Paul O. Dillon, Attorney at Law

Why are Contingent Beneficiaries Important?

If you’ve been married or in a longstanding relationship, it’s almost certain your initial beneficiary will be your spouse or partner. If you have children, it’s likely an easy decision to make them contingent or successor beneficiaries to your estate. More often than not, children inherit equally, explains the article “PLANNING AHEAD: The problems we have naming contingent beneficiaries” from The Mercury.

To avoid conflict, parents often decide to name children equally, even if they’d prefer a greater share to go to one child over another, usually because of a greater need. This is, of course, a matter of individual preference.

However, as you move down the line in naming a successor or contingent beneficiaries, you may encounter some unexpected stumbling blocks.

If there is a beneficiary who is disabled, whether a child, grandchild or more distant relative, or even a spouse, you have to determine if naming them is a good idea. If the disabled individual is receiving Medicaid or other government assistance, an inheritance could cause this person to become ineligible for local, state, or federal government benefits. An estate planning attorney with knowledge of special needs planning will help you understand how to help your loved one without risking their benefits.

A Supplemental Needs Trust may be in order, or a Special Needs Trust. If the person’s only benefit is Social Security Disability—different from Supplemental Security Income or some others—they may be free to inherit without a trust and will not impact benefits. Social Security Disability recipients cannot work in “substantial gainful employment.”

Another issue in naming successor and contingent beneficiaries is the choice of a trustee or manager to handle funds if a beneficiary cannot receive benefits directly. A grandparent will sometimes be reluctant to name a son-in-law or a daughter-in-law as trustees for minors if their daughter or son predeceases and the inheritance is intended for a minor or disabled grandchildren. The grandparents may be concerned about how the funds will be used or how well or poorly the person has handled financial matters in the past.

The same concern may be at issue for a child. A trust can be structured with specific parameters for a grandchild regarding the use of funds. If a supplemental needs trust is established, the trustee must understand clearly what they can and cannot do.

What happens if you’ve run out of beneficiaries? For those with small families or who live into their 90s, many family members and friends have passed before them. These seniors may be more vulnerable to scams or new “friends” whose genuine interest is in their assets. In these cases, an estate plan prepared by an experienced estate planning attorney will need to consider this when mapping out the distribution of their estate, however large or small, to follow their wishes.

Reference: The Mercury (Aug. 28, 2023) “PLANNING AHEAD: The problems we have naming contingent beneficiaries”

What Can You Tell Me About a Special Needs Trust?

A special needs trust is a specific type of trust fund that’s created to help a beneficiary with special needs but not jeopardize their eligibility for programs, like Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) and Medicaid. KAKE’s recent article, “How a Special Needs Trust Works,” says that programs like SSDI and Medicaid can be vital supports for those dealing with disabilities or chronic illnesses.

These programs have income limits to ensure they’re serving those who need them the most. If you were to just give money to your beneficiary when you pass away, it could come in above this income limit.

A special needs trust works around this. That’s because the owner of the funds is technically the trust, not the beneficiary. You also name a trustee to be in charge of disbursing the funds in the trust. Therefore, while the beneficiary benefits from the trust, she doesn’t have control of its assets.

If you are creating a special needs trust for a beneficiary, you must do this before the beneficiary turns 65. And funds from the trust typically can’t be used to pay for food or shelter.

If a person could benefit from a special needs trust, but they themselves own the funds, you can create a first-party special needs trust in which you serve as both the beneficiary and the grantor. These can be complicated to draw up, and states have varying rules determining their validity. A first-party special needs trust has the money that belongs to its beneficiary.

With a third-party special needs trust, the trust holds funds that a beneficiary doesn’t directly own. These are generally used by grantors to allow the beneficiary to start getting money from the trust, even before their death. The funds never technically belong to the beneficiary, so they can’t be used for Medicaid payments. The trust can be used to save money for the beneficiary and future beneficiaries.

The third type of these trusts is the pooled special needs trust. Nonprofit organizations manage assets for a fee, and these organizations pool the funds of multiple trusts together and invest them. When it comes to payments, beneficiaries get an amount equal to their percentage of the pooled trust’s balance.

A special needs trust lets you write down what you wish your funds’ purpose to be, making it legally binding. Special needs trusts are irrevocable, so you can also protect your funds from creditors and lawsuits against the trust’s beneficiary. It lets you help your beneficiary deal with the expenses that come with illness or disability, without hampering their ability to get other assistance.

Reference: KAKE (September 30, 2019) “How a Special Needs Trust Works”

What Changes Will Be Made to Social Security This Year?

While Social Security now delivers benefit checks to more than 63 million people every month, the program is primarily designed to provide a financial foundation for our nation's retired workers. Nearly 45 million retired workers (70% of all beneficiaries) receive a benefit check monthly, with more than 60% of these seniors expecting their payout to make up at least half of their income.

Motley Fool’s recent article, “5 Social Security Changes in 2020 That Could Affect Your Take-Home Income” explains that with the relative importance of Social Security, it should come as no shock that the second week of October holds considerable importance to these tens of millions of Americans. That's because it’s when the Social Security Administration (SSA) announces changes to the program for the upcoming year. Any changes could directly affect what beneficiaries are paid on a monthly basis. These changes can also affect non-retirees who aren't getting a Social Security benefit Let’s look at some of these changes.

1. The most important figure in the October announcement from the Social Security Administration is the cost-of-living adjustment (COLA). Social Security's COLA is measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average monthly CPI-W reading from the third quarter of the current year (July through September) is compared to the average monthly CPI-W reading from the third quarter of the previous year. If the average figure has risen from the previous year, then beneficiaries receive a "raise" that's commensurate with the percentage increase year over year, rounded to the nearest 0.1%.
2. Withholding thresholds. Early claimants who haven’t hit their full retirement age but are currently (or expected to begin) taking benefits, will be subject to the retirement earnings test. This test allows early filers to earn up to a certain amount of money, before the SSA is allowed to withhold a portion, or all, of their benefit. For those who won't reach their full retirement age in 2019, $1 in benefits can be withheld for every $2 in earnings above $17,640 ($1,470 a month). For those who’ll reach their full retirement age this year but have yet to do so, are allowed to earn $46,920 before the SSA begins withholding $1 in benefits for every $3 in earnings above the limit. Note that these withheld benefits aren't lost forever, because you get them back in the form of a higher monthly payout when you reach your full retirement age.
3. Maximum monthly payout. If you're currently claiming a retired worker benefit and have made a good deal of money on an annual basis over your working career, there's a chance that you'll be able to net more in monthly payouts in 2020. There’s a cap on the maximum monthly payout at full retirement age. In 2019, no individual at their full retirement age can take home more than $2,861 per month, even if they made millions of dollars each year throughout their working career.
4. Disability income thresholds. Even though 7 of 10 program recipients are retired workers, about 10 million people each month also get a check from Social Security Disability Insurance (SSDI). Approximately 8½ million are disabled workers, and the rest are spouses or children of these disabled workers. If the average CPI-W reading does increase on a year-over-year basis from the previous year (which appears likely), these SSDI income thresholds for the disabled and legally blind should go up a little in 2020.
5. A warning to the wealthy. Lastly, Social Security's changes for 2020 won't just impact those receiving a benefit. Wealthy workers can also anticipate paying more into the program, provided that inflation rises on a year-over-year basis, as measured by the CPI-W.

Reference: Motley Fool (July 28, 2019) “5 Social Security Changes in 2020 That Could Affect Your Take-Home Income”

Does a “Gray Marriage” Affect My Social Security?

Widowed or divorced Social Security beneficiaries can run into issues, if they decide to remarry later in life. Those who remarry in their 50s or 60s should know about the ways your new marital status can impact your Social Security benefits.

Investopedia’s recent article, “How Remarrying Late in Life Impacts SS Benefits,” gives us some things to consider.

First, if either you or your intended is widowed and receiving Social Security benefits based on the deceased spouse’s work record, age is important. A surviving spouse who remarries prior to age 60, becomes ineligible to receive benefits on their late spouse’s record. However, after your first anniversary with your new spouse, you become eligible for spousal benefits, based on that person’s work record.

Decide whether to wait for marriage in order to keep a widow’s benefit for longer, or if the spousal benefit from their new union will offer more financial security. If you’re married at least nine months prior to one spouse’s death, the surviving spouse is eligible for spousal benefits based on the second marriage.

If one or both members of the new couple is divorced, things are trickier because the Social Security Administration does allow a divorced spouse to collect spousal benefits based upon the work records of their deceased ex-spouse, as long as the divorced beneficiary meets the following criteria:

• The original marriage lasted at least 10 years;
• The beneficiary applying for divorced spousal benefits has remained unmarried; and
• The beneficiary applying for divorced spousal benefits is at least 62.

If you are divorced from an ex who significantly out-earned you and your new fiancé, remarrying stops the ex-spousal benefits you’d otherwise receive. This can make a big difference in your finances, and cohabitating without getting hitched, may make more financial sense for some couples.

Beneficiaries who are receiving Social Security Disability Insurance (SSDI) may have the toughest calculations, as far as a second marriages are concerned. This is because SSDI beneficiaries are subject to a family maximum benefit (FMB) calculation. The FMB limits the amount of money available for auxiliary benefits, like the dependent child benefit. Figure out and compare these three amounts to determine FMB:

1. 85% of the worker’s average indexed monthly earnings (AIME).
2. The worker’s primary insurance amount (PIA), based on full retirement age.
3. 150% of the worker’s PIA.

If number three is the highest of these three calculations, then the FMB is the higher of number one or two. However, if number one is the highest of the three calculations, then the FMB is number three.

It’s important that later-in-life couples don’t forget that there can be some unanticipated consequences to their new unions. Know the potential effects that marriage can have on your Social Security benefits, before you walk down the aisle. While you’re at it, make sure to meet with your estate planning attorney to update your wills and your estate plan, especially if one or both of you have children from a prior marriage.

Reference: Investopedia (August 1, 2018) “How Remarrying Late in Life Impacts SS Benefits”

How Do I Get Disability Protection as a Gig Worker?

The modern gig economy is dependent on contract workers. While it offers flexible jobs to millions of people, there are no benefits, says Kiplinger in the recent article, “If You're a Gig Worker, Here's How You Can Still Get Disability Protection.”

Most part-time employees do have one advantage over freelancers. That’s workers’ compensation benefits, provided that they earn a wage and have taxes deducted from their paychecks. On the other hand, employers typically aren’t required to provide workers’ compensation coverage to independent contractors. If these workers get injured on the job, they are out of luck, and certain small companies are also exempt from this requirement.

The Social Security Disability Insurance (SSDI) program is your disability safety net. It’s designed to help today’s part-timers and gig workers. SSDI is an income replacement insurance for former workers with disabilities, provided through the Social Security Administration. This “insurance” isn’t something you have to sign up for or buy—if you pay FICA or self-employment taxes, you’re already paying into it and are on your way to being covered. Workers who earn at least $1,360 (in 2019) per quarter get credit toward their disability insurance. Typically, to be covered you must have paid FICA payroll or self-employment taxes for five out of the last 10 years. These benefits are portable and available, if you meet eligibility requirements, regardless of the number of places you’ve worked.

When someone experiences a severe disability that prevents them from working for 12 months or more, SSDI also allows access to other important benefits, like Medicare prior to age 65, dependent benefits, and return to work support. SSDI continues until the individual is able to return to work on a regular basis or until retirement age, when old age benefits start. It has the added advantage of protecting future retirement benefit income.

To be eligible, you have to meet the work history requirements and be able to prove that your condition prevents you from working. If you meet the requirements, SSDI is a great resource, if you experience a disability without private long-term disability insurance or workers’ compensation protection.

Giggers: no matter which—or how many—companies you work for, SSDI can be your safety net to catch you.

Reference: Kiplinger (December 11, 2018) “If You're a Gig Worker, Here's How You Can Still Get Disability Protection”