The Catch-22 of Taxes and Social Security

I don’t think anybody likes taxes – in fact I think it’s safe to say we would all prefer not to pay them. To that end, we do whatever we can to reduce what Uncle Sam sees as our taxable income; and why not – after all we work hard for what we earn! Unfortunately, not very many companies offer pensions, so it’s up to the individual to save for his or her retirement. Add a child with a disability, and you’re saving for at least two generations; and this is where the catch-22 comes into play.

If you reduce your taxable income your reducing the amount you pay into social security. Social Security considers the average of 35 years of wage history, with any years not reported counted as $0 income. This average is used to determine what they will pay you, the worker, in the event you become disabled or retire. The lower the amount you pay in, the lower the amount you receive. This will be even further reduced by taking social security before your full retirement age (FRA).

So what,  you may be saying. Well, remember what I said in the first paragraph about most of us not receiving a pension. Without Social Security, 2 in 5 elderly Americans would have incomes below the poverty line – that’s 40% of people aged 65 and up (source Center of Budget and Policy Priorities). If you decrease the amount you “earn”, without saving for your retirement, you’re also reducing your retirement income; not to mention what you’ll leave behind for your spouse or disabled child.

Disabled adult children become eligible to receive SSDI, provided they were disabled before the age of 22, paid on their parent’s Social Security earnings record. There are additional requirements (found here); but the point I want to make is YOU control what your child will receive. In 2017 the maximum earnings subject to Social Security payroll tax is $127,200. This means if you’re married or head of household you’d be in the 25% federal tax bracket.

In my opinion it’s worth it (to me) for my son to receive the highest amount of SSDI possible. I’m not a fan of paying taxes, but I do want to ensure my son’s quality of life doesn’t drop when I’m gone. I’m not counting just on social security, I have life insurance and I’m fortunate to transfer some of my military pension to him as well. Each of us needs to make our own decisions, there is no right or wrong answer. However ensure you are making an informed decision. Weigh the pros/cons of taxes, and consider what you’re doing to help yourself, and if applicable, your disabled child.

This, like many financial decisions, doesn’t have to be made in a vacuum. Talk to your advisor and/or accountant; get their input. The solution is not necessarily always reducing your taxable income, especially if you’re a self-employed business owner and you’re reinvesting everything you make back into the business (not saving for retirement).

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Do You Have/Need an Exit Strategy?

Recently I’ve been receiving not so subtle reminders of how finite our lives are, and how much of a difference having a plan can make. I think we can all agree it’s impossible to plan for every eventuality, but I also think we can all agree there is at least one exit we are all going to make – to the best of my knowledge nobody has found the secret to immortality in our present state (this is not meant as a religious or philosophical post).

I remember how torn I was, weighing whether to reenlist or not. I retired with over 20 years, but if I’m completely honest with myself it’s not because I loved the Navy. The biggest reason I stayed was fear – I wasn’t sure what I would do about health insurance for my son – having received the Autism diagnosis in the early 2000’s and there not being much information available (that we were aware of). This had negative consequences – I was not someone anyone would want to be around; I felt trapped and took it out on everyone around me.

I think many, if not all, of us can relate to feeling trapped at some point in our lives – be it in a marriage, or a job or some other contract. And because this can be so overwhelming it’s easy for us to lose sight of options, convincing ourselves there is absolutely nothing we can do to make our situation better – regardless of what those around us may be proposing.

If you have kids, do you let them go through high school without talking to you about what their plan is after graduation? If the answer is “no”, then why are you treating yourself any different? This leads me to having an exit strategy – begin with the end in mind. Sounds trite, perhaps; but it will make a significant difference.

For example, no-one marries with the intent to divorce; but even if you don’t divorce the odds are one of you will outlive the other – even if it’s 50+ years down the road. Have a discussion of what you want, how you want to be remembered and where you want to be laid to rest – and put it in writing. Yes, this is an Estate plan; but it’s not meant to be set in stone – review it at major milestones, or at least every 5 years if you have nothing going on.

Another example I come across is similar to what I experienced in the Navy – people are afraid to leave their jobs (not just the military) because of uncertainty; will they make enough money, what else would they do, etc. In this case, my advice is to build yourself a “freedom fund”. Save money into an account with the strict purpose of giving you a buffer. How much is up to you, but I would suggest at least 6 months of income. I would also recommend you make a list of what is non-negotiable. What do you absolutely have to have – could be a minimum salary, specific benefit(s), etc; and also what you are completely unwilling to have in your life – could be too much autonomy, a micro-managing boss, specific working hours or days of the week, etc.

If you take nothing else away from reading this, please take the time to understand what’s most important to you. Don’t be upset or feel like you’re doing something wrong if your internal values don’t match your coworkers or friends – these are your values. When you are considering a change, especially a major one, take a moment to consider possible consequences. I’m doing this with my clients all the time, as I’d wager most Advisers are. Take it for what it’s meant to be, a glimpse of other possibilities; not finding fault with your ideas.

 

Check Yourself!

This year my son turns 18, which by any measure is a major milestone; but I’m finding it especially noteworthy as I consider what it means with regards to my estate planning and his disability. When he was younger I was able to delude myself into thinking there may be a miracle cure, he’d suddenly wake up one day and no longer have the cognitive delays he’s had since birth. Some of this is hyperbole, I’m certainly being melodramatic – but it has been weighing on my mind.

Specifically what will happen when I’m gone. Having lost my spouse to a sudden illness, making the toughest choice I’ve ever had to make taking her off life support; I understand nothing is promised. I have an estate plan, I completed it the year after my wife died; but so much has changed in the intervening years – now it’s time to revisit the plan and make the appropriate changes.

Many of my readers will experience similar thoughts and feelings, if you haven’t already; the question is what are you doing about it? It’s much easier to turn a blind eye and say “I’ll get to it”; but let’s be honest – for a myriad of reasons we never do. Me, I’m waiting until after my son’s birthday; for a couple reasons. First, I’ll be applying to the VA for his “helpless child” status; an unfortunate moniker which nonetheless will enable him to receive my Survivor Benefit Plan (SBP) when I’m gone. For those of you who are not familiar with SBP, it provides a spouse and/or child(ren) with up to 55% of the veteran’s pension.

The other reason I’m waiting is because I need to make the decision about becoming his Guardian. As a minor this is automatic, but after he becomes 18, should I choose to pursue this option, I will need to prove to a judge he is incapable of taking care of himself. In my son’s case this isn’t as simple as “yes” or “no”. I’ve always, and regardless of if my decision is for guardianship, will continue to be, a proponent of alternatives to guardianship. That’s a topic for its own blog, but needless to say I have some major decisions to make in the next few months.

Why am I writing all this? To show you I “get it”. I understand how difficult it can be to verify asset titling and beneficiary designations, and why you may not want to make that call to the estate planning attorney to get your documents in order. But believe it or not, doing so WILL help. In some ways I can’t wait to get mine done, ensuring my son’s first and third party trusts are established so he has one less thing to worry about when I’m gone.

Losing someone is difficult, there is so much to be done it’s often hard to conceive how you’re going to accomplish it all. Why add to this by making your family and loved ones try to figure out what you would’ve wanted? Have the tough conversation, and get your final wishes in writing – it’s a whole lot less unpleasant than not having anything when the unforeseen happens. My wife and discussed extreme measures, and although it didn’t make the decision easier when I had to make it; I’m glad I knew what she wanted – because I knew ultimately I was honoring her. So take a look at your documents, if it’s been more than 4 years since you had your estate plan done (or you haven’t gotten around to it yet) reach out to an attorney. I’m here for my clients should they need the moral support, and I’m sure many of you can rely on your Advisors as well.

Why I’d Rather Pay

Over the years I’ve been told, by well-meaning people, to trust in my network of friends and family to provide for my son when I’m gone; rather than hiring professionals. I know they mean well, and I will admit to a degree of cynicism; but when I’m gone I have taken measures to ensure my son has enough money to work with professionals for the duration of his life. This is not meant to imply any mistrust or cast doubt upon the capabilities of anyone in my personal sphere of influence – if I count someone as a friend it’s because they have proven time and again they may be relied upon, and I trust them implicitly.

Seems counter-intuitive, doesn’t it? After all – if I trust them, and I do; why would I not rely on them to help my son out? The short answer is they don’t have a stake in the game. I have no doubt they would do what they can for my son, but if push comes to shove they need to (and should) take care of their stuff first. For example, if they have a family emergency, I would not expect them to put it on hold to address the needs of my son.

Another of my considerations is doing what’s in HIS best interest. Again, I think most people mean well; but it can be easy to project one’s desires/interests onto someone else, especially if they do not have an active voice. This wouldn’t be done maliciously, or even consciously; but in my opinion it would eventually happen in more cases than not. Sometimes doing what is in someone else’s best interests requires them being told “No”; and this can be very difficult if  you have a relationship – because you want to keep them happy.

Using a professional significantly reduces these risks. If they are being paid for a service they have incentive to provide the service, and do so at a certain level of quality or they risk losing the contract. There are no feelings to be hurt by my hiring an impartial organization to monitor the delivery of the services I’ve requested. And there are much fewer acceptable reasons to not deliver the service they are being paid for.

If my son asks for something outside of the scope of the original agreement, I can build in parameters of what is acceptable – and the agency or individual(s) I’ve hired can use those parameters to make a decision. If it’s not in my son’s best interest, or acceptable within the parameters I’ve set forth; I have complete faith they’ll say “No”.

Are there risks, absolutely. It’s incumbent upon me to leave parameters broad enough to allow them to make the best decision; and I can’t predict every eventuality. There are costs associated, these are professionals and I’m asking them to provide a service – and you get what you pay for. To me, though; the benefits outweigh the costs. Being honest with myself about what I want, I took the time to do the research and get a baseline of what I can expect to pay. From there I worked out what I resources would be available when I’m gone; and purchased enough life insurance to make up the difference.

As is the case for anything else in our lives, this is a personal decision and will vary from individual to individual. In my case, I don’t want to rely on family and friends – for the reasons enumerated above; and I’m able to afford what I need to put this in action when I’m gone. Cost should never be the sole driver, but let’s be real – it will always be a consideration. For me, it means I’ve made some sacrifices over the years to afford the insurance; but in my mind it’s an investment towards my son’s future.

And this is what I think we all need to frame questions like this: Is it a cost, or an investment? If it’s a cost, then it can become very difficult to stick with the plan when you encounter challenges (and you will). But you believe, as I do, providing your child(ren) the opportunities they would be able to get for themselves if they didn’t have their disability is an investment you will let nothing get in your way.

THEY DID WHAT????!!!!!

I think it’s safe to say we’ve all either been in a position to say this, or know someone who has. This article is specifically focused on the titling of your estate. Far too often, in my opinion, there is conflict or confusion about what to do when someone passes away, and which is the last thing anyone should have to deal with when mourning.

Why does it happen? I think many of us just take it for granted everyone knows what we want, if we think of it at all. When I was Active Duty I was required to have a Will created before deploying, yet we never took the time to get one for my wife – just didn’t seem important back then. Even after she passed, it took me almost a year to get my estate documents prepared – and I lived it. The idea of our mortality is sobering, as it should be – but it shouldn’t be something to be afraid of, or taboo.

To be sure, it can be an uncomfortable conversation. Many of my clients have asked me for a “script” to approach their parents, acknowledging the irony they themselves don’t have plans. Unfortunately, it’s not enough to just “have the conversation” – action needs to be taken. So create a checklist with dates, and find somebody to help hold you accountable.

A good place to start is ensuring all your accounts have primary and contingent beneficiaries. Why contingent beneficiaries? Because it answers the question of what to do if something happens to both you, and your primary beneficiary.

If you have minor children, then you should have a trust. You don’t need to fund it, discuss with an estate planning attorney if a testamentary trust will be sufficient – it’s how I have mine set-up. Children cannot manage money, and it could be argued, to some extent, the same is true of  many young adults (< 25 years of age).The trust addresses and solves this problem, and because trusts are legal entities you can make them the primary or contingent beneficiary of your accounts.

Another situation I see far too commonly is not changing beneficiaries after a divorce. If you don’t remove your ex-spouse as a beneficiary, they are legally entitled to receive that money. I’m not an attorney, I don’t know the optimal time legally to change beneficiaries – but once the divorce is finalized I wouldn’t hesitate too long; unless there is something specific in your agreement or decree specifically addressing this.

Again, I want to acknowledge how difficult and overwhelming this can seem. As I stated above, it took me almost a year to get my estate documents in order after my wife passed away. Commit to a date you’ll have everything done by, doesn’t have to be this month but it does need to be this year. I wouldn’t put it farther than (2) months out, because it becomes too easy to ignore and delay. Once the date is set, talk to trusted friends and advisors – ask for referrals to estate planning attorneys.

Yes – you can use online resources like LegalZoom, but I would still have those documents reviewed by an attorney – because you want to make sure they meet the requirements for your State. Ensure the individual who will settle your estate, at a minimum, knows where to find your documents; perhaps even give them a copy. As a general rule you’ll want to review your estate plan every 3 – 5 years, or when you have a significant life event (birth of a child, divorce, etc). If/when you update your plan, be sure to destroy ALL the copies of the old one.

Speaking for myself, going through the process sucked. It did, not gonna sugar-coat it. But, and this is a huge BUT, when it was all said and done I felt like an enormous weight was lifted off my shoulders. You don’t have to do it alone, I offer to go with my clients when they meet with the attorney – and I’m sure most, if not all, of us have friends and/or advisors who will do the same.