Category: Social Security

Maximizing Lifetime Social Security Benefits

Maximizing Lifetime Social Security Benefits

Unless you know your date of death, it’s challenging to know how to start maximizing lifetime Social Security benefits. But, as explained in an article titled How to Calculate Your Social Security Break-Even Age” from U.S. News & World Report, you can get close.

Age 62 is when people can start taking payments, but they will be reduced compared to those taken at full retirement age. To achieve the maximum monthly benefit, wait to take benefits at age 70. The total monthly benefit will be higher if you start collecting at a later age, but it will take a while to receive the same amount if you start taking benefits earlier. The “break-even” point comes when the payments later in life begin to exceed the value of taking payments earlier.

A number of factors are at play:

  • Your personal and family health history
  • Your spouse’s age and benefits level
  • Other income streams

Here’s one example. If your full retirement age (FRA) is 67 and your benefits will be $2,000 per month, but you decide to collect at age 62, your monthly benefit is reduced by up to 30%. You’ll receive $600 less if you start payments at age 62, and your monthly benefit will be reduced to $1,400. If you can wait until your Full Retirement Age, the monthly benefit will be $2,000. Every additional year after age 67 you don’t take benefits, your monthly benefit increases by 8%. This would give you a monthly benefit of $2,480 per month at age 70.

Taking the wider view, claiming at age 62 means a total of around $470,000 in benefits if you live to 90 (not including any COLAs, or Cost Of Living Adjustments). Claiming at Full Retirement Age would net about $595,000 by age 90. If you started claiming benefits at age 62, you’d have to reach age 80 to break even with what you would have received if you’d waited until Full Retirement Age (FRA).

But there are other things to take into consideration. Since none of us knows when we are going to die, deciding when to start taking Social Security benefits should look at other considerations. One is your life expectancy. In some families, living into the late 90s is common, while others rarely make it past 70. If you have a chronic medical condition like diabetes, a heart condition or cancer, you may want to start taking benefits earlier.

Another element is your spouse’s medical status and benefits. If the main breadwinner takes benefits early, the surviving spouse’s benefits will be reduced. When one spouse dies, the surviving spouse will receive the higher of the two benefits.

Whether you are still working is another factor to consider. Earning more than $19,560 while collecting Social Security means any benefits will be reduced. If you earn more than $19,560 in 2022 and are collecting benefits before your FRA, your benefit will be temporarily reduced by $1 for every $2 earned above the limit. When you reach FRA, then you can earn an unlimited amount with no reduction in Social Security benefits.

Talk with a financial advisor and your estate planning attorney for help maximizing lifetime social security benefits. If there are other income streams for the household, it may make sense to use those accounts for income and hold off on Social Security. But if funds are tight and you don’t expect to live a long life, it may make more sense to file for benefits earlier, rather than later. If you would like to learn more about social security, please visit our previous posts. 

Reference: U.S. News & World Report (Aug. 26, 2022) “How to Calculate Your Social Security Break-Even Age

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Special Needs Trusts can Protect disabled Child

Special Needs Trusts can Protect disabled Child

Parents with disabled children worry about how their offspring will manage when parents are no longer able to care for them. Leaving money directly to a child receiving means-tested government benefits, like Social Security Supplemental Income or Medicaid, could make them ineligible for these programs, explains an article from Kiplinger titled “Estate Planning: A Special Trust for a Special Need.” In most states, beneficiaries of either program are only allowed to have a few thousand dollars in assets, with the specific amount varying by state. However, the financial support from government programs only goes so far. Many families opt to have their own family member with special needs live at home, since the benefit amount is rarely enough. A Special Needs Trust can protect your disabled child.

The solution is a Special Needs Trust, which provides financial support for a disabled individual. The SNT owns the assets, not the individual. Therefore, the assets are excluded from asset limit tests. The funds in the trust can be used to enhance quality of life, such as a cell phone, a vacation or a private room in a group living facility. The SNT is a means of making sure that a vulnerable family member receives the money and other relatives, such as a sibling, don’t have a financial burden.

SNTs can only be created for those who are younger than age 65 and are meant for individuals with a mental or physical disability so severe they cannot work and require ongoing support from government agencies. A disabled person who can and does work isn’t eligible to receive government support and isn’t eligible for an SNT, although an estate planning attorney will be able to create a trust for this scenario also.

Each state has its own guidelines for SNTs, with some requiring a verification from a medical professional. There are challenges along the way. A child with autism may grow up to be an adult who can work and hold a job, for instance. However, estate planning attorneys recommend setting up the SNT just in case. If your family member qualifies, it will be there for their benefit. If they do not, it will operate as an ordinary trust and give the person the income according to your instructions.

SNTs require a trustee and successor trustee to be responsible for managing the trust and distributing assets. The beneficiary may not have the ability to direct distributions from the trust. The language of the trust must state explicitly the trustee has sole discretion in making distributions.

Because every state has its own system for administering disability benefits, the estate planning attorney will tailor the trust to meet the state’s requirements. The SNT also must be reported to the state. If the beneficiary moves to another state, the SNT may be subjected to two different sets of laws and the trustee will need to confirm the trust meets both state’s requirements.

SNTs operate as pass-through entities. Tax treatment favors ongoing distributions to beneficiaries. Any earned investment income goes to the beneficiary in the same year, with distributions taxed at the beneficiaries’ income tax rate. Trust assets may be used to pay for the tax bill.

As long as all annual income from the trust is distributed in a given year, the trust will not owe any tax. However, a return must be filed to report income. For any undistributed annual investment income, the trust is taxed at one of four levels of tax rates. These range from 10% and can go as high as 37%, depending on the trust income.

An SNT can be named as the beneficiary of a traditional IRA on the death of the parent. Investments grow tax deferred, as long as they remain in the retirement account and the SNT collects the required minimum distributions for the retirement account each year, with the money passing as income. However, any undistributed amount of the required distribution will be taxed at the trust’s highest tax rate. Using a Special Needs Trust can protect your disabled child and ensure they have a quality of life for years to come. If you would like to learn more about SNTs, please visit our previous posts. 

Reference: Kiplinger (June 8, 2022) “Estate Planning: A Special Trust for a Special Need”

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Best Uses of Life Insurance Benefits

Best Uses of Life Insurance Benefits

The loss of a spouse is an extremely stressful event. It comes with many emotions that can be overwhelming for the bereaved. Hopefully, life insurance is one thing that was put in place to allow those remaining to process their loss without fretting over their finances. But what are the best uses of life insurance benefits, says Kiplinger’s recent article entitled “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

Life insurance death benefits can be paid within 30 days after you submit a claim. To do this, you need a certified death certificate, which is generally issued in less than a week by the funeral home. You should also order plenty of copies (about 15) for closing accounts.

The best use of the money is different for each widow and her unique situation.

Funeral Costs. Use life insurance money to cover these costs to decrease your financial strain.

Ongoing Expenses. When your spouse dies, living expenses do not stop. Your income is frequently reduced. In fact, after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings. The death benefit from a life insurance policy can help provide the funds you need to help cover your mortgage, car payment, utilities, food, clothing and health care premiums.

Debts. You are generally not personally responsible for paying off the debts of your husband, provided they are in his name alone. When an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced. Note that you may be responsible for certain types of debt, such as debt that is jointly owned or a loan that you have co-signed. Talk to an experienced elder law attorney to understand the laws of your state, so that you know where you stand concerning all debts.

Create an Emergency Fund. Life insurance can help build a liquid emergency fund, which should cover three to six months of expenses.

Supplement Your Retirement. When a woman loses her spouse, she becomes much more vulnerable to poverty. To retire, a person typically needs 80% of their preretirement income to live comfortably.

Education. If you are a young widow, the life insurance proceeds can be used to pay for going back to school to augment your earning abilities. These funds could also cover the cost of college for your children. However, you should only save for college educational costs after your retirement savings is secure.

It is up to beneficiary to decide the best uses of life insurance benefits going forward. It is a good idea to consult an estate planning and probate attorney to make sure you have a full grasp of the benefits provided. If you would like to learn more about life insurance and estate planning, please visit our previous posts. 

Reference: Kiplinger (Dec. 17, 2021) “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

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Addressing Financial Issues in a Remarriage

Addressing Financial Issues in a Remarriage

When it comes to addressing financial issues in a remarriage, couples should look at the past.  This should include the way in which each person handled finances, and their pre-marital liabilities and assets, along with the present (e.g., new benefit options) and the future. This means how they’ll handle finances as a unit or protect themselves and loved ones in case of death or divorce.

CNBC’s recent article entitled “Remarrying? Here are financial considerations to keep in mind before saying ‘I do’” says that it’s important to release any financial skeletons from the closet. Here are some smart financial moves for new parents:

It’s critical that blended families have similar talks with their children. The children were most likely brought up in different financial circumstances, so it’s important to talk as a family about new financial expectations.

After the prospective spouses identify their collective financial situation, there are a few topics to consider. For instance, if you were previously married for more than 10 years and collecting Social Security benefits on your ex-spouse’s account, you may forfeit those payments if you remarry.  Your new combined income may also result in a higher tax bill. This is sometimes called a “marriage penalty.”

Moreover, financial communication is a crucial best practice to achieve financial success in a relationship. After you remarry, look at the impact on benefits.

Marriage is a recognized life event, so you may be allowed to change your insurance options outside the regular autumn time window.

You should also be aware that if you were previously divorced and getting substantially discounted insurance via the healthcare.gov exchange, when you remarry, your insurance costs may go up if your joint income goes up.

It’s also smart to consider protecting pre-marital assets that were in your name only. You should consult an experienced estate planning attorney prior to addressing financial issues in a remarriage. They may advise against commingling some or all assets, and suggest a trust, segregating pre-marital assets from marital assets, to protect you in the event of divorce.

Estate planning is vitally important, if you have a new family with children. These are the documents that will take care of the people you love. If you would like to learn more about remarriage issues in estate planning, please visit our previous posts. 

Reference: CNBC (March 7, 2022) “Remarrying? Here are financial considerations to keep in mind before saying ‘I do’”

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consider delaying Social Security benefits

Consider delaying Social Security Benefits

You might want to consider delaying Social Security benefits. Kiplinger’s recent article entitled “3 Reasons to Wait Until 70 to Start Taking Your Social Security Benefits” provides three reasons why delaying taking your Social Security benefit to age 70 is a decision you may want to consider.

  1. You’ll Receive a Larger Monthly Social Security Check If You Wait Until 70. Claiming Social Security prior to full retirement age (FRA) means a reduction in benefits — as much as 25% to 30% less than you would have received if you had waited. This is permanent.

However, if you wait to take your benefits until after your FRA, Social Security will add an 8% delayed retirement credit to your eventual monthly payout each year you hold off, up until age 70.

  1. You May Be Receiving these Benefits for a Long, Long Time. Life expectancy is a significant factor in Social Security planning. While you can’t predict how long you’ll live, the CDC’s most recent figures say the average American who makes it to age 65 can expect to live another 19 years. Note that if your Social Security benefit at 70 is more than 75% higher than your benefit at 62, you’re going to have a lot more money to take care of your needs as you age.

If you’re married, the lower Social Security payment will go away when one of you dies. If the spouse with the greater Social Security wage history delays as long as possible to file for benefits, he or she will leave behind a bigger benefit for the surviving spouse.

  1. You Could Help Lower Your Taxes. Many people don’t realize that they could wind up paying federal income taxes on as much as 85% of their Social Security benefits. If you don’t have much taxable income in retirement, you may not have to pay any federal taxes on your Social Security benefits.

However, if you’re like many Baby Boomers — you may have a sizeable amount of your retirement savings in tax-deferred IRAs or 401(k)s — and the federal income taxes on those savings could be hefty. Therefore, it might be best to consider delaying Social Security benefits.

If you aren’t sure which Social Security claiming strategy is the best fit for your needs and goals, talk to an experienced estate planning attorney who is knowledgeable about retirement income planning and, specifically, Social Security benefits. If you would like to learn more about social security benefits, please visit our previous posts. 

Reference: Kiplinger (Sep. 9, 2021) “3 Reasons to Wait Until 70 to Start Taking Your Social Security Benefits”

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What should women know about long-term care

What Should Women Know about Long-Term Care?

A longer retirement increases the odds of needing long-term care. An AARP study found more than 70% of nursing home residents were women, says Kiplinger’s recent article entitled “A Woman’s Guide to Long-Term Care.”  What should women know about long-term care?

Living longer also increases the chances of living it alone because living longer may mean outliving a spouse. According to the Joint Center for Housing Studies of Harvard University, “In 2018, women comprised 74% of solo households age 80 and over.”

The first step is to review your retirement projections. It’s wise to look at “what-if” scenarios: What-if the husband passes early? How does that impact their retirement? What if a female client lives to 100? Will she have enough to live on? What if a single woman needs long-term care for dementia? Alzheimer’s and dementia can last for years, eating up a retiree’s nest egg.

Medicare and Medicaid. Government programs, such as Medicare and Medicaid, are complicated. For instance, Medicare may cover some long-term care expenses, but only for the first 100 days. Medicare doesn’t pay for custodial care (at home long-term care). Medicaid pays for long-term care. However, you must qualify financially.

Planning for long-term care. If a woman has a high retirement success rate, she may want to self-insure her future long-term care expenses. This can mean setting up a designated long-term care investment account solely to be used for future long-term care expenses. If a woman has a modest degree of retirement success, she may want to lower her current expenses to save more for the future. She may also want to look at long-term care insurance.

Social Security. Women can also think about waiting to claim Social Security until age 70. If women live longer, the extra benefits accrued by waiting can help with long-term care. Women with a higher-earning husband may want to ask the higher-earning spouse to delay until age 70, if possible. When the higher-earning spouse dies, the widow can step into the higher benefit. The average break-even age is generally around 77-83 for Social Security. If an individual can live longer than 83, the more dollars and sense it makes to delay collecting until age 70.

Estate Planning. Having a comprehensive estate plan is a must. Women (and men) should have a power of attorney (POA). A POA gives a trusted agent the ability to write checks and send money to pay for long-term care.

When it comes to long-term care, women should know their own health and the potential drain on the retirement savings. Work with a financial advisor and estate planning attorney to make sure your later years are secure.

If you would like to learn more about long-term care, please visit our previous posts.

Reference: Kiplinger (July 11, 2021) “A Woman’s Guide to Long-Term Care”

 

Estate planning for couples with big age differences

Estate Planning for Couples with Big Age Differences

Estate planning becomes more complicated for couples with big age differences. Seniors who are married to younger spouses have a special situation for estate planning, a situation that’s become more common, according to Barron’s recent article “Couples with Big Age Gaps Require Special Attention.”

This kind of family requires planning for the older spouse’s retirement needs and healthcare costs, while determining how much of the older spouse’s wealth should go to the children from any previous marriages while balancing the needs of a future child with a younger spouse. Beneficiaries for all financial accounts, last wills and all estate documents need to be updated to include the new spouse and child. The same goes for medical directives and power of attorney forms.

Social Security and retirement account considerations differ as well. The younger spouse may begin receiving their own Social Security at age 62, or a portion of the older spouse’s Social Security, whichever is greater. If the older spouse can wait to file for Social Security benefits at age 70, the younger spouse will receive more spousal benefits than if the older spouse claims earlier. Social Security pays the survivor’s benefit, typically based upon the older spouse’s earnings.

Pension plans need to be reviewed for a younger spouse. If the pension plan allows a survivor benefit, the surviving spouse will receive benefits in the future. IRAs have different beneficiary distribution rules for couples with significant age differences. Instead of relying on the standard Uniform Lifetime Tables, the IRS lets individuals use the Joint Life and Last Survivor Expectancy Table, if the sole beneficiary is a spouse who is more than ten years younger. This allows for smaller than normally Required Minimum Distributions from the IRA, allowing the account a longer lifetime.

Families that include children with special needs also benefit from trusts, as assets in the trust are not included in eligibility for government benefits. Many families with such family members are advised to use an ABLE Savings Account, which lets the assets grow tax free, also without impacting benefit eligibility. There are limits on the accounts, so funds exceeding the ABLE account limits may be added to special needs trusts, or SNTs.

A trustee, who may be a family member or a professional, uses the SNT assets to pay for the care of the individual with special needs after the donor parents have passed. The child is able to maintain their eligibility.

For same sex couples, revocable or irrevocable trusts may be used, if the couple is not married. Nontraditional families of any kind with children require individual estate plans to protect them,  which usually involves trusts.

Trusts are also useful when there are children from different marriages. They can protect the children from the first marriage and subsequent marriages. Estate planning is more complicated for couples with big age differences. A wisely constructed estate plan can do more than prevent legal battles among children—they can preserve family harmony in the non-traditional family after parents have passed.

If you would like to learn more about estate planning for older couples, or those in second marriages, please visit our previous posts. 

Reference: Barron’s (July 27, 2021) “Couples with Big Age Gaps Require Special Attention”

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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