“His attorney said I had no choice…”

A client came in yesterday to process a Canadian account from her ex-husband’s employer. While we were talking she mentioned that “his attorney” said it was “written in the MSA (Marriage Settlement Agreement) and that she had no choice but to have her alimony discontinued” when her ex retired. What?! I had read her MSA and knew that wasn’t the case, even though she had signed it before we met and “Against Legal Advice.” So, here’s some details on how this common misconception happens. Spoiler alert: There is nothing automatic, unless alimony was of a “fixed length of duration” which is less common and merits a separate discussion. So here’s a few basics:

1. Alimony doesn’t “automatically discontinue after retirement” by default.
2. Alimony is based on your respective incomes.
3. Income is derived from a) Salary; AND b) Dividends & Interest from investments i.e. stocks and bonds; c) Rental Property Income; d) Pension income; and anything else that shows up on a tax return. *Ask for the last couple of years tax returns and you’ll see.
4. There are retirement bonuses, compensation or additional benefits that can vest at retirement.
5. Changing alimony requires a court order, or an agreement of both parties.
6. With the Tax Cuts and Jobs Act of 2017, after January 1, 2019, any alimony order that is changed is subject to these new rules. Primarily, that ANY spousal support/alimony awarded after 1/1/2019 is no longer a tax deduction to the higher earning spouse. Meaning that taxes are paid at the higher earning spouses tax bracket. How this new rule will compute with CA Dissomaster calculations I have yet to see, or hear. However, this was added to the Tax Cuts and Jobs Act of 2017 to raise revenue (income taxes) to offset the tax cuts. Read more here.
7. Lastly, and this is another topic altogether, if your alimony is reduced by more than $15,000 per year in the first three years after divorce, the IRS has a recapture provision (read more here) that makes this a very, very unattractive proposition to the person who has been writing off alimony for the past year or two. Why we don’t hear more about this topic, I’ve yet to still understand.

So back to my client. She concurred that she should meet with her attorney to discuss this, and more importantly, won’t sign anything without taking it to her attorney.

This is a common trap that the lower earning spouse falls into: During the divorce, attorney’s fees were typically prorated based on respective income(s) and are often paid out of the family assets.

Now those $400 hourly fees to either attorney are paid out of pocket. And it hurts, big time. So I’ve seen a tendency to listen to what the ex’s attorney is saying as a way to “save money” which is never ends up being.

As a quick summary, remember that while an ex may no longer be employed, they still intend to live their lives in a lifestyle of a somewhat similar fashion–otherwise they’d keep working until they had enough. The higher earner’s Social Security will be larger, and the likelihood that they’ve continued to accumulate assets during their peak earning years matters as well. Yes, those new assets have nothing to do with you as far as the actual “holding” or splitting of those assets, but they do impact you! The income (dividends and/or interest) from those assets, that shows up on tax returns every year, IS a factor in determining spousal support, or alimony.

Do an easy google search, ask things like: How does retirement impact alimony? And go to school on that information. You can do this. You’re not in the same place of tumult and turmoil that you were during your divorce. Take a minute to breath, and recognize how very far you’ve come since that time. Then reach out to your financial advisor, your family law attorney and/or your CPA to create a strategy to move forward. You got this.