Estate Planning: Wait Until 70 to Draw Social Security?

Many of the clients who come in to our offices are either creating or updating their Living Trusts. They’re often older, and if not retired, they’re thinking about it. As a result, we hear many concerns about healthcare, social security, disability insurance and hospice.

Jane Bryant Quinn discusses timing of Social Security payouts

Jane Bryant Quinn, the personal finance expert who writes for the AARP, discusses when to start taking your social security payments in her article, Don’t Rush Social Security. Many people start at 62 because they need the money; others wait until they’re 67. But Quinn encourages people to wait until they’re 70 because their monthly payout will be a whopping 76% higher than if they’d begun receiving their payments at 62. For those who are married, waiting will also provide the surviving spouse with a larger survivor’s benefit.

What about the strategy of drawing social security at 62 and investing the money?

Let’s say your circumstances and investments allow you to make a choice: Would you be better off drawing Social Security at 62 and investing the payments? One expert, Bill Reich­enstein, a professor of finance at Baylor University, has created a powerful Social Security calculator that allows him to apply filters, such as the effect of taxes on the additional income, probable return on investments, and cost-of-living increases. He created various scenarios, taking into account the average life expectancy of a 62-year-old, and found that it’s better to wait until you’re 70.

For instance, if you take your Social Security benefit at 62 and start growing the funds through investments, how long would it last if you then started drawing from that fund at age 70 at the monthly amount you would have gotten if you’d waited? Unfortunately, not long enough. Your fund would be gone by the time you reached age 81. That may be average life expectancy, but 40% of people live longer than that and half of those will live into their 90s. With the fund now spent, you will have to do with the reduced benefit you took at age 62.

A valid case for drawing Social Security at 62

If your health is failing and you are not worried about a spouse getting a larger survivor’s benefit, the best decision may be to start drawing at age 62. If you are not going to need the benefit and want to start drawing and investing it, you could leave a fund for your heirs. Yet for most of us, good judgment and Bill Reich­enstein prevail; it’s difficult to beat the system. Investing those Social Security benefits taken at 62 will not beat the lifetime return of those benefits you draw at age 70.

Creating a Living Trust is an important part of your retirement planning. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment. We’re helpful, compassionate and affordable.

Distribution of Assets: Beware Property Tax Consequences

A recent experience with a Living Trust client brought up an issue that frequently surfaces for those who are dividing their estates among their children. “Joe” and “Marilyn” were planning to gift real property equally to their son, “Tony” and daughter, “Sarah”. In the beneficiary section of the Trust, they also were granting the residue (the remaining assets after all specific gifts have been made) of their Trust estate to Tony and Sarah equally.
In each case they named an alternate beneficiary in the event something happened to either Tony or Sarah. For both the property and the residue, the alternate beneficiary was the other sibling. This seems straightforward, but it creates potentially significant property tax ramifications for Tony and Sarah.

Background: Prop 58 excludes transfer of real property from reassessment

In 1986, voters in California approved Proposition 58, which excludes real property from being reassessed when it is transferred from parent to child. When the primary residence is transferred, there is no limit on the value of the property. For property other than the primary residence, there is a limit of $1 million per transferor.
This means that instead of reassessing the property at its current value, the assessment of the current Prop 13 value results in significantly lower property taxes. For Joe and Marilyn and their family, this means that when the property is transferred equally to Tony and Sarah, there will be no reassessment at that time (if they wish to exercise their exemption).

Sarah and her family are living in the primary residence

The situation gets a little more complicated with this family, as it does with many of our clients. Sarah and her own family are currently living in the property and plan to remain there after Joe and Marilyn die. Sarah can buy Tony out, but the assessor will treat the transfer this time as that of one sibling to another—which means that this time it will be without the exemption, so that 50% of the property would be reassessed at current values. In today’s inflated real estate market, this could result in an increase of a few hundred thousand dollars in assessed value and skyrocketing property taxes.

This scenario caused our clients to reconsider

Joe and Marilyn began rethinking how they would split their estate between their children. If they included the property as part of the residue of the estate, this gave Tony and Sarah additional options. If the Trustee valued the total of the estate and then split the estate, one half could include the home that one child wanted and the other half would include a total of equal real and liquid assets. With this scenario, the transfer of the home to Sarah would qualify for the exemption on the entire value of the home. No buyout would be required and no transfer from one sibling to the other would be necessary—avoiding the potentially huge property-tax burden. Tony could receive real property and assets equal to the value of the property that Sarah was inheriting.
California Document Preparers assists clients with the creation of Living Trusts, transferring property into the Trusts, and assisting Successor Trustees in transferring properties to beneficiaries. We also can assist in transferring property to your children now. The implications of the Parent-Child Exemption should be considered in any Deed transfers between parents and children.
Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment or to get more information to help make informed decisions. We’re helpful, compassionate and affordable.

We helped a Berkeley couple, “Brad” and “Sonya”, get a Legal Separation four years ago. They’d been married for eight years and had two young children. Their relationship had become increasingly troubled, yet they were not ready for Divorce; rather, they believed that taking the steps to legally separate was the right solution for their family at that time. Just as with Divorce, a Legal Separation requires division of property and a parenting plan. Brad and Sonya were both professionals generating good incomes, and they agreed that Sonya would get the house, and be responsible for refinancing it in her name alone. They shared custody of their two children, but since the kids spent 70% of their time with their mother, Brad agreed to pay child support.

Four years later, they were ready to get a Divorce

The four years of Brad and Sonya’s legal separation did nothing to repair their relationship, and they agreed that it was time to get divorced. Over the period of their separation, both spouses had been promoted, increasing their salaries. Both had made investments, and Sonya had inherited her grandmother’s Tahoe cabin. They had never executed a Deed transferring the home to Sonya, so we immediately prepared a Deed transferring the property to her, enabling her to refinance the family’s home.

Once a legal separation is finalized, the case is closed . . . but a couple is still married, with the responsibilities of a married couple

Legally separated couples need to keep in mind that even if they are officially separated, they’re still married. If, like Brad and Sonya, they decide to divorce, they must start a brand new case and prepare new documents. If a couple wants to keep their agreement the same, the documents can reference their previous judgment, but if they want to make additions or changes to the division of assets or the parenting plan, they must submit a new agreement.

While a separation can take just a few months (effective as soon as the judge signs the document), California legally requires a minimum of six months and one day from the date the spouse is served for a divorce to be official. Some legally separated clients who proceed with a Divorce are surprised that they can’t simply sign off on the change of status, and Brad and Sonya’s case clearly illustrates why this wouldn’t be the best course of action, even if it were possible. Circumstances can change dramatically over the course of an extended separation—for better and for worse, which necessitates revisiting a couple’s collective assets and debt and how they plan to share in the raising of their children.

If you’re considering a Legal Separation or if you’ve decided that it’s time to go through with a Divorce, contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment. We’re helpful, compassionate and affordable.

Trust Update: 25 Years Later, a Completely New Document

Oakland resident “Henry” came in to update his Living Trust after his wife died. Their Trust was amendable by the survivor, and he wanted to make some changes. Henry and his wife had created their Trust 25 years ago, and while it named their five children as beneficiaries, it did not address the fact that two of their now-adult children had special needs.

A lot had changed in 25 years, including the addition of new grandchildren

Henry wanted to add his five grandchildren as beneficiaries—all had been born after the Trust’s creation. Henry was active and in good health, but his wife’s death had made him aware of his own vulnerability, and he wanted someone to help him manage the Trust’s assets immediately. His son, John, was a CPA, and while Henry was closer to his artist daughter, Kate, he knew that John would be the better choice to help manage his estate.

As often happens, we discovered real property that had not been moved into the Trust

There’s a reason why we urge our clients to review their Trusts periodically or after important life events. A lot changes in 25 years. When we investigated the status of his real properties, we found that they were no longer in the old joint Trust. Since these were the only assets they had originally deeded into their Trust, and they were no longer in it, Henry decided that the old trust was so dated that it made sense to start from scratch, creating a new Trust and moving all of the appropriate assets into it. He would also address the life changes that had taken place since the first Trust some 25 years before, including adding his new grandchildren and making accommodation for his two special-needs children. Henry completed the appropriate workbooks for us, including those to establish two Special Needs Trusts as well as the transfer of his three properties into the Trust.

Another obstacle: Incorrect Deeds which needed to be unraveled

When we were preparing the Deed transfers to go into his new Trust we could see that the property descriptions for two of the properties were incorrect. After exploring this with him, we found out that more than 20 years ago, he had split one property into two. No new property descriptions had been written, and the last recorded Deeds were incorrect. With the help of the county assessor, we were able to discern what needed to be done to help him correct the property descriptions and transfer the properties into his Trust. This was important because Henry was leaving one of those properties to his son.

Important features of the new Living Trust

• John was immediately named as co-Trustee; if Henry became incapacitated or simply needed help with Trust assets, his son could take over without requiring the involvement of doctors.
• Two Special Needs Trusts put the beneficiaries’ shares in the hands of the Successor Trustee to manage so his children did not lose the public benefits to which they are entitled.
• After Henry’s death, shares for Henry’s five grandchildren will be controlled by the Successor Trustee who, at his discretion, can use the funds if needed for their welfare or education until they reach an age Henry designated.

California Document Preparers prepared the new Trust, an updated Power of Attorney, and Advance Health Care Directive and called Henry when it was time to sign them. He was immensely relieved to have these documents brought up to date.

How long has it been since you prepared your Living Trust? Like Henry, there’s a very good chance that there have been significant changes to in your life. Call California Document Preparers at one of our three Bay Area offices today to schedule an appointment to amend your Trust. We’re helpful, compassionate and affordable.