Social Security Survivor Benefits for Spouses

Clients often think of Social Security for retirement planning, but Social Security survivor benefits, especially for spouses, should be considered as well.

Social Security is the main retirement income source for more than 60% of Americans, which is why it is usually the focus of news about retirement income. However, there’s more to Social Security survivor benefits, including how it helps surviving spouses. Social Security survivor benefits can be a critical part of retirement securities when families lose a loved one, says the article “Understanding the Basics Of Social Security Benefits for Surviving Spouses” from Forbes.

The rules about Social Security survivor benefits for spouses can be complicated. There are four basic categories of survivor benefits. Here’s a closer look:

Survivor benefits at age 60. At their full retirement age, the surviving spouse can receive full survivor benefits based on the deceased individual retirement benefit. The amount from the survivor benefit is based on the deceased spouse’s earnings. At full retirement age, the survivor receives 100% of the deceased individuals’ benefit or their projected benefit at full retirement age. If they collect benefits before full retirement age, you’ll get between 70% to 99% of the deceased spouse’s benefit.

You cannot receive both your benefit and your deceased spouse’s benefit. In most cases, it makes sense to defer whichever is the higher benefit, taking the lower benefit first while the larger benefit continues to increase.

Lump sum payment. This was originally intended to help survivors with certain funeral and end-of-life costs. However, the amount has never been indexed for inflation. Therefore, it won’t cover much. To get the payment, the surviving spouse must apply for it within the first two years of the deceased individual’s date of death.

Disabled benefit. If you qualify as disabled, you can receive survivor benefits as early as age 50. Divorced spouses can also receive survivor benefits, if the marriage lasted for at least ten years. If you remarry, you cannot receive survivor benefits. However, if you remarry after age 60, or age 50 if disabled, you can continue to receive survivor benefits based on your deceased spouse’s benefit, if you were married for at least ten years. You can even switch over to a spousal benefit based on the new spouses’ work history at age 62, if the new benefit would be higher.

Caring for children under age 16. A surviving spouse of any age caring for a child who is under age 16 may receive 75% of the worker’s benefit amount. The child is also eligible for a survivor benefit of 75% of the deceased parent’s benefits. A divorced spouse taking care of the deceased ex’s child younger than 16 is also entitled to 75% of the deceased spouse’s benefit. In this case, the ex does not need to meet the ten-year marriage rule, and they can be any age to collect benefits.

You can also see this article from Mary Galligan that discusses the timing of these benefits.  https://galligan-law.com/social-security-benefits-what-happens-when-a-spouse-dies/

One thing to consider: the rules surrounding Social Security benefits are complex, especially when it comes to coordinating benefits with an overall financial plan. Contact our office and your financial planner to learn how these rules may help protect your family and children.

Reference: Forbes (Dec. 30, 2019) “Understanding the Basics Of Social Security Benefits for Surviving Spouses”

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How the SECURE Act Impacts Your Estate Plan

The SECURE Act made major changes to beneficiary distributions you should consider in your estate plan.

The SECURE Act has made big changes to how certain retirement plans, such as IRAs, 401(k)s, and 403(b)s, distribute after death. Anyone who owns such a retirement plan, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.  Our firm has mentioned the SECURE Act in past blogs, such as here:  https://galligan-law.com/proposed-ira-rules-and-their-effect-on-stretch-iras/ on Kevin’s Korner and will address the impact of these changes in the future, but today I wanted to focus on some key issues as mentioned in the article.

First, the SECURE Act means changes to some existing estate plans, especially ones including provisions creating conduit trusts that had been created to hold retirement plan death benefits and preserve the stretch benefit, while the retirement plan owner was still alive.  Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust or to evaluate possible plans.

This first change will apply to many, many clients.  A typical client who may be affected by the SECURE Act is a parent creating a trust for their children’s inheritance.  These types of trusts typically serve to provide creditor or divorce protection for their beneficiaries while maximizing the tax benefits of stretching the retirement.  Now that the stretch benefit may not apply to a beneficiary, it may make sense to alter the trust to maximize asset protection instead of the tax savings that are no longer available.  If you have this situation, you definitely want to review your plan.

Another potential strategy for clients who are including charities in their estate plan be making a charity the beneficiary of the retirement account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation to heirs.

One more creative alternative is to pay the retirement account balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.  This is a more complex strategy, but may be effective for charitably minded clients.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the stretch treatment for beneficiaries inheriting retirement plans after 2019. Most beneficiaries who inherit a retirement account after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch retirement payments out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the retirement account continued to grow tax free.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the retirement assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many retirement account owners to bequeath a large retirement balance completely to their heirs. Others, with larger retirement accounts, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, disabled heirs and some individuals not less than 10 years younger than the account owner. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the retirement plan and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. If you believe these changes affect you, contact our office at 713-522-9220 to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

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The Biggest Estate Planning Mistakes to Avoid

Some of the biggest estate planning mistakes are easy to avoid, including having an up-to-date will, checking beneficiary designations and planning younger.

Nobody likes to plan for events like aging, incapacity, or death. However, failing to do so can cause families burdens and grief, thousands of dollars and hundreds of hours.

Fox Business’ recent article, “Here are the top estate planning mistakes to avoid,” says that planning for life’s unexpected events is critical. However, it can often be a hard process to navigate. Let’s look at the top estate planning mistakes to avoid, according to industry experts:

  1. Failing to sign a will (or one that can be located). The biggest mistake is simply not having a will. I’ve written on this often (see here for example https://galligan-law.com/everyone-needs-an-estate-plan/), but unfortunately clients consistently say they didn’t think they needed a will. Estate planning is critically important to protect you, your family and your hard-earned assets—during your lifetime, in the event of your incapacity, and upon your death.  In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning error is simply losing a will. Make sure your family has access to your estate planning documents.
  2. Failing to name and update beneficiaries. An asset with a beneficiary designation supersedes any terms in a will. Review your 401(k), IRA, life insurance, and any other accounts with beneficiaries after any significant life event. If you don’t have the proper beneficiary designations, income tax on retirement accounts may have to be paid sooner. This may lead to increased income tax liability, and the designation of a beneficiary on a life insurance policy can affect whether the proceeds are subject to creditors’ claims.  In many cases where clients tried to avoid probate, one broken beneficiary designation becomes the sole reason to probate the will.

There’s another mistake that impacts people with minor children, which is naming a guardian for minor children and then naming that person as beneficiary of their life insurance, instead of leaving it to a trust for the child. A minor child can’t receive that money. It also exposes the money to the beneficiary’s creditors and spouse.

  1. Failing to consider powers of attorney for adult children. When your children reach age 18, they’re adults in the eyes of the law. If something unfortunate happens to them, you may be left without any say in their treatment. In the event that an 18-year-old becomes ill or has an accident, a hospital won’t consult with their parents if a power of attorney for health care isn’t in place. Unless a power of attorney for property is signed, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could create an issue when your child is in college—especially if he or she is attending school abroad. It is very important that when your child turns 18 that you have powers of attorney put into place.

If you have any of these estate planning mistakes in your plan, please contact us for a consultation to fix these mistakes for you and your family.

Reference: Fox Business (October 15, 2019) “Here are the top estate planning mistakes to avoid”

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