Maximizing Social Security Benefits

By Monte Schatz

Changes in legislation always require an adjustment period and time for understanding.  The Social Security Administration approved legislation in October 2016, effective January 2, 2017.  Their changes affected six major areas: payments, tax cap, earnings limit, maximum benefit, double claims, and suspended payments.

  1. Payments. The payments change is a 0.3% increase which although modest amounts to an average of $5 per retired claimant per month. This change also affects the maximum possible benefit for retirees, increasing by $48 per month.
  2. Tax Cap. The tax cap increase changes the amount of income, upon which the 6.2% earnings tax applies, from $118,500 to $127,200. This increase results in an average additional $45 of tax withholding monthly if you earn more than $127,200 annually. There are no changes to the withholding amounts if you make less than the previous limit.
  3. Earnings Limit. The earnings limit is affected by two major changes.
    • The first is an increase in the allowed amount for those receiving benefits but not yet at full retirement age (65 and younger) from $15,720 to $16,920. The $1200 annual increase allows a worker to earn this additional amount annually, before being subject to decreased monthly social payments.
    • The second earnings limit change reduces the payment withholding to $1 for every $3 earned in excess of $16,920.  Previously, payment withholding was assessed on $1 for every $2 limit of earnings in excess of the full retirement age limit
  4. Maximum Earnings. The earnings the reduction of payment withholding will be  particularly beneficial for those who elect to defer receiving benefits at full retirement age (66 years of age and older). Benefits for those who elect to wait until full retirement age increases by $3000 annually to a limit of $44,880.
  5. Double Claim. The double claim adjustment seeks to close a previous loophole which allowed individuals to claim spousal payments at an early age and then claim individual payments after reaching full eligibility age. This change removes the ability to elect a different payment option for married retirees and automatically entitles the recipient to the higher of the two at the time they elect to receive.
  6. Suspension Procedure. Finally, the changes to the suspension procedure prevents an individual from filing for retirement and then suspending receipt of benefits. This previously allowed a recipient to suspend their benefits until they reached the full benefit age while still collecting allowing their spouse or dependent to benefit at the reduced level. Other than an exception for divorced spouses, if the entitled recipient elects to suspend benefits, all related family entitlement will be suspended for the same period.

With these changes, it is important to understand the impact on individual retirement planning. The most significant long term change is the increase in earnings limit, expected to impact twelve million wage earners.  If your income exceeds the previous limit you are now subject to a tax on more of your earnings, although this tax is nominal it does affect retirement planning.  With a decrease in available net earnings, if earning more than $118,500 a careful review of planned retirement investment amounts is necessary for your own personal portfolio.

The other significant change is the combination of suspension payments and double claim rules.  A best practice to maximize social security benefits for retirement is to wait to claim until full benefit age is reached and not just retirement age.  This practice continues to be the more prudent decision if health and ability restrictions do not limit your capacity for earning.  The new wait and suspend changes, your monthly total benefits will be higher but you will not be able to double dip meaning you cannot have one wage earner and one benefit recipient in the same household.  A careful review of financial status and evaluation of ability to wait and receive both payments at the higher amount instead of both at a reduced amount is a beneficial practice for retirement future.

© 2017 Vandenack Weaver LLC
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Selection of Asset Protection Trust Jurisdiction

By Monte L. Schatz

A lawsuit for wrongful death and negligence was filed February of 2017 in the Los Angeles Superior Court by parents of their 21 year old son who drowned July of 2015 in the pool of celebrity Demi Moore’s Beverly Hills residence. The suit is being filed against two individuals (Demi Moore’s employees who managed the house) as well as the Tree House Trust. Moore’s property was strategically titled in this trust for asset protection purposes. Moore is not likely to be named individually in the lawsuit because of her residence being held in an asset protection trust.

Most clients should consider effective asset protection strategies. Asset protection requires many legal and tax considerations unique for each client’s situation.

Historically, many trusts placed heavy reliance upon trust spendthrift clauses. These clauses often protected the trust from creditors from satisfying judgments against property held within the trust. However, once a distribution is made from the trust to a beneficiary, the creditor can attach those distributed trust assets to satisfy their judgments. Also, many states exempt certain classes of creditors as a matter of public policy from spendthrift provision. Examples include creditors who have provided essential services, or individuals who have judgments for unpaid alimony or child support liens.

Irrevocable asset protection trusts can provide additional protection from creditor claims. Asset protection trusts can be “domestic” or “offshore”. Before 1997, most asset protection trusts were set up in “offshore jurisdictions” outside the United States and generally were used by only the extremely wealthy. In 1997, Alaska adopted the first state laws for “domestic asset protection” statutes. Many states have since adopted similar laws and other states are considering adopting asset protection laws. The primary differences between the two types of asset protection trusts is that domestic asset protection trusts are not as likely to raise concerns with the IRS as offshore asset protection funds. Creditors may have a more ability to attack a domestic asset protection trust as they are within United States jurisdiction, the fact remains assets are kept offshore in a secure account is something that will raise IRS scrutiny due to prior historical IRS tax evasion scams utilizing offshore trusts.

© 2017 Vandenack Weaver LLC
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Proposed Basis Consistency Regulations

The Internal Revenue Service released proposed and temporary regulations to further consistency in the reporting of the tax basis of certain property received by a beneficiary of an estate or trust. These regulations provide guidance regarding the basis consistency requirements under IRC 1014(f) and reporting requirements under IRC 6035.

For estates with tax due after July 31, 2015, the executor or trustee is required to file Form 8971 indicating information about the beneficiaries, the property to be acquired by the beneficiaries, and the estate tax value of the property. The initial basis of the beneficiary may not exceed the basis reported to the IRS on such form. The executor is also required to furnish a statement (Schedule A of Form 8971) to each beneficiary who will acquire property from the estate including the value of the property. Estates filing tax returns to elect portability for a surviving spouse are not required to file the basis consistency reports. The regulations also establish penalties for inaccurate basis reporting and failures to furnish correct statements.

 Generally, Form 8971 must be filed with the IRS no later than 30 days after the estate tax return is due or filed and is required to be filed separately from the estate tax return. Effective March 23, 2016, the IRS announced that additional time will be granted to estates currently required to file Form 8971 and delayed the time to file and furnish the statement to beneficiaries until June 30, 2016.

© 2016 Vandenack Williams LLC
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New Nebraska Law for Accessing Digital Assets of Deceased

On April 13, Nebraska passed legislation for handling digital assets for those that die or become unable to manage their own assets. LB 829 authorizes four types of individuals to manage the digital assets, similar to how they would manage tangible property, for the deceased or incapacitated. This law follows the Revised Uniform Fiduciary Access to Digital Assets Act, as finalized by the Uniform Law Commission in 2015.

Prior to this law, managing the digital accounts of the deceased was difficult and time consuming, especially in situations where the fiduciary does not have the passwords for the deceased. This new law works in conjunction with Nebraska probate, guardianship, trust, and powers of attorney laws. For executors or administrators of deceased individual estates, court-appointed guardians or conservators, agents appointed by a power of attorney, or a trustee, they will now have a legal basis for accessing digital assets.

When a fiduciary is in a situation needing to access the deceased digital assets, the law creates a tiered system for access. Generally, if the digital asset has an online portal maintained by a third party that allows the user to grant access to another, those rules take priority. However, failure to use such an option or if no tool exists, the new statutory power granted to the fiduciary will apply.

© 2016 Vandenack Williams LLC
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Preventing Financial Abuse of Elders

Elder abuse can take many forms, but according to a True Link report, 36.9% of elder abuse takes the form of financial abuse in any five year period. This same True Link report estimates that financial abuse of elders costs $36.48 billion, annually. One particularly challenging area of financial elder abuse stems from high-pressure selling tactics for estate planning tools, such as living trusts, that are unnecessary for the senior.

Although living trusts have many benefits, the seniors targeted by the high pressure sales tactics tend to have few transferrable assets, which makes the benefits of having a living trust relatively small. What’s worse, when a sales tactic is successful and the senior signs up for a living trust, usually that relationship leads to an estimated $2,000 of needless financial products sold to that senior for every $20 lost to the initial exploitation. Overall, this type of financial elder abuse costs seniors an estimated $17 billion dollars, with trust abuse at $6.7 billion, annually.

For elders, prior to agreeing to a living trust or other financial vehicle, speaking to another financial professional will aid in combating these abusive sales tactics. Moreover, if you purchase a living trust agreement in a location other than the seller’s place of business, you have three days to cancel the deal. Finally, take the time to verify any facts presented in a high pressure sales effort.

© 2016 Vandenack Williams LLC
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Using Intra-Family Loans to Transfer Wealth

Intra-family Loans can be a great opportunity for families to give their children or relatives additional funds, or if a relative is looking to make a significant purchase, a relative can borrow from a member of the family at a much better rate than going to a financial institution. Most individuals are familiar with the idea of making gifts to their children or relatives of an amount below the annual gift exclusion of $14,000, but those seeking to make transfers to their family that exceed the annual exclusion should be considering intra-family loans because of current low interest rates.

If making such a loan, the loan should be properly documented and interest must be charged and paid. If these requirements are not met, the Internal Revenue Service (“IRS”) may recharacterize the loan as a gift. If treated as a gift, the loan will reduce the lender’s gift and estate tax exemption or may cause the gift to be taxed at the current gift tax rate of 40%. It is recommended that the loan be documented with a promissory note and a fixed payment schedule. An interest rate equal to or above the Applicable Federal Rate (AFR) must be charge on the loan. The AFR will depend on the length of the loan. For loans with an annual compounding interest, the January interest rates are as follows: short-term (< 3 years): .56%; mid-term (3-9 years): 1.68%; and long-term (> 9 years): 2.61%. The recommended length and structure for repayment of the loan will likely depend on the AFR at the time of the loan, the financial needs of the lender, and the funds available to the borrower.

As an example of the effectiveness of such a loan, Parent makes a loan to Child for $500,000 and Child invest such funds with an annual return of 5%. If the loan is for a term of 9 years with a balloon payment at the end of such time, the applicable January mid-term rate would be 1.68%. At the end of the 9 year period, Child would have $775,664. The payment due on the loan would be $580,885. Child nets $194,779. Parent would be required to report the amount of interest, $80,885, as interest income.

While current rates remain low, it is likely that the rates will increase over the course of 2016. If you want additional information or would like to take advantage of the current interest rates, contact the attorneys at Vandenack Williams LLC.

© 2015 Vandenack Williams LLC
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New Considerations for Planning with a Special Needs Trust

Special needs trusts remain a critical planning tool for individuals with disabilities, or parents with children that have disabilities. Moving into 2016, a multitude of changes are occurring within the law that require a practitioner to at least review the potential complications. These changes involve ABLE accounts, state-based entitlement programs, or even potential complications with veterans’ benefits. However, of particular concern is the revamped Social Security Administration special needs trust review process.

In 2014, the Social Security Administration (SSA) started routing all Supplemental Security Income applications that include a trust to the Regional Trust Reviewer Team. This was a response to criticism that the prior system, which simply allowed the local office to review based upon their interpretation of the Program Operations Manual System (POMS) trust guidelines, was inconsistent. As a result of the new system, unintended consequences recently started surfacing. For example, the SSA is now retroactively rejecting previously approved trusts under the redefined policy interpretations. This means special needs trusts must meet the new interpretations of the POMS trust guidelines, otherwise risk having the disabled individual disqualified from government benefits.

For those considering a special needs trust to plan for an individual with a disability or those that currently have a special needs trust, this new review process requires considering whether the redefined trust rules would disqualify the individual from receiving government benefits. If questions arise about amending a special needs trust or the process taken by a regional reviewer, an individual should consult with a trust attorney.

© 2015 Vandenack Williams LLC
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Changes to Social Security Opportunities in Budget Act

by Joshua A. Diveley

On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 (the “Act”). Included in the Act were multiple changes that will remove strategies previously utilized to increase social security benefits available to individuals. The changes will affect individuals who will turn 62 in 2016 or later.

First, the Act removes the ability to utilize the “Claim Now, Claim More Later” strategy. Under this strategy, a spouse with lower earning history applies for worker’s benefits, and the spouse with a greater earning history, and who has retained full retirement age, files a restricted application for spousal benefits. This strategy permits the spouse with greater earnings to delay receipt of his or her own worker benefits, which causes delayed retirement credits to accumulate and creates the opportunity for significantly greater benefits at age 70. Upon reaching age 70, the spouse who has delayed benefits can then apply for his or her benefits, which will have increased due to the delayed retirement credits.

Second, the Act removes the ability to utilize the “File and Suspend” strategy. Under File and Suspend, the spouse with greater earnings applies for benefits at full retirement age and then immediately suspends receipt of benefits until age 70. This permits the spouse with lower earnings to receive spousal benefits while the spouse with higher earnings accumulates delayed retirement credits, which creates significantly greater benefits at age 70.

The changes under the Act affect individuals who will turn 62 in 2016 or later. Anybody that is 62 or older prior to December 31, 2015, may still be able to utilize the Claim Now, Claim More Later or File and Suspend strategies.

© 2015 Houghton Vandenack Williams
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To Gift or Not to Gift: A Year End Question

By Mary E. Vandenack

A long time estate planning strategy is to use the annual exclusion ($14,000 for 2015) as a method to transfer assets to heirs during life in an effort to reduce estate size and ultimate estate size. In 2015, donors have a lifetime exemption of $5.43 million. If married, each spouse has a $5.43 million exemption for a total combined exemption of $10.86 million.

For those individuals who still have estate over the lifetime exemption amount, annual exclusion gifting may still be a good idea; however, consideration should also be given to income tax consequences. When a donor transfers a gift to a beneficiary, the donee (recipient of gift) receives a transferred basis.

By way of example, consider that Donor James wants to make an annual exclusion gift to each of his three children equal to $14,000. He transfers cash to Orvis and Ollie but transfers a share of X stock to Orin. The X stock has a fair market value of $14,000 but a basis of only $1,000. As a result, the gift to Orin carries with it a tax burden of approximately $5,000, which means his net gift is really only $9,000.

At Donor James death, the share of X stock will get a step-up in basis to its fair market value of $14,000. Thus, if the stock is transferred to one of James’ children the day after death, there is no tax liability that transfers with the gift. Orin can sell the stock with no gain.

For those who are now under the estate tax exemption amounts, annual exclusion gifting during lifetime may actually result in your beneficiaries receiving less in the long-term than if the estate passes at death. For those with estate tax exposure, annual gifting remains good planning but consideration should be given to the most leveraged and tax effective approach to using annual exclusions.

© 2015 Houghton Vandenack Williams
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Priority for the Right of Distribution of Remains and Funeral Arrangements

Provisions have been adopted to the Nebraska Probate Code that clarify who has authority to make decisions regarding a decedent’s funeral or disposition of remains. Section 30-2223 provides that by affidavit or will, any person who is eighteen years of age or older may direct the location, manner, and conditions of disposition of his or her remains, as well as the arrangements for funeral goods and services to be provided upon his or her death.

In carrying out the decedent’s directions for disposition of remains or funeral services, the power is vested in any person who is designated by the decedent. If no one is designated or the person designated fails to act, the Legislature has provided a priority list for the exercise of the power. First priority is the surviving spouse, followed by the decedent’s children. If there are no children or surviving spouse, the priority goes to related parties (parents, siblings, grandparents, or the next closest relative). If none of the above are available, the guardian of the decedent, the personal representative, or other representatives will have the power.

Any person entitled to the right of disposition shall forfeit the right if it is not exercised within the earlier of three days after notification of death or four days after the decedent’s death. The right of disposition is also forfeited if the person was estranged from the decedent, as determined by a county court. There are also provisions allowing a court to handle disputes over the right of disposition and notwithstanding the priority listed above or the designation by the decedent, the court has the power to award the right to a person who the court determines to be most fit and appropriate.

For additional information see, Neb. Rev. Stat. 30-2223, available at http://nebraskalegislature.gov/laws/statutes.php?statute=30-2223.

© 2015 Houghton Vandenack Williams
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