Sometimes it might seem like everything about relationships is alternative and unexpected these days, but human beings remain pretty traditional in one sense: We tend to still get married when we love each other. Millions of people get married every year in the U.S., and each one of those partnerships is an example of optimism. Marriage isn’t just an emotional commitment, after all, it’s also a financial and social partnership.
That’s why we regard divorce as a defeat, despite the fact that 41% of first marriages end that way. Getting divorced doesn’t just mean you’ve lost that loving feeling with your partner, it means your whole life has to be rearranged, often to your detriment. This is especially true when it comes to money, because divorce can have an incredibly negative impact on your finances.
But not always—in fact, divorce can sometimes have a positive impact on your finances, and it’s not unheard of for people to get a “strategic divorce” in order to take advantage of those benefits. It’s not something everyone should consider, but under certain circumstances the best thing you and your partner can do, financially, is to get divorced on paper while staying together IRL.
Here are four scenarios when a strategic divorce might make sense.
To lower your tax bill
Some married partners are surprised to discover their tax bill goes up after they get married. It’s called the “marriage penalty,” and it can make being married a lot more expensive than you expected. It doesn’t apply to every married couple, but under specific circumstances you can find yourself hit with a dismaying tax bill—if your combined income puts you over the limit for the earned income tax credit, for example, or pushes you both into a higher tax bracket, for example.
If your marriage has fluffed up your tax bill significantly, it’s possible that a strategic divorce would make sense: You can continue to live your life as a committed couple while enjoying a lower tax bill because you’re filing separately as single people. If your tax bill has been shocking since you got married and you think the savings might make the trouble of a divorce worthwhile, you should have a conversation with an accountant or tax professional first to make sure you understand the complexities and that your math works out.
To qualify for benefits
As anyone who has ever relied on government benefits for their survival knows, it can be maddening to maintain your qualification. A significant barrier for a lot of people is income: If you make even slightly more than the maximum, you can fall off the “benefits cliff” and lose the supplemental income you rely on, even though your new income doesn’t actually cover your needs.
For some married couples, their combined income might exclude them from a wide range of programs, from federal student aid to Medicaid. For example, if one spouse needs to enter a nursing home they may not qualify for Medicaid because your combined income is too high. A “strategic divorce” might lower their individual income to a point where they can receive benefits, or it might lower the custodial parent’s income to a point where your children can receive federal aid.
To pay medical bills
If you’re dealing with a wave of medical bills, whether due to a chronic illness, a major accident, or a sudden change in your health or the health of your partner, you might need to try what’s known as a “medical divorce” to afford the necessary care. This is a simple concept: The shared assets of the marriage are transferred to the healthy spouse, and when the divorce is finalized the newly-“single” partner can qualify for higher benefits. At the same time, the assets (a house, retirement accounts, etc.) are protected from being drained to cover necessary care.
When you need to borrow from an IRA
If you have retirement accounts, you know that the money you put in there is tax-privileged, meaning it isn’t taxed until you withdraw it. But withdrawing it before you hit retirement age comes with early withdrawal penalties on top of the taxes—about 10% of the withdrawal amount in most cases. That can be a significant bill to pay, especially if you’re withdrawing money early because of a severe hardship when every dime counts.
In an extreme case, a strategic divorce can spare you that penalty. A divorcing couple can include what’s known as a qualified domestic relations order (QDRO) as part of their settlement. A QDRO divides up retirement assets—and withdrawals made as part of a QDRO are exempt from the early withdrawal penalties. If you desperately need to rake cash out of your retirement accounts without losing 10% on top of everything else, a carefully planned strategic divorce can allow you to do so.
