Paul O. Dillon, Attorney at Law

Estate Planning Myths Debunked

Estate planning is intimidating to people who think it’s only for the wealthy or don’t want to consider their own mortality. However, not addressing estate planning can cause families to suffer everything from the expense of estate battles to fractured families. A recent article from Forbes, “10 Estate Planning Myths You Shouldn’t Believe,” addresses the most common myths.

Estate planning is for the wealthy. Many articles focus on strategies to avoid paying the federal estate tax, which is only an issue if your estate is worth more than $12.92 million. However, estate planning is also about three things: planning for your finances to be taken care of if you’re incapacitated, making sure your health care decisions are carried out the way you want even if you aren’t able to communicate your wishes and making sure that your children and other heirs are cared for when you die. Estate planning is for anyone who may become seriously ill or die, which means everyone.

You’re too young for estate planning. The news is filled with stories of celebrities who die unexpectedly before creating a will. We never know when we may need estate planning.

If you die without a will, the state will get your assets. If you die without a will, each state applies intestacy laws to determine who inherits your property. You or your family may not like how the law distributes property. However, there won’t be anything they can do about it. Even if you don’t care about your property, if you have minor children, you need a will to determine who would be the guardian of your children if both parents die. Otherwise, the court will decide for you.

You don’t have to worry about probate if you have a will. This is wishful thinking, as probate can be long and expensive, especially if more than one court decides about your assets. While a will gives the court guidance on your wishes, it doesn’t avoid probate entirely. A will becomes public information that can be easily contested in court. If you own property in more than one state, each property may have to go through probate in its respective state.

You can draft these documents without an attorney. Yes, there are many forms online, and your hospital may have forms available for Health Care Proxy. However, you may be creating more problems than you solve by doing so. There are nuances in health care decisions not addressed by standard forms. Wills and trusts need the guidance of an experienced estate planning attorney to ensure that the documents align with state laws and accurately reflect your wishes.

No one needs an estate planning lawyer. There may be complicating issues in your life you are unaware of. An experienced estate planning attorney needs to review any estate planning documents to prevent problems for you and your family. Estate planning practitioners are accustomed to families coming for help after a do-it-yourself estate plan has gone wrong.

To avoid probate, you need a trust. Jointly owned property generally passes to the other owner without going through probate, as do assets with beneficiary designations, including life insurance, annuities and retirement plans, like 401(k)s and IRAs. Each state has its own rules for titling property to facilitate the transfer when a joint owner dies.

Trusts avoid estate taxes. If you’re worried about having a taxable estate, talk with an experienced estate planning attorney. Certain trusts can be part of a strategy to reduce and sometimes eliminate estate taxes.

You don’t have to worry about the estate tax. You may not need to worry about the federal estate tax, but some states have their own estate tax with far lower thresholds. Add in the value of your home, life insurance proceeds and retirement accounts. Then, talk with an estate planning attorney.

You’ll have to pay a gift tax if you give someone more than $17,000 annually. If you give an individual more than $17,000 in a single year, you reduce your federal lifetime gift and estate tax exclusion amount. You must start paying a gift tax only after you use up the entire exclusion. You still have to file a gift tax return and keep track of how much you’ve reduced your lifetime exclusion amount, so to avoid the hassle, you may want to stay within the $17,000 annual amount.

There are many misconceptions about estate planning, all of which can be cleared up with an appointment with an experienced estate planning attorney. This is one part of your life where a skilled professional can make a big difference for you and your family.

Reference: Forbes (Oct. 2, 2023) “10 Estate Planning Myths You Shouldn’t Believe”

Tax Strategies for Different Stages of Aging

Defining “late old age” must consider factors like health, mental status, family history and plain old luck, says a recent article from Financial Advisor, “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age.” However, imagine this scenario: a person in late old age is often widowed and, if they are well-to-do, has more assets than they are likely to spend in their remaining years after accounting for reserves needed for long-term care.

At this stage, it’s important for the person to have an estate plan in place, with named beneficiaries on any retirement and investment accounts, and have taken steps to minimize taxes heirs will be liable for upon their death. If this planning has not been done yet, there’s still time—but there’s no time for delay.

Recent changes in the treatment of inherited retirement accounts and events like deaths, births, or marriages in the family mean every plan needs a close look at least annually. What else needs to be done?

• Directed, consistent, constant dollar levels of withdrawals from traditional individual retirement accounts (IRAs). This avoids being catapulted into a higher tax bracket. Charitable donations should be used, while enough IRA assets should be retained to take advantage of lower tax brackets coming in late old age.
• Topping off required minimum distributions (RMDs) with voluntary withdrawals to fund Roth conversions, starting when the individual was married, and the spouse was alive when couples enjoy more advantageous tax levels than singles.
• This is also the time to contribute to donor-advised funds (DAFs) or the family foundation by selling highly appreciated stocks. If one spouse’s death was anticipated, a share of appreciated stock held in joint accounts could be transferred to a separately owned account to gain the step-up at the spouse’s death.

After the work has been done and you enter late old age, there are three priorities to keep in mind:

• Be sure the beneficiaries in your IRA reflect your current preference and minimize the beneficiaries’ taxes from traditional IRAs.
• Confirm that the person named as your executor understands your investments and bequest preferences and is ready to take on the tasks to come in the future.
• In the case of imminent inheritance tax liability imposed by federal or state law, speak with your estate planning attorney about how a planned charitable gift or other means of minimizing estate taxes might be accomplished.

Can beneficiaries’ tax burdens be minimized? Consider these options:

• Switching IRA beneficiaries to grandchildren or younger family members in lower tax brackets, since non-spouse beneficiaries have only ten years to empty the accounts.
• Helping wealthy children who don’t need inheritances designate their children or others in the family’s next generation as beneficiaries of other non-IRA assets in the estate.
• Make a planned charitable gift to avoid federal and state inheritance taxes and capital gains taxes on appreciation the estate will owe before probate is completed.

An experienced estate planning attorney can handle legal filings after death. Nevertheless, the exact attorney needs to be part of the team, including a competent executor aware of your intentions and a financial advisor familiar with your assets and transaction history.

Reference: Financial Advisor (Oct. 3, 2023) “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age”

Why You Need to Include Digital Assets in Your Estate Plan

A new form of wealth, with different ownership, storage, and transferability terms, has created a new challenge for estate planning from traditional forms of wealth. These are digital assets, electronic records in which an individual has a right or interest, as explained in a recent article, “Planning for Digital Assets 101,” from Wealth Management.

Digital assets can be divided into two groups: sentimental digital assets and investment digital assets.

Sentimental digital assets are those with an emotional tie, like photos, videos, social media accounts, etc. For these assets, the goal is to provide access to loved ones after a person’s death. Some platforms allow settings to name a legacy contact. A list of accounts, usernames and passwords will be helpful for family members.

The IRS defines investment digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger, like a blockchain, or any similar technology as specified by the Secretary.” This type of asset includes cryptocurrency, stablecoins and non-fungible tokens.

The challenge of digital investment assets in estate planning centers on how they are owned and stored.

Digital assets are stored in digital wallets, web-based or hardware-based. “Hot wallets” are web-based and run on smartphones or computers. Many investors use them for small amounts of cryptocurrency and frequent trading. “Cold wallets” are hardware-based wallets stored on devices not connected to the internet, reducing the risk of unauthorized access. A cold wallet can only communicate with an internet-connected device when plugged in. An investor will have a seed phrase or backup code to access the cold wallet, which the owner must store in a secure place.

Understanding the storage system is essential for estate planning for two main reasons:

Beneficiary Access. The recipient of a gift or bequest of the digital asset must have access to the relevant storage device to access the actual investment. Sharing this information comes with an element of risk, as access is inherently tied to value.

Fiduciary Access. If only the owner has access, heirs will have no way to gain access to the digital assets when the owner dies. Digital exchanges don’t allow users to name a contact to access the investment information upon death. Most exchanges don’t have centralized entities to record information. If access is denied to the heir, the investment could be lost.

Transferring digital assets requires providing access to beneficiaries and/or fiduciaries. There are several ways to structure such a transfer while minimizing the risk of theft or loss.

Digital assets can be transferred to a Limited Liability Company, and subject to certain limitations, retain control of the digital assets' management by serving as LLC manager. Transferred LLC interests can also provide a mechanism to discount the value of the transferred interest. In addition, LLCs can provide asset protection since, in most states, LLCs protect a member’s personal assets from an LLC’s liabilities.

A directed trust is another way to transfer digital assets, while maintaining control and decision-making with the owner. In some states, a directed trust can have an “investment trustee” or “investment trust director” to exclusively handle investment responsibilities, including managing and storing digital assets.

Even using these two methods, someone other than the original owner must be granted access to the digital assets. One way to do this is by naming a “digital fiduciary”—someone tasked with managing the digital assets.

Estate plans involving digital assets must clearly outline heirs for the digital investment and its tangible storage devices. The assets can pass with the residuary, and complexities can arise if the residuary beneficiaries differ from tangible property beneficiaries who will receive the storage device. Speak with an experienced estate planning attorney to be sure that your digital assets are included in your estate plan.

Reference: Wealth Management (Sep. 19, 2023) “Planning for Digital Assets 101”

What Happens When the Second Parent Passes?

After doing everything right, including having an estate planning attorney prepare estate plans for her parents, a woman managed her mother’s affairs after her death in a matter of months. She expected the same when her father died, but some unexpected events occurred. A recent article from Business Insider, “I thought I was ready to wrap up my parents’ finances when they died. I was wrong,” provides some cautionary insights.

As their Power of Attorney, she managed her parents’ finances for several years before they passed, including placing most of their assets into irrevocable trusts. When her mother died, the trusts specified how the assets would be divided. A third went to the surviving spouse and a third to each of the two children. She was able to complete the transfer by phone with the investment company. She also filed her mother’s final tax returns and paid any outstanding bills.

She expected to have the same experience when her father died. However, she found that settling the second spouse’s affairs more complicated, even though she’d previously helped settle a second spouse's estate for her father-in-law.

Her father’s estate was more straightforward: he lived in an assisted living facility with few possessions. Transferring the remaining trust assets to her sister and herself took one phone call and outstanding medical bills were paid in a matter of months. However, problems arose.

Her father’s bank account wasn’t in the trust, and neither she nor her sister could access his bank account without a will. He had a trust but no will, so her sister had to go to court and be legally declared his next of kin before she could close the bank account.

Filing the final tax return was also a challenge. While getting his traditional mail was always a challenge, she had been able to find any paper documents in the past. She could not log into his online accounts, since digital assets were never addressed.

Getting a transcript from the IRS has been a long and complex process, and she’s hoping to get tax information in time to file by the tax extension deadline. As he died in 2023, she’ll have to do another set of tax returns next year.

Lessons learned:

Having a will and trust documents prepared by an estate planning attorney will make life easier. Designating an executor and/or trustee ahead of time can ease potential friction between siblings.

Gather all the paperwork. If parents are well enough and willing, gather financial paperwork, from tax records, bank and credit card information and login information to online accounts while they are still living.

Set realistic expectations. Don’t expect to complete all tasks quickly. It will take a few months and maybe longer to finalize taxes, sell property and deal with any outstanding legal or financial issues. Knowing it’s going to take time may make the process less frustrating.

Losing a parent is hard, and losing a second parent is often harder. Preparing for the estate planning aspects in advance can make a tough time a little easier.

Reference: Business Insider (Sep. 19, 2023) “I thought I was ready to wrap up my parents’ finances when they died. I was wrong.”

Seniors Be Careful: Elder Financial Exploitation More than Doubled Since COVID

Recent research from AARP shows the rate of elder financial exploitation has more than doubled since the start of the COVID pandemic, costing seniors age 60+ an estimated $28.3 billion annually, according to a recent article from Financial Advisor, “Rise of Financial Exploitation Presents New Challenges for Advisors.”

The size and scope of this problem make protecting seniors’ overall well-being, financial goals, and ability to meet their goals something all family members and professionals involved with seniors need to be aware of.

Becoming familiar with the most common forms of financial fraud and abuse will help seniors and their professional advisors, including estate planning attorneys, to be prepared. These include:

Power of Attorney or Fiduciary Abuse. When naming a Power of Attorney—a written consent permitting someone else to make decisions on their behalf—the person is expected to act in their best interest. Abuse of Power of Attorney or fiduciary abuse can lead to money being mismanaged or being spent on something other than a senior’s expenses and care.

Abuse by a Family Member. This is sadly common and can include identity theft, misappropriating funds for personal use, forging documents or checks, unauthorized use of a family member’s credit card, insurance fraud, financial coercion, etc.

Investment fraud. This is one of the top methods of financial exploitation and includes a number of tactics, from pump-and-dump schemes to investment opportunities offering guaranteed returns, and Ponzi schemes. It also includes affinity fraud, pretending to have things in common with a person to gain their trust, only to aggressively sell inappropriate or worthless investments once they’ve gotten the seniors’ trust.

Medicare or Medicaid fraud. This occurs in several different forms: paying for care never received, being charged multiple times for a service or medical device only received once, fraudulent claims submitted in a senior’s name, or being offered a product or service unauthorized by Medicare or Medicaid.

Homeowner Scams. These schemes include wire fraud, foreclosure or mortgage relief, reverse mortgages, home improvement and rental scams. Anyone soliciting a senior for a home improvement project because their company is “in the neighborhood” should immediately be identified as a scammer.

No one wants to see seniors exploited. However, they become more vulnerable to financial abuse as they age. While the topic of aging and money can be uncomfortable and even taboo for many, it’s a pivotal discussion to have with family members.

Reference: Financial Advisor (Sep. 26, 2023) “Rise of Financial Exploitation Presents New Challenges for Advisors”

Do I Have to Pay Taxes on Trusts?

Dealing with trusts and the tax implications for those who create them, and their beneficiaries can seem confusing. Nevertheless, with the help of an experienced estate planning attorney, those issues can be managed, according to a recent article, “5 Taxes You Might Owe If You Have a Trust,” from Yahoo! Finance.

Trusts are legal entities used for various estate planning and financial purposes. There are three key roles: the grantor, or the person establishing the trust; the trustee, who manages the trust assets; and the beneficiary, the person or persons who receive assets from the trust.

Trusts work by transferring ownership of assets from the grantor to the trust. By separating the legal ownership, specific instructions in the trust documents can be created regarding using and distributing the assets. The trustee’s job is to manage and administer the trust according to the grantor’s wishes, as written in the trust document.

Trusts offer control, privacy, and tax benefits, so they are widely used in estate planning.

There are two primary types of trusts: revocable and irrevocable. Revocable trusts are adjustable trusts that allow the grantor to make changes or even cancel during their lifetime. They avoid the probate process, which can be time-consuming and expensive, especially if assets are owned in different states. However, the revocable trust doesn’t offer as many tax benefits as the irrevocable trust.

Think of irrevocable trusts as a “locked box.” Once assets are placed in the trust, the trust can’t be changed or ended without the beneficiary’s consent. In some states, irrevocable trusts can be “decanted” or moved into another irrevocable trust, requiring the help of an experienced estate planning attorney. However, irrevocable trusts are not treated as part of the grantor’s taxable estate, making them an ideal strategy for reducing tax liabilities and shielding assets from creditors.

Trust distributions are the assets or income passed from the trust to beneficiaries. They can be in the form of cash, stocks, real estate, or other assets. For instance, if a trust owns a rental property, the monthly rental property generated by the property could be distributed to the trust’s beneficiaries.

Do beneficiaries pay taxes on distributions from the principal of the trust? Not generally. If you receive a distribution from the trust principal, it is not usually considered taxable. However, the trust itself may owe taxes on any income it generates, including interest, dividends, or rental income. The trust typically pays these before distributions are made to beneficiaries.

It gets a little complicated when beneficiaries receive distributions of trust income. In many cases, the income is taxable to the beneficiaries at their own individual tax rates. This can create a sizable tax wallop if you are in your peak earnings years.

There are ways to plan to minimize the tax consequences strategically. One approach is to structure trust distribution with a Charitable Remainder Trust, where income goes to a charity for a set number of years, and the remaining assets are then distributed to beneficiaries. An estate planning attorney will be a valuable resource, so grantors can achieve their goals and beneficiaries aren’t subject to overly burdensome taxes.

Reference: Yahoo! Finance (Sep. 27, 2023) “5 Taxes You Might Owe If You Have a Trust”

Estate Planning and Tax Planning for Business Owners

Business owners who want long-term financial success must navigate an intricate web of taxes, estate planning and asset protection. Pre- and post-transactional tax strategies, combined with estate planning, can safeguard assets, optimize tax positions and help strategically pass wealth along to future generations or charitable organizations, as reported in a recent article from Forbes, “Strategic Tax and Estate Planning For Business Owners.”

Pre-transactional tax planning includes reviewing the business entity structure to align it with tax objectives. For example, converting to a Limited Liability Company (LLC) may be a better structure if it is currently a solo proprietorship.

Implementing qualified retirement plans, like 401(k)s and defined benefit plans, gives tax advantages for owners and is attractive to employees. Contributions are typically tax-deductible, offering immediate tax savings.

There are federal, state, and local tax credits and incentives to reduce tax liability, all requiring careful research to be sure they are legitimate tax planning strategies. Overly aggressive practices can lead to audits, penalties, and reputational damage.

After a transaction, shielding assets becomes even more critical. Establishing a limited liability entity, like a Family Limited Partnership (FLP), may be helpful to protect assets.

Remember to keep personal and business assets separate to avoid putting asset protection efforts at risk. Review and update asset protection strategies when there are changes in your personal or business life or new laws that may provide new opportunities.

Developing a succession plan is critical to ensure that the transition of a family business from one to the next. Be honest about family dynamics and individual capabilities. Start early and work with an experienced estate planning attorney to align the succession and tax plan with your overall estate plan.

Philanthropy positively impacts, establishes, or builds on an existing legacy and creates tax advantages. Donating appreciated assets, using charitable trusts, or creating a private foundation can all achieve personal goals while attaining tax benefits.

Estate taxes can erode the value of wealth when transferring it to the next generation. Gifting, trusts, or life insurance are all means of minimizing estate taxes and preserving wealth. Your estate planning attorney will know about estate tax exemption limits and changes coming soon. They will advise you about gifting assets during your lifetime, using annual gift exclusions, and determine if lifetime gifts should be used to generate estate tax benefits.

Reference: Forbes (Sep. 28, 2023) “Strategic Tax and Estate Planning For Business Owners”

What Is Joint Life Insurance?

We never know what the future may bring, and waiting too long to investigate life insurance could leave loved ones in a financial bind, according to a recent article from Money, “What Is Joint Life Insurance and How Does It Work?” There are plans ranging from term and whole to individual and joint, and you’ll want to understand how each works before determining which policy best fits your needs.

Joint life insurance is a single plan covering the lives of two people with one premium, with the policyholders becoming each other's beneficiaries or passing benefits to their heirs. Depending on your coverage, these types of life insurance pay out death benefits when one or both of the policyholders dies.

This eliminates the need for separate policies for spouses or partners and minimizes paperwork and the underwriting and administrative costs associated with life insurance policies. This type of plan is often used for business partners, who can use the death benefit to fund the company if one of them dies unexpectedly.

Joint life insurance plans are usually permanent or whole-life policies and stay in effect as long as premiums continue to be paid or until the policy pays out. Investing in joint whole life insurance has certain advantages because it provides long-term certainty.

There are two kinds of joint life insurance—first to die and second to die.

A first-to-die life insurance policy pays a death benefit to the surviving policyholder when the other party dies. This ensures the living policyholder receives a payout, which can be used for living costs if the family’s primary income source is the first to die.

Situations where one spouse doesn’t qualify for life insurance may also make first-to-die life insurance a good idea. Insurance companies may be more willing to insure someone with pre-existing health conditions because there’s only one payout between two policyholders. However, the healthier spouse will most likely incur higher cost premiums with a joint policy than an individual plan.

The first-to-die joint policy terminates once the payout occurs, leaving the surviving spouse or partner without life insurance unless they have an additional individual plan. If the surviving party doesn’t have their own policy, they must purchase a separate policy to ensure their beneficiaries receive a death benefit.

Second-to-die life insurance, or survivorship life insurance, doesn’t pay out until both policyholders die. These plans are often used to leave money for beneficiaries or pay for funeral expenses. A second-to-die policy can be helpful with estate planning because heirs don’t pay estate tax on the death benefits unless they exceed estate tax thresholds.

Determining which policy best suits your family depends on several factors, including how you expect beneficiaries to use the proceeds. Life insurance policies should be part of a discussion with your estate planning attorney and align with your overall estate plan.

Reference: Money (Sep. 15, 2023) “What Is Joint Life Insurance and How Does It Work?”

Estate Plan can Ease Anxiety and Confirm Legacy

Creating an estate plan can take stock of today’s priorities while creating a legacy by clarifying intentions. This could mean providing for your family, supporting charitable organizations, or providing a means for future generations to know about your passions. Estate planning also addresses tax issues and can be used to reduce court involvement with your estate, according to a recent article from Worth, “Take Charge of Your Legacy With an Estate Plan.”

For most people, considering death is uncomfortable, but your estate plan is essential to those loved ones taking care of your estate. Nearly all wealthy Americans expect to leave money or other assets to their children. People who don’t consider themselves wealthy also intend to leave property to their loved ones.

Consider what happens when no estate planning is done. It took six years to settle the $156 million estate of singer Prince, who died without a will in 2016. A jury only recently finished determining the inheritance of Aretha Franklin, who left conflicting wills after she died in 2018. While the estate was being decided, it dwindled from an estimated $80 million to $6 million.

Having an estate plan can also alleviate anxiety, with a survey showing individuals with investible assets of $1 million—$10 million feeling more in control of their finances once they have an estate plan in place.

Creating an estate plan may be easier if you address parts individually. You may even have some parts in place already, such as details about ownership of bank or investment accounts and beneficiary designations.

All assets need to be recorded, including digital assets. The estate plan should include information on life insurance proceeds because there may be adverse tax implications for the estate if they’re not appropriately structured. For instance, life insurance proceeds are generally exempt from federal income taxes; they are included in the estate and could potentially bump the estate's value above the federal estate tax exemption. This can be avoided by transferring ownership of the policy to another person or establishing an Irrevocable Life Insurance Trust. Any transfer of life insurance policies made within three years of death is subject to federal tax, so this step needs to be considered carefully with the help of an estate planning attorney.

Don’t overlook the emotions of loved ones. Items with sentimental value often cause family strife, so create a distribution plan for possessions. Your last will and testament should include jewelry, artwork, and family heirlooms.

Part of your estate plan addresses what would happen if you become incapacitated. This includes Do-Not-Resuscitate instructions and other wishes for medical care. Everyone over 18 should have a Power of Attorney in place so someone can manage their legal and financial affairs in case of incapacity. There are different types of POAs; your estate planning attorney will know which best suits your needs.

Estate planning is a time to speak with family members about the role they can play in carrying out your legacy. A family meeting to discuss values, vision, and purpose can be helpful at any level of wealth, from endowing a new building at an alma mater to volunteer opportunities in the community.

Your estate plan is not a “set-it-and-forget-it” document. It should be reviewed annually and fine-tuned, especially when significant life changes occur, like marriage, divorce, death, the sale of a business, a change in the law, or a change in real estate ownership.

Reference: Worth (Sep. 22, 2023) “Take Charge of Your Legacy With an Estate Plan”

Social Security Cost of Living (COLA) Is Likely to Increase in 2024

Following two years when Social Security Cost of Living Adjustments (COLAs) soared to the highest levels in decades, beneficiaries should not be surprised by more modest increases in monthly payments in 2024, reports a recent article, “Social Security COLA 2024: How Much Will benefits Increase Next Year?” from AARP.

The inflation gauge used by the Social Security Administration (SSA) to set the annual COLA rose at a 2.6% annual rate for July and 3.4% for August. These are the first two of three months the SSA uses to determine the final increase, which will be announced more formally in October.

The August uptick was a bit higher than anticipated, and September’s inflation numbers are expected to rise to similar levels. Analysts expect a 2024 COLA of about 3 percent.

This may seem like a letdown for recipients. Still, COLA is calculated to exactly offset the price increases faced by consumers, measured by the Consumer Price Index, since the prior COLA was determined.

A 3 percent COLA indicates inflation is slowing down or getting under control, which is especially important for seniors living on a fixed income. While a higher COLA sounds nice, it reflects rising prices, which can be far more challenging for retirees who count on Social Security benefits to pay their household bills.

All forms of benefits are affected by the COLA, including retirement, disability, family, and survivor benefits. The adjustment starts with the December Social Security benefits, which most folks receive in January 2024.

Benefits are calculated by the CPI-W, a subset of the main Consumer Price Index, which measures a broad range of retail prices. The SSA compares the average CPI-W for July, August, and September of each year to the figure for the same period the year before to arrive at the COLA for the year to come.

For example, the year-over-year changes in the CPI-W for the three months in 2022 were 9.1%, 8.7%, and 8.5%, respectively. Over the entire quarter, the index was 8.7% higher than average for the same period in 2021, resulting in the COLA used at the start of 2023.

If projections hold, and there’s no reason to think they won’t, the 2024 adjustment will align more with the relatively low inflation pre-pandemic period. When there’s no inflation, there’s no COLA. This happened in 2010, 2011 and 2016. The most significant adjustment ever? 14.3 percent in 1980.

Studies by the Center for Retirement Research show Social Security benefits generally keep up with inflation in the long term but can lag during short-term periods of volatility, depending on whether or not the price index is trending up or down when the COLA is set.

Beneficiaries in 2021 and 2022 lost buying power when COLAs were outpaced by surging inflation, peaking around 9 percent in mid-2022. This year, inflation was cooling somewhat when the 8.7 increase took effect and remained below the COLA level.

Another factor impacting the COLA’s value is Medicare costs. A rise in Medicare Part B premiums in 2024 would offset a portion of the COLA increase for Social Security recipients who have premiums deducted directly from their benefits, which is about 70 percent of Medicare enrollees.

Reference: AARP (Sep. 13, 2023) “Social Security COLA 2024: How Much Will benefits Increase Next Year?”