While there are many financial situations that are unique to widows, including but not limited to, tax planning, benefits, IRA and qualified plans, and cash flow, Social Security is often where people are most surprised by the benefits- for better and for worse. Social Security can be a huge benefit to widows, as well as their minor children, if they have them. In fact, as a child, Stephanie’s grandmother was one of the first generations to receive Social Security after her father died back in the 1940s. It kept her and her family out of poverty. For that reason and many more, we pay a lot of attention to this very important benefit and the impact it has on our clients.
Social Security was originally established in the 1930’s to keep people out of poverty due to old age, disability or death (for spouses and children). Because of this, from the time that people have earned a benefit with Social Security, there is a benefit at retirement, upon disability, or possibly at their death for their widow and minor children. For the purpose of this article, we’ll focus on what happens when one spouse passes.
When a spouse passes, depending on their age and the age of their children, there may be an immediate benefit for the children. Children can typically receive a benefit from their deceased parent until they are 18 years of age, or if still in high school, until they are 19. Typically, they qualify for the benefit upon the death of the parent, so if it takes a few months before the widow realizes they are eligible, the back benefit can be paid up. This money must go for the benefit of the child and it must be accounted for. We typically recommend that this is deposited in an account (we help with titling, depending on the situation) ear marked only for the child. Multiple children mean you need multiple accounts. Money goes into the account from Social Security and can come out to pay for as much of the child’s regular expenses as necessary, and can even include some of their housing expenses. At the ripe old mature age of 18, the child is fully entitled to all of the money in the account. For this reason alone, we usually recommend that widows use this money for the children’s expenses and don’t leave it in the account for college or as a gift in the future. Instead, we recommend they use the Social Security for any and all legitimate kid expenses, and the money they would have used out of their personal funds to pay those bills they can keep aside, in their control, for the future. This strategy can sometimes also help with college financial aid, too. It’s important that all money from Social Security for the kids be used for legitimate expenses for the kids and tracked as such. Don’t mess around with this as it’s a mess to try to clean up in the best circumstances.
The surviving spouse is also entitled to a care-taker benefit if their income isn’t above a certain (low) threshold and it doesn’t exceed a family maximum benefit. That benefit should deposited in a separate account than each child’s benefit and can be used for whatever the spouse needs or wants. It is not something that needs to be reported back to Social Security on an annual basis the way the benefit for the kids does.
When a spouse passes at a young age, and no one has yet to collect a benefit, but both the surviving spouse and the deceased spouse have earned their own benefit, then the widow is entitled to a survivor benefit starting at age 60. However, if she takes this benefit and earns more than a (low) threshold, it is essentially taxed back to Social Security. It will also be a significantly reduced benefit than if she took it 62, which is reduced from the benefit value at Normal Retirement Age, and the Normal Retirement Age benefit is lower than the maximum benefit would be if the benefit was claimed at 70. If a widow has at least a minimum benefit of her own, but her deceased spouse had a much higher benefit, it may be worth looking into to claiming her own earned benefit at 62 if she is not working more than the (low) threshold of income, or at Normal Retirement Age if she is working. At age 70, as the law is written as of today, she can then switch to her deceased spouses benefit, assuming it is higher.
If her benefit was higher all along (we are seeing more of this these days), then she can reverse the above strategy and take her deceased spouse’s benefit, depending on her work status, starting as soon as 60 and switch over to hers at 70. This allows her benefit to continue to grow and could result in up to a 32% higher benefit for life! That’s not an insignificant amount of money we are talking about, especially if she has a long life! Because of this increase between the first available opportunity to take Social Security and the benefit at age 70, we work hard to find other resources we can use for income before 70. This allows the possibility of the benefit being maximized.
If a widow has not yet taken her Social Security, but her spouse has, the rules are slightly different, but the structure still applies. If both spouses have already started claiming Social Security, that is where the bad news comes in to play. At that point, at the passing of a spouse, only one of the checks can continue to come. It is obviously the higher one, but more and more we are seeing people with more equalized Social Security benefits as their spouse. This means that when that income goes away, assuming it was necessary, they will need other income and assets to make up the shortfall.
Let’s add a wrinkle, just for a twist. Let’s say you are widow who had been married for 10 years or more previously to someone besides your deceased spouse. Their Social Security, whether they are alive or deceased, can also come into play in your strategy. There is no limit on marriages, but each marriage had to last 10 years, and you only can choose one’s spouse’s benefit. No combining or swapping allowed. However, let’s say when you claim Social Security you are remarried at the time. If you are remarried, you are no longer eligible for the Social Security of your former spouse or spouses. If that is the case, only your earned benefit and the earned benefit of the spouse you are currently married to can be part of your claiming strategy.
As you can probably tell, Social Security strategies can be a tricky part of planning. Be sure to utilize professionals who can guide you as to the best option for your situation.