By Jacquelyn M. Basso, CPA
I recently received a text and picture from one of my clients in her cap and gown. "Wouldn’t be here without your support and motivation," she wrote. I couldn't be prouder of her. The journey to her diploma was nontraditional, and the accomplishment was monumental!
Let's go back a few years. A woman I knew socially asked if I could help her through a divorce. I won't go into all the details of how she got there, but I do want to share the steps we took as a team to make her feel confident that she could get through the divorce and thrive on her own. Divorce planning is a specific discipline in the personal financial planning process; it always starts out emotional, but the end result is a financial transaction for both parties. So, we had to plot a plan for her personal financial success.
As a PFP member of the AICPA, I subscribe to Broadridge Forefield resources. The first thing we did was to find as many informational assets as possible to help her through the transition from stay-at-home mom to in-charge mom. A divorce planning checklist and a financial planning checklist helped us build a plan.
As "chief household officer," she was used to running the home, managing her children's education and social events, and paying the bills. I asked her to gather the usual documents: bank account statements, brokerage reports, retirement accounts, past tax returns, insurance policies, mortgage statements, life and health insurance policies, and other pertinent financial information. She met with her attorney who counseled her on the legal aspects of divorce, including obtaining a separation agreement detailing spousal and child support and maintenance of health insurance coverage. These documents provided information about the amount of monthly income she would be receiving.
Next, we created a budget. Often, divorcing parties want to maintain the family home so as not to disrupt the children, their schooling, and the general household. But maintaining two households is not an option for many. Considering the children would soon be off to college, selling the house was the best option for this couple. Then we had to determine whether she would rent or buy a home, and where. Once the house was sold, my client chose to rent an apartment close to the children's schools. Renting was her best choice because it allowed her to remain in the area on a temporary basis.
The hardest thing to explain to any client who is the recipient of alimony is the tax consequences of reporting the payments as taxable income, filing a tax return, and having to make quarterly estimated tax payments. It can seem unfair to have to pay taxes on alimony when it is necessary income to live on. Under the Tax Cuts and Jobs Act of 2017, alimony won't be deductible for payors nor taxable to recipients for separation and divorce agreements executed after Dec. 31, 2018. These are new provisions in the tax code.
My client had a high-earning ex-spouse, but the alimony and child support (her monthly income) would soon come to an end. In Pennsylvania, monthly child support payments cease when a child reaches age 18 or graduates from high school. The most important part of her divorce plan was to prepare her to become self-supporting. She secured a 20-hour-a-week job primarily for the health care coverage. She met with the admissions director at a local university to establish a plan to finish her bachelor's degree in three years to coincide with her last child-support payment and a partial year of alimony. We financed her education so she could preserve her emergency cash fund.
We also wanted to plan for her retirement. A qualified domestic relations order provided a distribution from her ex-spouses 401(k) plan. We split the proceeds into a variable annuity and a Rollover IRA to provide future guaranteed income as well as current portfolio diversification. Her time frame to retirement, risk tolerance, and goals, were all considered in the decision to use multiple retirement products.
For the past three years she has been seeing her children off to college, juggling a part-time job, and completing her degree. Now, she is moving on to a job search. Her student loans will soon be in repayment, but earning a larger paycheck with benefits and job security will make monthly payments easier.
Congratulations! I am so proud of my client, her journey, and her accomplishments!
Jacquelyn M. Basso, CPA, is owner of J. M. Basso & Associates in Downingtown, Pa., and is chair of PICPA’s Personal Financial Planning Committee. She is also past president of PICPA’s Greater Philadelphia Chapter.
Order by
Newest on top Oldest on top