Paul O. Dillon, Attorney at Law

Is Your Estate Plan Ready for 2025?

Talk about a possible third version of the SECURE Act, elimination of Social Security taxes and a host of other potential changes combined with rules and regulations already set to take effect in 2025 adds a lot of complexity to estate planning for the coming year, says a recent article from Think Advisor, “7 Big Unknowns That Could Shake Up Retirement Planning.”

Possible changes to the SECURE Act. The Setting Every Community Up for Retirement Enhancement was initially passed in 2019, followed by SECURE Act 2.0 in 2022. Both made many changes to retirement and estate plan rules. One former Labor Department official has said a third version is beginning to form.  However, details are sketchy. Republicans in Congress are expected to be eyeing tax cuts. However, reducing government revenue may be problematic.

Historically high estate tax exemptions. The high estate tax exemption created by the 2017 Tax Cuts and Jobs Act may be extended. However, the exact path forward for federal budget negotiations and tax reform is riddled with many unknowns. Can a “core TJCA extension” occur, while avoiding a filibuster in the Senate? Stay tuned.

Social Security taxes. Some states tax Social Security benefits. Campaign promises to eliminate taxes on Social Security may be a bit harder to implement than the extension of federal estate tax exemptions. It would have to be done through stand-alone legislation requiring Democratic support. It is possible, yes, but not certain.

Possible elimination of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). The House passed the Social Security Fairness Act on November 12 by a wide margin. The Senate may act in the coming lame-duck session to do away with these two policies, which reduce Social Security benefits for government workers. As of this writing, the Senate version of the bill is still in committee, so the legislation will probably need to be reintroduced in 2025.

Will the Full Retirement Age (FRA) be lifted for Social Security? Depending on who you ask, the insolvency date for Social Security is 2033 or 2034. Increasing the FRA from 67 to 68 or 69 could increase funding. According to the Congressional Budget Office, this change is expected to reduce annual yearly benefits by about 13% for people who fall into this older FRA category. Experts think this may not happen in the next Congress but expect to see a change to the FRA in 2025 or 2026.

Changes to ERISA. Two rulings from federal courts in Texas temporarily halted a new fiduciary rule under the Employee Retirement Income Security Act. The rule seeks to minimize conflicts of interest when financial advisors work with clients on tax-qualified retirement accounts. It was set to take effect on September 23. However, it is now in limbo. Until a Labor Secretary is appointed, it will be hard to determine when the ruling will be reinstated.

Roth accounts. Whether more tax revenue will be needed because of estate tax extensions is followed by transforming more retirement accounts from tax-deferred to Roth-style, where taxes are paid when the assets go into the account. Forcing taxpayers to save for retirement on an after-tax basis could help with collecting tax revenue.

Regardless of these and more changes, an estate plan is still the best means of protecting your family and yourself, managing tax liabilities and preparing for the future.

Reference: Think Advisor (Nov. 26, 2024) “7 Big Unknowns That Could Shake Up Retirement Planning”

Social Security Updates You’ll Want to Know

Navigating Social Security isn’t always easy, largely because things keep changing. Not being aware of the changes can put a dent in retirement finances, according to a recent article, “3 Social Security Changes Retirees Need to Know About in 2024,” from Nasdaq.com. Anyone receiving benefits in 2024 should be aware of these changes.

Monthly benefits are higher due to inflation. After a long period when inflation was seemingly gone, we’re now experiencing both inflation and shrinkflation (packages becoming smaller while prices increase). The Social Security Administration has a built-in tool to respond to inflation: the Cost of Living Adjustment, or COLA.

Every year, Social Security benefits are adjusted to account for inflation. The increase is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a measure of inflation monitoring costs of necessities: food, housing, and transportation. The average of the CPI-W for July, August, and September are compared to the prior year’s average inflation to arrive at the rate. Estimates for 2025 aren’t released until October, but early estimates expect it to be 2.6%. In 2024, the COLA was 3.2%.

Adjustments in 2024 increased the amount you can earn if you take benefits early. Some of your benefits may be withheld if you take Social Security benefits before reaching Full Retirement Age (FRA). If you don’t reach FRA this year, the earnings limit is $22,320. Your monthly benefit will be reduced by $1.00 for every $2.00 earned over the limit. However, if you reach FRA this year, the earnings limit is $59,520, with benefits reduced by $1.00 for every $3.00 above the threshold.

Note that these benefits aren’t permanently lost. Once you hit FRA, the SSA recalculates your benefits and adds back the amount that had been withheld.

It’s become harder to reach Social Security’s maximum monthly benefit. The core formula is based on your top 35 earning years. To qualify for the maximum benefit, taxpayers need to do two things: delay benefits until they turn 70 and earn more than the wage base limit for the 35 years used in the calculations. In 2024, the wage-based limit will be $168,000, the highest income subject to Social Security taxes. After this much income has been earned, there are no Social Security taxes.

Wage base limits change often, so if you want to reach the maximum monthly benefit, keep track of these changes and your income.

Reference: Nasdaq.com (July 29, 2024) “3 Social Security Changes Retirees Need to Know About in 2024”

Money Tips for Taxes at Different Stages of Retirement

There are different stages of retirement, just as there are different stages of any portion of life. Each stage has its own challenges and needs, nearly all of which can be addressed by planning in advance. A recent Forbes article, “Tax-Saving Strategies For Three Stages Of Retirement,” describes the different stages and their requirements.

Pre-retirement is age 50-64. This is when you’re entering your final years of work and getting financial retirement and estate plans in order. The most critical tasks:

Make the most of retirement plan opportunities, including maxing out contributions to any employer-sponsored plans, especially those with matching features.

After age 50, wage earners qualify for catch-up contributions to IRAs and 401(k) plans. In 2024, a 50-year-old can contribute an additional $7,5000 to a 401(k) and $1,000 more to an IRA.

This is the time to review your Social Security benefits. While you can take benefits any time after age 62, by waiting until your Full Retirement Age (FRA) or later, your monthly benefit will grow. This is a personal decision, as some people need to take Social Security earlier, while others can draw income from retirement accounts until they reach age 70.

Active retirement is considered ages 65-74. The focus here is wrapping up your working life and ensuring that you have enough money to support your lifestyle. The factors to focus on:

Required Minimum Distributions (RMDs) are the least amount of money you can take from your retirement accounts. The SECURE Act 2.0 extended the time you have to leave money in these accounts. However, you’ll need to take your RMDs strategically so you don’t get pushed into a higher tax bracket.

After age 70 ½, you can make Qualified Charitable Distributions (QCDs) directly from your IRA to any qualified charitable organization. You may donate as much as $100,000 per year if it is a direct donation from the IRA to the organization. For people who will make donations with or without tax benefits, this allows you to make your donations, reduce taxable income and leave a legacy while still living.

Late retirement is anything after age 74, where you may want to focus your attention on passing wealth to heirs. You should have an estate plan in place by now. However, it probably needs to be reviewed. Have any of your beneficiaries passed away? Is the person you named as your executor still willing to perform the tasks? Review your estate plan with your estate planning attorney to ensure that it complies with your state's laws and wishes.

If you’re concerned about estate taxes, this is the time to use the annual gift tax exclusion to transfer wealth to heirs with no tax liability. In 2024, you may gift $18,000 to as many people as you want as a single, while married couples may gift $36,000 to as many people as they wish.

Reference: Forbes (July 12, 2024) “Tax-Saving Strategies For Three Stages Of Retirement”

Good News about Social Security

The simplest explanation is that Social Security is paying out more than is being collected and going into the trust funds to make up the difference. If this were to continue, the trust funds would be exhausted at some point, and the only money for benefits would be revenue being collected at the present time. However, there is no need to worry, says this article “Social Security Retirees Just Got Some Good news About Future Benefit Cuts” from yahoo! finance.

While future cuts are a possibility, there’s also good news, according to the 2024 Social Security Trustees Report. The Old-Age and Survivors Insurance (OASI) Fund will be able to continue to pay full benefits until 2033. If nothing changes, there must be a 21% benefit cut. The Disability Insurance (DI) Trust Fund is anticipated to be able to pay benefits until at least 2098.

What would happen if the OASI Fund were emptied? A few things could happen. A law change could combine the OASI and DI funds. Because this is a real possibility, the trustees share data on when the combined funds might be emptied.

In 2023, the Trustees Report said the combined funds would pay full benefits until 2034, but this year’s report shows there’s enough money to pay full benefits until 2035. It also notes that if any cuts were to go into effect, the money coming into Social Security from the combined funds would be able to pay 83% of promised benefits, up from 80% in 2023.

These may sound like small improvements but indicate a trend in the right direction. Much of this is due to stronger-than-expected economic growth, which has led to improved labor productivity and lower projections for long-term disability insurance benefits. Taken together, Social Security’s long-term stability is looking good.

The additional year means any benefit cuts will be smaller than previously anticipated. If needed, Congress could also act to fund the trust funds. There’s still reason to worry about what might happen in 2035, since many seniors count on Social Security to fund most of their retirement.

Lawmakers will unlikely allow this program to be defunded, since seniors continue to be a major voting bloc. Similar situations occurred in the early 1980s, and Congress passed amendments to protect the program.

The new issue? Those amendments from forty years ago included a change to Full Retirement Age, when a person may collect an unreduced benefit. They also imposed a tax on some benefits for high-wage earners. As a result, there may be changes in the future.

Overall, though, the news is good. Hopefully, the good economic news will keep coming to protect Social Security, giving lawmakers more time to figure out ways to fund this vital program.

Reference: yahoo! finance (May 16, 2024) “Social Security Retirees Just Got Some Good news About Future Benefit Cuts”

What Is Expected from Social Security?

More than a third of Americans rely on Social Security for all or part of their monthly income. When created, Social Security was intended to serve as a safety net for the sick and indigent. However, it has become part of most American’s retirement budget. An article appearing in The Motley Fool asks the key question: “Social Security on Average Pays 40% of Workers’ Earnings in Benefits, but What Will You Get?

Social Security was meant to provide 40% of pre-retirement earnings for the average American wage earner. Some people get more based on their years of earnings, and others receive less. Figuring out how much you’ll get isn’t as complicated as you might think.

How does the Social Security Administration calculate your benefits? There are three key numbers used to calculate a worker’s benefits. First, how many years did you work to earn income? Income from other sources, like rental properties or investment accounts, doesn’t factor into the Social Security equation. It’s all about earnings.

The SSA looks at your 35 highest-income years. The lowest earning years are ignored if you worked more than 35 years. However, if you worked for less than 35 years, those years are treated as “zero-income” years and added to your benefit calculation.

The next number is how much money you earned during those 35 highest-income years.

Remember, you pay Social Security payroll taxes on the first $168,600 in 2024, so only this amount counts towards benefits. Every year has a ceiling at which point your income isn’t counted, and in past years, this number was lower.

Increasing your earned income increases your monthly benefits. It’s that simple.

The last of the three factors concerns when you begin receiving benefits. You’ll need to wait until your official “Full Retirement Age” or FRA to receive the full benefits determined by your birth date. Taking benefits too early could reduce them by as much as 30%. Delaying benefits is good if you can. However, it’s simply not a possibility for some people. Consider your health and financial situation to determine the best time to start taking benefits.

The government has a robust website called My Social Security Account that helps you fully understand your benefits. Simply create an account, and you’ll be able to see how much you have paid into the system and what you can expect to receive.

Why should you spend the time getting familiar with this information? One is obvious; you’ll want to plan your retirement budget with this information. However, another reason concerns your estate plan. How much money you’ll have to live on during retirement impacts how your estate planning attorney structures your estate plan. Will you leave anything to heirs based on your Social Security benefits? Will you need to have a trust created to protect assets?

Creating a holistic estate plan with an experienced estate planning attorney will address Social Security income and other retirement income sources, so you’ll know what you’ll have during retirement and what kind of a legacy you might leave to your family. Remember, legacies aren’t just about money.

Reference: The Motley Fool (April 19, 2024) “Social Security on Average Pays 40% of Workers’ Earnings in Benefits, but What Will You Get?

How Can I Minimize Taxes During Retirement?

During your working years, your actions to minimize taxes aren’t the same as those you’ll need after retirement. How you manage your tax liability may have an even bigger impact during your non-working years, says a recent article, “5 Ways to Minimize Taxes on Retirement Income,” from U.S. News & World Report. Re-evaluating finances and tax liabilities at retirement age can help minimize taxes for the coming decades.

Roth Conversion. Once you’ve turned 59 ½ years old and the account has been opened for at least five years, you may take withdrawals tax-free at any time with no taxes or penalties. The conversion takes planning to avoid pitfalls. First, you must be prepared to pay the taxes on the converted accounts. You’ll also need to be careful not to place yourself in a higher tax bracket. Converting to a Roth should be done when income is lower.

Delay Social Security Benefits. When you start taking benefits will impact whether the amount you receive could be subject to taxes. If you file taxes single and your income is more than $25,000, you’ll pay taxes on as much as 85% of your Social Security benefit! Married couples with income exceeding $32,000 will suffer the same tax fate. If possible, delay taking Social Security until after you reach Full Retirement Age (FRA) which is 66 or 67 for most people. If you can delay taking benefits until age 70, you’ll have reached the maximum benefits, but circumstances don’t always allow this.

Coordinate Estate Planning with Required Minimum Distributions (RMD). After age 73, you’ll probably need to start taking RMDs from traditional IRAs and 401(k)s. If you forget, there will be penalties. If you take the RMDs, you must pay taxes on the income. Talk with your estate planning attorney to explore how you might keep your withdrawals within lower tax brackets to reduce your tax liability.

Consider Low-Tax States. If retirement relocation is in your future, consider state tax laws in your decision-making. Some states don’t tax Social Security benefits, while others provide exemptions for pensions. You’ll want to investigate income, sales and property taxes. Your analysis should include an overview of all the factors. For instance, a state may not tax Social Security, but it might have higher property taxes.

Create a Trust. Creating a trust removes assets from your taxable estate. Depending upon the trust your estate planning attorney recommends, you may need an irrevocable trust, which gives the trust the assets and control of the assets to the trustee. Income generated by the assets in the trust may be taxed at a different rate than your income.  

Estate planning and tax planning intersect in many ways, so speak with an experienced estate planning attorney to see what strategies are available and which are best suited to your situation.

Reference: U.S. News & World Report (March 14, 2024) “5 Ways to Minimize Taxes on Retirement Income”

What You Need to Know about Social Security

For millions of Americans, a monthly Social Security deposit into their bank accounts is a crucial source of retirement income. For those who have just started receiving benefits, there are a few basics to know, according to a recent article from NASDAQ: “New to Social Security? 3 Things You Need to Know.”

Social Security knows inflation is a problem for seniors living on fixed incomes. If you’re receiving $1,800 a month right now, in five years, the same amount of money won’t have the same purchase power as it does today. Every year, Social Security examines inflation and adjusts benefits, known as the Cost Of Living Adjustment, or COLA.

COLA’s goal is to ensure that your buying power stays the same over time. It’s not a pre-set amount but is based on inflation data. Unlike an annuity, which increases at a certain rate, Social Security COLA rates are reviewed and increased depending on inflation data. There may be one year when benefits increase a lot, but there will also be years when increases are practically nil if inflation is low.

You may continue to work and receive Social Security benefits, but if you haven’t reached Full Retirement Age, your benefits will have an earnings test limit. Full Retirement Age is when you can collect your monthly benefit in full based on your past earnings history. After this date, based on your birthday date, you can earn as much as possible without any benefits being withheld.

If you’ve started taking benefits before that time, an earnings-test limit will deduct a certain amount from your benefits. The limit, like the COLA, changes every year. In 2024, it’s $22,320 or $59,520 for wage earners who will reach their FRA in 2024 but haven’t gotten there yet.

The funds are not lost forever if you earn more than the limit. When you reach FRA, the money will be returned to your monthly benefit. But you must consider the deduction if you’re creating a household budget.

Social Security does have serious challenges that may impact your benefits. The dramatic headlines about Social Security trust funds running out of money come in waves, but there are some real problems ahead to be aware of. The trust funds are expected to run dry in 2034. While a lot can happen in ten years, seniors would be wise to try to bank some of their benefits in case they shrink. The more saved, the easier it may be to manage if and when these cuts occur.

While Congress may always act to fund the trusts, working a part-time job or as a consultant in your field may be an excellent way for many retirees to prepare for any future cuts and reduce their dependency on Social Security benefits.

Reference: NASDAQ (March 18, 2024) “New to Social Security? 3 Things You Need to Know”

Does It Pay to Wait Until 70 to Claim Social Security Benefits?

There’s no lack of advice about when retirees should start claiming their Social Security benefits. Much of it repeats the adage to wait until age 70 if possible, and the reasoning’s not wrong. The longer you delay taking benefits, the higher your monthly benefits will be. The odds are good you’ll maximize your lifetime benefits, explains a recent article from The Motley Fool, “The Unfortunate Truth About Claiming Society Security at Age 70.”

However, there are some downsides to waiting until age 70.

Waiting to take benefits until age 70 means you’re not claiming earlier, which means you’re forgoing as many as eight years of benefits. The CDC says the average 62-year-old will live long enough to take home more lifetime benefits if they delay. However, this is just an average.

A 2019 study from United Income found that 57% of retirees would have maxed out their retirement wealth by waiting to claim until age 70, but this also means 43%—nearly half—would not.

There’s no way to know if you would fall into the 57% or 43% categories. You may not want to wait if you have a health condition and a lowered life expectancy. However, at some point, you’ll need to make a decision.

If your spouse earned far less than you, they might be able to claim a higher benefit on your earnings record than if they claim on their own. Social Security spousal benefits allow spouses to collect up to half the amount their partner will receive at their full retirement age. This could add a significant boost to your household income in retirement. However, there is a catch: both spouses must actively collect Social Security benefits.

Unlike personal retirement benefits, spousal benefits max out at full retirement age. If you’re waiting to claim your benefits but your spouse has already reached full retirement age, they may be collecting a smaller benefit than they could if you were also taking them.

Coordinating Social Security claiming strategies with your spouse can be tricky and require complex calculations. Including this discussion with your estate planning attorney will be helpful when discussing creating an estate plan, planning for taxes and passing wealth to the next generation.

When you delay taking Social Security benefits, you may rely more heavily on retirement accounts to support your lifestyle in your 60s. Yes, your Social Security annuity will increase while you delay. However, it has no residual value after you pass. In other words, once you die, the value of your Social Security is zero, with the potential exception of survivor benefits for your spouse.

You might decide to collect early instead, hoping your investments will grow faster than the Social Security increase. Collecting early may help you delay taking money from your retirement accounts before turning 70.

Social Security offers a guaranteed inflation-adjusted increase in your monthly benefit when you delay taking benefits. Collecting earlier and keeping more money in markets is an option. Howewver, it may not always work to your advantage. If you’re concerned about not having enough money for your later years, deciding when to take your benefits needs serious consideration.

Reference: The Motley Fool (Feb. 10, 2024) “The Unfortunate Truth About Claiming Society Security at Age 70”

How to Earn the Maximum Social Security Benefit in 2024

The amount received in Social Security benefits impacts most retiree’s budgets, says a recent article from U.S. News & World Report, “The Maximum Social Security Benefit in 2024—and How to Earn It.” In 2024, the maximum Social Security benefit is $4,873 per month. However, reaching this number depends on many factors, including the number of wage-earning years, income levels and age when claiming benefits.

The Social Security Administration uses a formula to determine how much you’ll receive each month based on the 35 highest earning years. Working and paying taxes for at least ten years is necessary to qualify for Social Security. In addition, earnings are adjusted or “indexed” to reflect the general rise in the cost of living during the person’s working life.

If your working years include low-income figures, the average will decline, and Social Security benefits may be dramatically less for the full span of your retirement. If you can, working for a few more years may be helpful. Every year you work at a higher income level replaces a lower income level in the calculation.

For those married to a spouse with a long record of high income, it may make sense to take a spousal benefit, which is 50% of the spouse’s benefit. If you were out of the workforce raising a family for many years, you may not have had the opportunity to build 35 years of earnings. Compare your benefit with your spouse to see if a spousal benefit would give you a higher monthly payment.

Wage earners pay Social Security tax based on their income. Employees working for a company generally have a tax rate of 6.2%, withheld from paychecks, and employers pay a matching 6.2% for a combined contribution of 12.4%. Self-employed people pay the entire Social Security tax rate of 12.4% on their income.

Once you reach a certain income level for the year, you’ve maxed out on your Social Security taxes. In 2024, the taxable income limit is $168,600. People who earn this much a year are eligible for the maximum benefit, and someone who earns more gets the same benefit. To attain the highest benefit when claiming Social Security, you’ll need to earn up to this limit or more for at least 35 years.

When you claim benefits matters also. If you start claiming benefits earlier than your Full Retirement Age (FRA), the benefit will be reduced by about 8% each year. The earliest you can apply for benefits is at age 62. Every year you wait after reaching your FRA, your benefits will increase by 8% until you reach 70. If you can wait until age 70 to apply for Social Security benefits, you’ll get the maximum benefit.

Filing at age 70 usually requires an “income bridge”, unless you can cover living expenses and medical costs while you wait to file for Social Security. Some people choose to continue working or use earnings from their retirement accounts.

Reference: U.S. News & World Report (Jan. 12, 2024) “The Maximum Social Security Benefit in 2024—and How to Earn It”

Will My Social Security Benefits Be Affected If I Work?

It’s tempting to increase income once a wage earner is eligible for Social Security—at age 62—by taking benefits early. However, those benefits are likely to be temporarily reduced because of earned income. The “retirement earnings test” is poorly understood by the public, as reported in an article from CNBC, “Social Security rule for beneficiaries who keep working is ‘poorly understood,’ report finds. This is from a study conducted by the Social Security Advisory Board, a bipartisan, independent federal agency.

According to the study, between 20% and 50% of pre-retirees don’t know their monthly benefits may be lowered if they claim Social Security and keep working.

Even wage earners who know their benefits might be reduced don’t know this is a temporary reduction. As few as 30% to 40% understand the reductions will eventually be added back to their benefits when they reach their full retirement age (FRA).

Here’s how the retirement earnings test works. It applies to Social Security beneficiaries under FRA, generally between ages 66 and 67, depending on their date of birth. A beneficiary under FRA who continues to work will have their benefits cut by $1 for every $2 earned in 2024. The rule applies to income over $22,320.

The rule differs for the year a beneficiary reaches their full retirement age when $1 is deducted for every $3 earned over a separate limit. In 2024, this applies to earnings over $59,520 only for the months before a beneficiary reaches full retirement age.

Today’s wage earners are more likely to remain in or move in and out of the workforce before fully retiring, so this rule will likely impact more people.

The Social Security Administration’s policy directs the field office staff to discuss the retirement earnings test with all applicants. However, this doesn’t always happen, according to the Society Security Advisory Board. These conversations also don’t always happen with prospective beneficiaries who have stopped working.

The report recommends making the information on the Social Security website more accessible and doing the same for related tools on the website.

Misunderstanding the retirement earnings test often influences workers to delay claiming benefits until full retirement age. Waiting to claim at full retirement age means workers receive all the benefits they earned, while those who claim earlier have permanently reduced benefits.

For most people affected by the retirement earnings test, there’s no effect on the amount of their lifetime benefits, but not understanding the rules may keep them from enjoying more income in their senior years.

As beneficiaries continue to work, they also pay Social Security payroll taxes. This could increase their benefits if the earnings fall within their highest earnings years.

Beneficiaries must properly report wages, as the IRS reports wages to the SSA. If it is determined benefits have been overpaid, the SSA will withhold benefits until the sum is recouped. This is a situation to avoid.

Reference: CNBC (Dec. 20, 2023) “Social Security rule for beneficiaries who keep working is ‘poorly understood,’ report finds