions today, they’re also less likely to split – either permanently via divorce or through other mechanisms, such as trial and legal separations. With major impact to couples’ finances since the financial crash, one might wonder whether there is a financial motivation to not seeking a divorce.


The prohibitive (and hidden!) costs of divorce


Depending on where (which State) you file for your divorce, and how you go about it – With/without a lawyer, contested/uncontested, with/without arbitration – a divorce might set you back by an average of $15,000 per person.  A typical divorce lawyer charges approximately $250 per hour. However, in some states (New York or Los Angeles), that hourly charge could be as high as $950 per hour.


But then, divorcing couples must also come up with a lump-sum retainer that each will pay their lawyers. This amount could vary between $2,500 and $25,000, once again, depending on the State where the divorcing couple resides, and the complexity of the divorce.


If you’re thinking of a mediated divorce, you could accomplish your objective by spending anywhere between $7,000 and $10,000.  But the costs don’t stop there. There are other (often hidden or overlooked) costs that can often push the $15k ballpark figure much higher. Psych evaluations, counselling sessions, and parent education classes are just a few such line items to consider.


Then, you might have to untangle financial dealings – joint accounts, co-sponsored contracts (phone, credit card applications, etc.) that could ding you with penalties, fees, and early redemption charges.  Add in the cost of relocation or address changes. By the time the dust settles, you could be looking at costs well above $20 to $25k in some instances.

Divorce, either contested or otherwise, may therefore not be the best financial choice.


Legal separation - The financially better choice


A legal separation is a court-approved arrangement, where couples “technically” remain married, but continue to live separately. A divorce, on the other hand, whether contested or uncontested, is a more permanent dissolution of a marital arrangement. So, what makes legal separation so appealing?


Well, here are 6 compelling financial reasons that couples are opting to separate rather than divorce:




Typically, even though they are no longer a “couple”, a legal separation entitles the spouse to retain certain health care benefits of a plan that’s in the name of the other party. With the average monthly healthcare premium for an Affordable Care Act (ACA)-compliant policy hovering around $465, the ability to leverage spousal health care benefits are a definite financial incentive.


Depending on the terms worked out for an annulment settlement, such benefits typically terminate upon finalization of a divorce.


Religious beliefs


Couples, who are co-believers in religious orders that forbid divorce, may opt for legal separation – rather than a divorce – to continue to enjoy official privileges their religions might provide them.


Military and veterans’ benefits


Military spouses, who haven’t been married for more than 10-years, might opt to go the legal separation route, as opposed to a divorce. Doing so, until they remain officially “married” for 10-years, entitles the spouses to benefits under the Uniformed Services Former Spouse Protection Act. A divorce, prior to the 10-year milestone, erases all entitlements to spouses under the Act.


Social Security and other retirement benefits


Another financial reason for seeking a legal separation, prior to the 10-year marriage anniversary, relates to eligibility of financial benefits under the social security laws. Under the law, if a marriage lasted over 10 years, the spouse whose earnings are lower could qualify for certain government retirement benefits based on the earnings history of the higher-earning spouse.


With legal separations, there’s no “wait time” to collect social security benefits. In the case of a couple that divorces, but an eligible spouse isn’t yet receiving social security benefits, the divorce must be in effect for at least 2-years before the other spouse can collect benefits based on earnings history.        


Employer-provided benefits


When it comes to employer-provided benefits, employers typically do not consider a divorcing spouse as a dependent of the employee. Many employers, therefore, drop dependent privileges – such as gym memberships, subsidized merchandise, or company-sponsored perquisites. Most employer health plans too won’t cover the divorcing spouse.


Many employers continue to offer these financial incentives legally separated spouses, though some might not.


Tax incentives


Depending on State law, legally separated spouses may still be eligible to file joint taxes, thereby benefiting from this filing status. In most instances, states allow joint filers the privilege of claiming some additional benefits that individual filers aren’t entitled to – such as marital deductions.


Once a divorce is finalized, couples must file taxes individually. This deprives them of claiming some of the deductions they previously claimed as a couple. 


Simplistic solution


While cookie-cutter online divorce document vendors claim their recipe for  uncontested divorce makes the best sense for divorcing couples, the truth is far from that.  As you can see, divorces aren’t necessarily the best way to proceed with un-entangling a relationship. There is another – better – financially-viable choice. Before signing on the dotted line of any template, it would behoove couples to consider the financial implications of divorce versus legally separating.