After a divorce is finalized, the client must consider some key questions: What can I afford? How do I make my cut of the pie last? Will I be able to retire? Here are the top five ways CPAs as trusted advisers can help clients through this process.
EMPHASIZE THE IMPORTANCE OF A SUSTAINABLE BUDGET
The first step in budgeting is to determine financial priorities. Encourage clients to honestly assess what is necessary versus unnecessary and then work with the client to create a budget that he or she can stick to.
The division of income and the determination of new expenses can be overwhelming at first, but creating a budget can help clients be more strategic with their financial choices.
Taxes are a critical component to any budget. Bear in mind that the IRS considers individuals to be unmarried for the whole tax year in which their divorce or separate maintenance agreement is finalized (IRS Publication 504, Divorced or Separated Individuals).
HELP CLIENTS THINK ABOUT WAYS TO MITIGATE RISK
In addition to having a cash safety net of six months or so, clients should give thought to the insurance coverage changes that may have taken place as a result of the divorce and begin to think through whether they need to modify or replace any policies.
Navigating the world of insurance can be daunting, but the following types of coverage should be considered:
- Life insurance (income protection), especially if the divorced couple have children;
- Umbrella, homeowner's, or renter's insurance (property protection); and
- Health insurance (current employer, COBRA, or from a health care exchange).
HAVE CRITICAL DISCUSSIONS ABOUT RETIREMENT
Dividing retirement savings between the former spouses generally results in a less-than-rosy retirement picture. If your client originally had retirement planning prepared on a joint basis, it is critical to reassess the client's goals, assets, and overall plan.
Start by focusing on the client's current retirement savings. Discuss when he or she wants to retire and the lifestyle desired upon retirement. In this area, it may also be wise for the client to consult with other qualified advisers who can help determine how much is needed to meet his or her retirement goals.
DO NOT FORGET ESTATE PLANNING AND BENEFICIARY DESIGNATIONS
After the divorce paperwork and fees are settled, estate planning is a significant task that is commonly missed. Death is inevitable, and planning for it should not be an afterthought.
This is a critical time for clients to take a fresh look at wills, beneficiary designations, and the titling of property. It is important to ensure their wishes are known and can be carried out.
It is also important for clients to understand the probate process and potential planning associated with trusts and estates. Many people are unaware of how many different planning avenues there are to protect their assets for potential beneficiaries, while maximizing tax savings.
ASSIST CLIENTS IN CREATING A LONG-TERM PLAN
While a budget will help guide clients' short-term goals, a comprehensive financial plan will provide them a long-term road map that can last a lifetime.
A financial plan merges all the previously mentioned considerations and more. It is a valuable way for an adviser to understand a client's holistic financial picture. A financial plan must be tailored to meet each client's unique circumstances and objectives.
For a detailed discussion of the issues in this area, see "Tax Clinic: Top 5 Things for Clients to Consider Now That They Are Divorced," in the December 2019 issue of The Tax Adviser.
— Megan Wilsey, CPA, and Elizabeth Hutchison, CPA/PFS
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
Also in the December issue:
- A look at split-dollar arrangements and estate inclusions.
- An analysis of a quirk in the TCJA small business exceptions.
- A discussion of the practical implications of Wayfair.
AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section membership includes a one-year subscription to The Tax Adviser.