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Social Security, Estate Planning and the Bipartisan Budget Act of 2015

Estate Planning

Social Security is a massive program codified in federal law that purports to give all Americans (yes, this includes Saginaw, Bay City, and Midland) minimal assistance.  Of late, some have feared that the financial security of our own Social Security system is in danger.  Congress, it seems, annually tinkers with Social Security and the latest attempt to help with Social Security’s financial security is the Bipartisan Budget Act of 2015 signed by President Obama on November 2, 2015.

As part of our estate planning advice, we commonly evaluate and discuss possible Social Security benefits with our clients.  A couple of important strategies that were in play have been removed in the Bipartisan Budget Act of 2015 in the name of closing “loopholes”.  This blog deals with the limited aspects of the Bipartisan Budget Act of 2015 regarding these Social Security strategies (“loopholes”) and their impact on estate planning.

Social Security is not financially intuitive.  It appears to be designed to favor a non-working spouse.  For example, a single person will pay the same Social Security tax as a married person, assuming they earn the same amount of money.  If the married person’s spouse does not work, that person ends up with an individual benefit equal to the single person plus a substantial spousal/family benefit that the single person does not have even though it is not paid for.  In the private world, family and spousal benefits would typically cost more money in premiums or result in a reduction in payout.  This general premise is not affected by the Bipartisan Budget Act of 2015.

The law as it applies to widows or widowers is also not changed, they will continue to have the opportunity to restrict an application to only widow benefits or only retirement benefits and later, switch to the other benefit.

The spousal benefit referred to above allows a spouse when they reach their full age of retirement to receive one-half of the benefits their spouse is entitled to.  This included a divorcee if they were married to a spouse entitled to benefits for 10 years or more.  Married workers then had the opportunity to look at and strategize with their own benefit package versus their spousal benefits package.  These strategies include the (1) Restricted Application and (2) Voluntary Suspension.

“Restricted Application” refers to a process in which a person can file for spousal benefits when they reach the full age of retirement and allow their own retirement benefits to continue to appreciate until age 70.  This strategy applied to individuals that were eligible for both a spousal benefit and eligible based on their own work record.

“Voluntary Suspension” refers to the procedure where a wage earner files for Social Security benefits to establish the amount of benefit but suspends receiving payments so their personal Social Security benefit amount would continue to grow (about 8% increase in monthly payment per year of deferral) through age 70.  The spouse of this wage earner could then claim one-half of this amount when he or she reached their full age of retirement.

As indicated above, the Bipartisan Budget Act of 2015 limits both Restricted Application and Voluntary Suspension strategies.  The law has created three categories of persons: (a) those born before May 1, 1950; (b) those born after May 2, 1950, but before January 2, 1954; and (c) those people born after January 2, 1954.

For those people born before May 1, 1950, there will be no change so long as they apply immediately.

For people born on or after May 2, 1950, but before January 2, 1954, there are limitations.  They can still do a Restricted Application under the new law, meaning a spouse can elect a spousal benefit at full retirement age and then begin taking their own Social Security benefit at age 70, thus having the benefit of receiving Social Security at full retirement age and then having the accumulated benefit (roughly 8% a year) annual increase at age 70.  However, if a wage earner elects Voluntary Suspension, all benefits, including spousal and family benefits, are suspended.

For people born on or after January 2, 1954, there is no Restricted Application option.  Voluntary Suspension suspends the benefits of the spouse and children.  Because there is no Restricted Application, there is no opportunity for a spouse to receive spousal excess.

A couple of things to note are that under the old law, you could suspend the benefits and then retroactively claim the benefits if there was a major change.  This is no longer available.  However, you can still suspend the benefits and then unsuspend them without a retroactive effect.

What can be done now?  If you were born on or before May 1, 1950, you should immediately contact your wills and trusts attorney to determine whether or not you should file either a Restricted Application and/or a Voluntary Suspension.  If you were born on or after May 2, 1950, it is still a good idea to contact your wills and trusts or estate planning attorney for a review.  Whether or not you have a Social Security issue, a comprehensive estate planning review of your will, trust, and assets should be done at least every three years.