What is a special needs trust and how does it work?
Dear Liz: A 33-year-old friend is developmentally disabled (Down syndrome). He received Social Security Disability Insurance of about $693 a month and could not accumulate more than $2,000 in assets or he’d be disqualified. His father died and he now receives $1,585 a month and is accumulating money in savings. Are his benefits subject to termination if he accumulates too much money?
Answer: Social Security Disability Insurance does not have asset limits, so the benefits your friend receives are probably Supplemental Security Income — and yes, those can be terminated, along with his health coverage through Medicaid, if he accumulates too much money.
This is why parents of special needs children, or anyone thinking of leaving an inheritance to someone with special needs, are encouraged to have a carefully crafted special needs trust as part of their estate plans. These trusts, if properly written, can benefit the recipient while preserving their eligibility for SSI and Medicaid.
If such a trust wasn’t created, the person receiving the inheritance can hire a lawyer to draft what’s known as a “first party” special needs trust to avoid losing benefits. There’s a key difference between a first-party trust and the kind created by other people, however. With a first-party trust, the state will have a right to be reimbursed from any remaining funds after the person dies.
Walmart has unveiled a private-label insulin that sells for about a fifth of what similar insulins cost. Can we expect the same for other drugs?
Roth IRAs for kids
Dear Liz: After reading your column about Roth IRAs for young people, I have a question about what defines earned income. If I were to pay my child or grandchild for doing jobs around the house, such as mowing the lawn or cleaning, would the IRS allow that as income?
Answer: Potentially, yes. To contribute to a Roth, a person must have taxable earned income — which typically means wages, salary or self-employment income. Talk to your tax pro about how to best structure this. If it’s self-employment income, the child may have to pay the 15.3% self-employment tax. If it’s paid as wages, you may need to issue a W-2.
The maximum contribution is $6,000 this year or 100% of earned income, whichever is less.
The child doesn’t have to make the actual contribution — you could simply match the child’s earnings, and make the contribution as a gift, if you’re feeling generous.
Many different types of taxes come into play with an inheritance. Here’s how to sort them out. Also: figuring out your real credit score.
Inheritances and community property
Dear Liz: A friend is leaving me around $100,000 when she dies. Her documents have named only me and not my husband. When I inherit the money, will it be considered community property or will it be my sole and separate property?
Answer: Even if you live in a community property state such as California, gifts and inheritances are considered separate property. If you want it to remain separate, however, you should avoid commingling it with community funds. When you get the check, for example, don’t deposit it in a joint account. Open a new account in your name only.
The 8% annual growth is difficult get elsewhere, so planners often urge clients to tap other money first when they retire.
Social Security advice needs updating
Dear Liz: I know the general recommendation is to delay taking Social Security as long as possible. My brokerage advisor said that my spouse ideally should wait until 70 to apply to maximize his benefit and the survivor benefit, but that I should go ahead and file at 62 since I am the lower wage earner. A friend got the same advice from the same brokerage, although she has a different advisor. My husband and I are 59 and planning to retire at 62. We thought we would live off our savings, or work part time to stretch our savings, until our full retirement age of 67. That’s still the basic plan but now we’re not sure if I should wait or file for Social Security at 62.
Answer: Did your advisor ask you a whole bunch of questions and then use sophisticated Social Security claiming software to come up with that advice? If not, then what you got was possibly outdated boilerplate rather than true, personalized counsel.
Several years ago, the “62/70 split” strategy made sense for a lot of couples because the higher earner could receive a spousal benefit while putting off filing for their own retirement benefit. That’s no longer possible, however. Claiming early would lock you into a significantly lower payment for the rest of your life, plus you’d be subjected to the earnings test, which reduces your benefit by $1 for every $2 you earn over a certain amount ($18,960 in 2021) until your full retirement age.
AARP has a free Social Security claiming calculator that can help you see the effect of different scenarios. Before you retire, though, consider paying for a consultation with a fee-only advisor who can review your entire situation and offer comprehensive, personalized advice. Retirement decisions are complicated and often irrevocable, so get some experienced guidance before you take the plunge.
Liz Weston, Certified Financial Planner®, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.