How Can Social Security Help With Estate Planning?

The Social Security Administration (SSA) oversees benefits for elderly and disabled individuals, which influence your estate and should be considered in your estate plan. These benefits include supplemental income, disability benefits, retirement income, and survivor benefits.

Let’s talk about how Social Security benefits have an impact on your estate, their taxation law, and how you can maximize your estate plan to make the most out of Social Security. 

The Role of Social Security in Estate Planning

Estate planning is a crucial component of securing financial stability for oneself and loved ones. It involves making legal arrangements that dictate how an individual’s assets and responsibilities will be managed or distributed in the event of death or incapacitation. 

While much of estate planning focuses on tangible assets like property, investments, and bank accounts, one often overlooked aspect of it is Social Security. 

Social Security is a government-backed system providing financial support and integrating it into estate planning provides several advantages. These include:

1. Providing Income in Retirement

Social Security offers a dependable source of income for retirees. The benefits an individual receives are determined by their lifetime earnings and the age at which they choose to begin drawing on these benefits. 

Retirees can start receiving social security as early as age 62, although delaying benefits until full retirement age or up to age 70 results in a higher monthly payout.

From an estate planning perspective, Social Security reduces the need to rely heavily on other retirement savings, such as pensions or personal investments. It helps retirees to preserve or strategically distribute their real estate, retirement accounts, business interests, and other assets. 

2. Survivor Benefits for Family Members

Social Security also provides ongoing financial support to eligible family members, including a deceased worker’s spouse, children, and sometimes parents. For families, this serves as an essential lifeline during a difficult time, especially if the deceased was the primary breadwinner.

Spouses may be eligible to receive survivor benefits as early as age 60, or as early as 50 if they are disabled. Minor children also qualify for benefits until they reach the age of 18 (or 19 if still enrolled in secondary education).

These payments cover essential living expenses, education costs, and other financial needs, and reduce the risk of economic hardship for the family.

3. Disability Benefits as a Safety Net

Social Security provides disability benefits to individuals who become unable to work due to a qualifying medical condition. Through the Social Security Disability Insurance (SSDI) program, disabled workers and their families can receive monthly payments designed to offset the loss of income. 

These benefits not only provide financial stability for the disabled person but also reduce the strain on other estate assets that might otherwise be liquidated to cover living expenses.

Social Security and Tax Considerations in Estate Planning

The federal government taxes Social Security benefits based on your combined income, which includes your adjusted gross income (AGI), non-taxable interest, and half of your Social Security benefits.

Tax thresholds for Social Security benefits are as follows:

1. Single filers:
   • If combined income is between $25,000 and $34,000, up to 50% of benefits are taxable.
   • If combined income exceeds $34,000, up to 85% of benefits are taxable.
2. Married filers (joint):
   • If combined income is between $32,000 and $44,000, up to 50% of benefits are taxable.
   • If combined income exceeds $44,000, up to 85% of benefits are taxable.

In addition to federal taxes, some states also impose taxes on Social Security benefits. As of recent data, 41 states and the District of Columbia do not tax Social Security benefits. 

However, Minnesota, Utah, Colorado, Virginia, and a few other states apply taxes depending on income thresholds. If possible, you may consider relocating to a state that exempts Social Security benefits from taxation. 

How to Maximize Social Security Benefits for Estate Planning

Given that Social Security represents a guaranteed, inflation-adjusted income stream, decisions regarding how and when to claim benefits should be made very strategically.  Below, we discuss key strategies to make the most out of these benefits. 

Choose an Optimal Time for Claiming Benefits

Benefits can be claimed at age 62, but doing so results in a permanent reduction in monthly payments. Conversely, delaying benefits past your full retirement age (66 or 67, depending on birth year) leads to an increase of up to 8% per year until age 70.

In a dual-income household, one spouse can claim benefits early while the other delays so you get both immediate income and long-term benefit growth.

Individuals with a family history of longevity benefit more from delaying benefits, while those with health concerns can opt for earlier access.

Coordinate With Other Retirement Accounts

Social Security should not be viewed in isolation. Effective estate planning requires balancing it with distributions from other retirement accounts, such as 401(k)s, IRAs, and pensions.

Retirees who delay Social Security draw more heavily from tax-advantaged retirement accounts earlier in retirement. It potentially reduces Required Minimum Distributions (RMDs) and the associated tax burden later on.

Consider withdrawing from tax-deferred accounts before RMDs begin at age 73 (as per the SECURE 2.0 Act) to smooth out taxable income over time. 

Alternatively, convert traditional IRA or 401(k) funds to Roth accounts, which offer tax-free withdrawals. Distributions from Roth IRAs or Roth 401(k)s do not count toward combined income for Social Security tax calculations. 

Create a Comprehensive Estate Plan

Social Security benefits should be integrated into a broader estate plan that accounts for assets and liabilities. This plan should include key documents like wills, trusts, and durable powers of attorney.

For a comprehensive estate plan: 

• Calculate projected Social Security benefits alongside other income sources to determine how much of your estate can be preserved or passed on.
• Beneficiaries with special needs or complex financial situations should establish trusts to protect assets while ensuring they remain eligible for government benefits.
• Ensure that your estate plan includes provisions for incapacity, such as appointing a financial power of attorney to manage Social Security benefits if needed.

Choose Beneficiary Designations 

While Social Security benefits cannot be directly inherited, survivor benefits are important in estate planning for spouses and dependent family members.

A surviving spouse may receive either their own benefit or the deceased spouse’s benefit, whichever is higher. Couples should coordinate benefit timing to maximize survivor benefits.

Minor children are entitled to survivor benefits if a parent passes away. Ensuring children are properly listed in estate documents prevents delays in accessing these benefits.

Consider Minor and Dependent Beneficiaries

Social Security provides financial support to minors and other dependents for families with young children or dependents with disabilities.

Survivor benefits for minor children that continue until age 18 (or 19 if still in school) require a legal guardian to manage funds, which makes the appointment of guardianship in your will essential.

Individuals with disabilities receive Social Security Disability Insurance or Supplemental Security Income. Creating a special needs trust ensures that these individuals can receive benefits without jeopardizing eligibility for government assistance.

Select an Advanced Designation

An advance designation of a representative payee allows you to choose someone to manage your Social Security benefits if you become unable to do so in the future due to illness, disability, or incapacity.

You can name one or more individuals as your representative payee in advance. The representative payee is responsible for ensuring your benefits are used for essential needs, such as housing, food, medical care, and personal expenses.

Contact the SSA and make an advance designation of a representative payee via phone, visiting the website, or scheduling an appointment at a local SSA office. 

When to Seek Professional Help?

Mistakes when applying for Social Security result in higher taxes or insufficient financial protection for your loved ones. 

Here are key situations when you need professional assistance to ensure you don’t lose any assets:

• You are unsure whether to claim benefits early or delay until age 70 and require guidance on coordinating spousal/survivor benefits.
• You are close to the income threshold that triggers Social Security benefit taxation and therefore, need a tax-efficient withdrawal strategy.
• You want to prevent Required Minimum Distributions from increasing your taxable income.
• You have minor or special needs dependents for whom you’re considering trusts or guardianship appointments.
• You have been divorced and need to understand how Social Security benefits are affected by your marital history.
• You are applying for or appealing a denial of disability benefits for a dependent. 

Why Choose Birch Grove Legal’s Services?

At Birch Grove Legal, we specialize in helping clients integrate Social Security into a comprehensive estate plan. Here’s what you can expect when you work with us: 

• We assess your Social Security benefits, retirement assets, and tax obligations to develop a personalized strategy.
• Your life circumstances and estate planning needs are unique. Therefore, we create custom estate plans according to your situation.
• As your life and financial circumstances evolve, so should your estate plan. We provide ongoing support to adjust your plan as needed. 

Sounds helpful? Contact us today to book your free consultation.