Stages of Life & Estate Planning: Professional Singles

by Jonathan A. Nelson

The last Stages of Life post talked about college students and estate plans. Moving forward in life, professional singles (in varying degrees individually) can have significant debt, growing assets, and changing relationships.

As mom and dad tend to become less a part of daily decision-making (though hopefully no less loved), changing the power of attorney and medical directive to someone trusted who has more knowledge of and proximity to the person may make sense. Depending on the assets and debts, a will can control estate costs, facilitate handling increasing assets, and, by naming an executor, prevent creditors from taking control of the estate.

There may also be personal or tax reasons to direct the estate to different beneficiaries than the legal default: without a will, the estate of a person with no spouse and no descendants goes to his or her parents, but leaving the assets to siblings or a family college fund for nieces or nephews may be more tax efficient than sending the money back to the parents’ generation, only to have it come forward again later.

Estate planning outside these documents is also important at this stage: financial accounts need appropriate beneficiary designations; life insurance is inexpensive at this age but can protect cosigners (parents on education loans!) or co-tenants who may be left holding a lease. Although they are not legal documents, a list of major assets and points of contact, bills set on autopay, and means of electronic access to accounts are extremely helpful in the event there is an emergency and someone is stepping in and figuring out what to do.

Next in this series: Non-Marital Relationships

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

LAW UPDATE: U.S. Supreme Court Decision Will Impact Estate Planning With Family Businesses

by Jonathan A. Nelson

The U.S. Supreme Court this week, in Connelly v. U.S. (opinion here), added a wrinkle to estate and succession plans for businesses with only a few owners.  

Estate plans often depend on life insurance proceeds to give one's family (or other beneficiaries) a financial benefit from the decedent's having built a business, but without jeopardizing the future of the company by giving full rights of ownership and management to people unable or unwilling to run the company or perhaps a group who can't efficiently get along.  Some such plans pay the insurance proceeds directly to the company and have the company purchase the decedent's ownership interests back in a forced sale, usually for a price equal to the amount of insurance, thereby increasing proportionally all other ownership interests.  That buyback is a contract matter, and there is usually a mechanism for calculating the price.  

Brothers Michael and Thomas Connelly had such an arrangement for the building supply company they owned together - as it happened, Michael died first, so Thomas would keep the company and the company would pay the life insurance proceeds to buy back the stock from Michael's survivors for $3,000,000.  The executor filed a federal estate tax return (Form 706, the tax on a gross estate in excess of $13.61M in 2024, but less when Michael died) reporting a valuation of Michael's share of the company as $3,000,000.  The valuation had excluded the insurance proceeds as offset by the obligation to repurchase the shares, and the IRS disagreed with the offset.  The difference in tax was nearly $900,000.  

There may also be personal or tax reasons to direct the estate to different beneficiaries than the legal default: without a will, the estate of a person with no spouse and no descendants goes to his or her parents, but leaving the assets to siblings or a family college fund for nieces or nephews may be more tax efficient than sending the money back to the parents’ generation, only to have it come forward again later.

The Supreme Court has now ruled that the insurance proceeds must be included in the valuation, reasoning that even if the total value of the company goes down after the funds are used for a repurchase at fair market value, the value per share does not change, and in any event the valuation looks at date of death value (with received or receivable insurance proceeds) not post-redemption value.  Before the present decision, the federal circuit courts of appeal were split on this question.

Stock redemption plans are complex and must be tailored to the outcome needed for that specific company and the overall financial pictures of the owners.  If you have a stock redemption plan, buy-sell agreement, or provisions in a shareholder agreement, operating agreement, or similar document which restrict transfers and direct the disposition of the ownership interests, please check with your counsel on whether a change should be made in light of Connelly.

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Stages of Life & Estate Planning: Do College Students Need Estate Planning?

by Jonathan A. Nelson

Dinnertime conversation in a lawyer's house can get interesting. I have had to deal with whether it is accurate to call it "mom’s and dad's house" when it's in a trust, and whether an 8-year-old having a will would protect baseball cards and Legos (it can't - you have to be 18 or emancipated to sign a will; I may address estates of minors in a later post, but legal involvement is unusual). Taking the spirit of those discussions, though, we will look briefly at a few stages in life and the documents that are often helpful as life changes. Every situation is unique, and if we talk we will assess how your particular needs can best be met.

For college students with few assets and usually a lot of debt, often the most useful estate planning documents are a Durable General Power of Attorney and an Advance Medical Directive. For a college student, these are frequently made out to mom or dad. The Power of Attorney is really useful if the student gets into something over their head ("I have a big final tomorrow and my car was just impounded"), needs help moving money around (including for tuition), needs information for financial aid, or wants assistance handling transactions back home. The Medical Directive makes sure that the right person is designated to make emergency medical decisions regardless of what state the school is in, and provides access to medical history information that may be important to making those decisions intelligently.

Some instances where a will is helpful at this age are: adverse relationships with a parent or other family situations, assets requiring special or timely administration, inherited or contingent assets, or debts where the creditor needs to be prevented from controlling the estate. But generally, with few assets and parents being the heirs-at-law (and likely co-signers on debts), a will won’t usually change a lot compared to the default laws during this stage of life.

Next in this series: Professional Singles

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Amy & Dan Smith's Planning for Life: Gift and Estate Tax: Where Are We Now?

Changes in the tax law have created some confusion regarding the current state of taxes associated with the transfer of assets both at death (estate tax) or during lifetime (gift tax). A brief summary of the current tax law may be helpful to some of our readers.

Estate Tax: The taxation of estates can apply on two levels: federal and state.

With regard to federal estate tax, the exemption is now $11,400,000 per person. The exemption amount is to be increased annually by C.P.I. adjustment. Furthermore, the law contains a provision for “portability.” This means that, as between a married couple, the unused portion of the exemption of the first spouse to die can be preserved and utilized at the death of the second spouse by filing a simplified estate tax return. This (increased by C.P.I. adjustment of the second spouse’s exemption) at his/her death. The law creating this increased exemption is due to expire at the end of 2025, unless it is then extended. If allowed to expire, the exemption will revert to the amount existing before the change in the tax law increased by C.P.I. adjustment, estimated at $5,600,000 per person. The provision allowing portability is not set to expire.

Virginia does not have a state estate tax. However, both Maryland and D.C. have estate taxes which apply in addition to the federal estate tax.

There is one other type of “death tax” which can affect a beneficiary of an estate: the inheritance tax. Whereas an estate tax is a tax on the totality of a decedent’s assets which pass at his/her death, the inheritance tax applies to the share of the estate which a beneficiary receives. It applies even if an estate tax is also to be paid on the same share. Fortunately, very few states have an inheritance tax. In our area only Maryland has an inheritance tax. Thus, the estate of a Maryland decedent could be subjected to both federal and state estate taxes, and the beneficiary could be subjected to an inheritance tax on his/her share of the estate. (Some advice: “Don’t be caught dead in Maryland.”)

Gift Tax: The current amount which may be given annually without any gift tax consequences is $15,000 (“the annual exclusion”). This amount is subject to annual C.P.I. increases. For example, a husband and wife may each give $15,000 per year to their son or grandchild or friend. So long as the gift is within the annual exclusion amount, no gift tax return is required to be filed.

If a gift from a donor to a person exceeds the annual exclusion amount, the donor is required to file a gift tax return. The purpose of this return is to show the IRS what part of the donor’s exemption is being utilized by this gift. The gift tax exemption is the same amount as the estate tax exemption and is also to be increased by C.P.I. adjustments. Thus, if Mother gives a gift of $115,000 to Daughter, Mother would use $100,000 of her exemption that year. As with the estate tax exemption, the amount of the gift tax exemption is to revert to its level prior to the tax law changes at the end of 2015 unless the law is extended.

One note on gifts during lifetime: they carry the same basis to the donee which they had in the hands of the donor. This does not apply to gifts of cash, but should be a consideration with other gifts. For example, assume Father paid $5 for a share of GE stock. If Father gives that to Junior at a time when the stock is selling for $10 and Junior sells at that price, Junior has a capital gain of $5 which he must report on his income tax return. (Note: there is no tax to Junior for receiving the gift.) However, if Junior inherits the stock from Father at his death, Junior takes a “stepped up” basis; that is, the value of the stock at the time of Father’s death. In this way, significant capital gains can be avoided.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

Investment advisory services are offered through Amy V. Smith Wealth Management, LLC. Amy V. Smith Wealth Management, LLC, is not a registered broker/dealer and is independent of Raymond James Financial Services. Raymond James and its advisors do not offer tax or legal advice. You should discuss tax or legal matters with the appropriate professional. Dan Smith is not affiliated with Raymond James or Amy V. Smith Wealth Management, LLC. Amy V. Smith Wealth Management is located at 161 Fort Evans Road, NE Suite 345, Leesburg, VA 20176. Telephone 703 669-5022.

Amy & Dan Smith's Planning for Life: Applying for Medicaid Benefits

How do you apply for Medicaid?

Because Medicaid is administered by the states, each state has its own eligibility requirements and available benefits. Considerable variation can exist.

To apply for Medicaid, you or your representative must use a written application on a form prescribed by your state and signed under the pains and penalties of perjury. Give the application to your state Medicaid office.

What information must you disclose?

The Medicaid application process will require the disclosure of certain personal information, including:

• Proof of age, marital status, residence, and citizenship (or lawful alien status).

• Social Security number.

• Verification of receipt of other government benefits, such as Social Security, SSI, AFDC, and veterans’ benefits.

• Verification of all sources of income and assets for you and spouse. (Regarding assets, an indication as to how title is held (jointly, etc.) should be required.)

• A description of any interest you or your spouse has in an annuity (or similar financial instrument) regardless of whether the annuity is irrevocable or is treated as an asset.

• Lists of all transfers of income and assets within the applicable look-back period. This should include dates of transfer, name of transferee, consideration (if any) for transfer, and purpose of transfer.

For transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), the look-back period is 60 months for all transfers. The waiting period begins on: (1) the first day of the month during or after which assets have been transferred, or (2) the date of first possible eligibility for Medicaid (but for the penalty period), whichever is later.

Federal law generally requires state agencies to determine an applicant’s eligibility for Medicaid within 90 days for those who apply on the basis of disability and within 45 days for all other applicants. State agencies must send each applicant a written notice of its decision. If the application is approved, the applicant will be notified of the effective date of his or her Medicaid eligibility (which can cover a retroactive period of up to 90 days from the date of the application), as well as a calculation of the applicant’s “patient paid amount” or the amount of the monthly medical expenses that the applicant will be responsible for paying from his or her own income. If eligibility is denied, the reasons for the denial must be outlined, the relevant regulation cited, and an explanation of appeal rights outlined.

What are your appeal rights?

Federal law requires states to provide an opportunity for a fair hearing before the state Medicaid agency to any individual whose claim for medical assistance is denied or not acted upon with reasonable promptness or to any recipient who believes the agency has acted erroneously. To appeal, you must sign the request for a fair hearing within the time stated on the notice of denial. The time frame is generally anywhere from 30 to 90 days.

Hearings are handled by administrative officers, with review authority in state courts of appeal, federal circuit courts of appeal and, ultimately, the U.S. Supreme Court.

If the hearing decision is favorable to the applicant, the state Medicaid agency must make corrective Medicaid payments retroactive to the date an incorrect action was taken.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: 12 Financial Resolutions

Review and revamp your financial plan all year long

Instead of hauling out those familiar New Year’s resolutions about eating less and exercising more, how about focusing on something that’s also very good for you in the long run-and even sooner? We’re talking about your financial plan-your fiscal health, if you will. The approach of a new year – or any time, for that matter – is a great time to review your plan and make whatever revisions might be indicated. With that in mind, here are 12 suggested resolutions that, if followed, could help you go a long way toward attaining your financial goals.

Get your balance sheet in order – using December 31 as the effective date, update your personal balance sheet (assets versus liabilities, broadly speaking.)

Review your budget and spending habits – how close did you come to what you had planned to spend last year? Where did you go off-track and what can you do about that?

Review the titling of your accounts – account titling is more than just using the right form – it can also be a tool for estate planning. Review your account titling and determine if that’s still the arrangement you want.

Designate and update your beneficiaries – if you don’t correctly document and update your beneficiary designations, who gets what may be determined not according to your wishes but by federal or state law.

Evaluate your cash holdings – everyone should have a certain amount of their assets set aside in cash.

Revisit your portfolio’s asset allocation – are you comfortable with the current amount of risk in your portfolio?

Evaluate your sources of retirement income – every individual picture is different. Think about how secure each source is.

Review your Social Security statement – use the SSA’s online calculator to compute your benefits at various retirement ages

Review the tax efficiency of your charitable giving – give, but do so with an eye toward reducing your tax liability.

Check to see if your retirement plan is on track – retirement has a lot of moving parts that must be monitored and managed on an ongoing basis.

Make the indicated changes – go after any problem areas – or opportunities-systematically and promptly.

Set up a regular review schedule with your advisor – establish a regular schedule for getting together and reviewing your portfolio, your financial and retirement plans, and what’s happening in your life.

Since we all know that resolutions tend not to survive very long, add one more to make this a baker’s dozen. Resolve to really follow through on these – and give yourself permission to spend a day lazing around watching movies and eating ice cream when you’re done! Just one day though.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: What Happens to my Debt when I Die?

A question often asked by an heir of an estate or a person who has been nominated to be the administrator of an estate is: Am I going to be personally liable for the debts of the decedent? The answer is that, unless you undertook joint liability with the decedent during his/her lifetime, as a general rule you will not be liable for his/her debts. Nevertheless, the debt of a decedent can affect the heirs significantly.

If husband and wife signed a mortgage as owners of the residence and one of them dies, the survivor continues to be liable for the mortgage debt. The survivor may be able to adjust payments to manage the debt burden, but failure to make the required payments could lead to foreclosure.

If the debt is owed by the decedent alone (that is, there is not a joint debtor), then the estate of the decedent is liable for the debt. This can affect the heirs in different ways. For example, assume that the decedent had a car loan. If the estate does not have sufficient assets to pay off the loan, the car may be repossessed and resold. To the extent that the value of the car is insufficient to pay off the loan, the creditor (e.g., the bank or other financing company) can attempt to recover the remainder of the debt from the estate. Secured creditors (e.g., the car lender) come before the priority list of creditors discussed below.

Creditors holding unsecured loans fall into the category of “General Creditors.” An example would be a credit card issuer. Assuming that no one was on the credit card except the decedent, the balance due at the time of death is a debt of the estate. Here’s how that works. Pursuant to statute, creditors have different levels of priority in their claims against the estate. Costs of administration of the estate, family and spousal statutory allowances, funeral expenses, federal and state tax liabilities, and some medical expenses are at the top of the priority list. At the bottom of the list are general creditors. After payment of the priority creditors, the general creditors share proportionately in whatever assets remain. Subject to some exceptions, only after all the creditors are paid do the heirs receive their shares. Thus, even though an heir is not personally liable for the debt of his/her decedent, such debt can directly affect his/her inheritance.

The term “estate” applies to assets passing under a will or by intestacy. It is important to note that the claims of creditors apply equally to the revocable trust of a decedent which he/she created during lifetime, even though assets transferred into that trust during lifetime avoid probate.

An estate administrator incurs no personal liability for the decedent’s debts simply by assuming the office of administrator. However, the administrator can incur liability by failing to administer the estate according to the rules and safeguards established under the Virginia Code. For example, paying a general creditor ahead of a priority creditor can generate personal liability for the administrator.

There are some circumstances (beyond the scope of this article) where the assets of the estate after passing into the hands of an heir can be recalled to pay debts of the estate. The heir is not personally responsible for the debt but the asset(s) he/she receives may be subjected to a claim of an estate creditor.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Caregiver Connections

Whether in-person or online, connections fostered among caregivers provide long-range benefits.

As the populations for our country ages, the face of caregiving is changing along with it.  Today, 80 percent of those providing long-term care in the United States are not healthcare professionals-instead they are family members and even friends.  There are 40.4 million unpaid caregivers of adults ages 65 and older in the United States.  Most help one aging loved one, but 22 percent help two, and an impressive, but likely overwhelmed, 7 percent help three or more.*

With this shift from the clinical to the familial comes another change. A majority of those same individuals do not self-identify as “caregivers,” despite providing assistance to loved ones on a regular basis.  This may not seem like a problem, until you consider that caregivers who don’t truly understand their role are less likely to connect with those around them, for support and encouragement.

A Caring Community

Fostering connections with those who understand what you’re going through can make the road you’re traveling easier to navigate. By standing together, caregivers create a community through shared experiences that’s widespread and accessible anywhere, both in their local area and through online platforms.

Many caregivers enjoy participating in community events, attending support groups or gathering over brimming cups of coffee.  Group text messages are easy to create and maintain, and provide a safe space to exchange well wishes, best practices, uplifting messages and more. Scheduling regular get-togethers with nearby caregivers is another way to connect, providing an outlet as well as a wealth of resources.

Tap Into Your Virtual Network

An internet connection can also play an important role in your caregiving experience, cluing you into new advances in medicine and technology. Not only that, but a majority of caregivers who have accessed online information say that it has helped them cope with stress.

When venturing into online spaces, search out message boards with discussions that reflect your own experiences, pencil in video chat dates with faraway friends, and read up on all the internet has to offer-from in-depth research to lighthearted blog posts.  There’s no limit to what you can find.

Connect and Reflect

As a caregiver, you’re a part of a community of empowered individuals who give themselves to better the lives of those they love.  And since we’re on the topic of connections, it’s important not to forget the greatest connection that can be strengthened during your time as a caregiver; the one you share and are fostering each day with your loved one.

Next Steps

Connect with someone who can relate to your caregiving experience.

Explore a message board for added caregiving insight.

Have a conversation with your advisor about the financial implications of caregiving.

Sources: bls.gov,pewinternet.org; *Pew Research Center

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: Insurance—What’s the Use of It?

It’s like putting money down a black hole – Until You Need It! It is the major, unplanned-for loss that permanently wrecks financial well-being. Consider the following:

Major illness: Paying the premiums and then the deductible is annoying. However, failure to cover the possibility of a long-term illness can devastate savings and, even, lead to bankruptcy.

Fire: The loss of a residence seems remote to most folks. However, it happens. If there is inadequate coverage, comparable replacement may not be possible. At the same time the mortgage must be paid.

Liability: Harm to an individual – eg., an invited guest or a random victim in a car accident – can be emotionally gut-wrenching. One can be charged with liability for his/her actions which arguably caused injury to a friend or family member as well, of course, to a stranger. Having ample liability coverage – and, I would suggest, an umbrella policy – does give some peace of mind even though it may not remove the personal pain. Also, not having to pay lawyers to defend you (they are paid by your insurance company) can help relieve much stress.

Disability: The inability to function in the workplace due to disease or accident can put an abrupt end to the income stream which is supporting the family in whole or in part. Income replacement policies are expensive and are often not part of the employment package provided by employers. Furthermore, there are vast differences among policies — e.g., the definition of “disability,” waiting period before coverage begins, length of time the benefit is paid, etc. High quality policies are more expensive. Honestly, this is a difficult area of risk management, and hopefully it will not be needed. For the major bread-earner, however, it is an essential element for financial well-being of the family.

Long term care: Medicare does not provide long term care. The need for in-home care or residential assisted living must be self-insured. Having a policy can mean the difference between staying at home or having to going into residential living. It also gives peace of mind to parents who are not wanting to deplete the children’s inheritance. The cost of the long-term care policy depends on the “bells and whistles” one contracts for – eg, waiting period, length of time the benefit will pay, the amount of the benefit, and whether there is an inflation adjustment to the benefit. It is not too early for folks in their late 40’s to begin to look at these policies. The earlier coverage begins, the lower the premium.

Life: This is certainly an area where you hope the insurance company wins the bet; that is, that you live a long life! The type of policy one obtains—permanent vs term — depends on the risk that the loss of the insured poses. The major bread-earner with young children certainly needs to cover potential child care and education costs. Even the non-income producing spouse should have some coverage. Typically, cost of term insurance for parents with young children is inexpensive; however, it is the time of life when insurance is most needed.

Your author does not sell insurance. However, he has personally experienced the loss of his residence by fire, the long-term illness and death of a loved one, and a disability. The value of appropriate insurance at the right time cannot be overstated.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.

Amy & Dan Smith's Planning for Life: New Reports Highlight Continuing Challenges for Social Security and Medicare

Most Americans will receive Social Security and Medicare benefits at some point during their lives. For this reason, workers and retirees are concerned about potential program shortfalls that could affect future benefits.  Each year, the trustees of the Social Security and Medicare trust Funds release lengthy annual reports to Congress that assess the health of these important programs.  The newest reports, released on June 5, 2018, discuss the current financial condition and ongoing financial challenges that both programs face, and project a Social Security cost-of-living adjustment (COLA) for 2019.

What are the Social Security and Medicare Trust Funds?

Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits.  Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.  Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest.  As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
 
Note that the trustees provide certain projections based on the combined OASI and DI(OASDI) trust funds.  However, these projections are theoretical, because the trusts are separate, and generally one program’s taxes and reserves cannot be used to fund the other program.

Medicare:  There are two Medicare trust funds.  The Hospital Insurance (HI) Trust Fund helps pay for hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).

Highlights of Social Security Trustees Report 

This year, for the first time since 1982, Social Security’s total cost is projected to exceed its total income (including interest) and remain higher for the next 75 years. Consequently, the U.S. treasury will start withdrawing from trust fund reserves to help pay benefits in 2018.  The trustees project that the combined trust fund reserves (OASDI) will be depleted in 2034, the same year projected in last year’s report, unless Congress acts.

Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 79 percent of scheduled benefits for 2034, with the percentage falling gradually to 74 percent by 2092.
Based on the intermediate assumptions in this year’s report, the Social Security Administration is projecting that the cost-of-living adjustments (COLA) announced in the fall of 2018, will be 2.4 percent. The COLA would apply to benefits starting in January 2018.

Highlights of Medicare Trustees Report

Annual costs for the Medicare program exceeded tax income each year from 2008 to 2015. Although last year’s report projected surpluses in 2016 through 2022, this year’s report projects that costs will exceed income (excluding interest income) in 2018.

The HI trust fund is projected to be depleted in 2026, three years earlier than projected last year. Once the HI trust fund is depleted, tax and premium income would still cover 91 percent of estimated program costs, declining to 78 percent by 2042 and then gradually increasing to 85 percent by 2092. The Trustees note that long-range projection of Medicare costs are highly uncertain.

Why are Social Security and Medicare facing financial challenges?

Social security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on trust funds.

What is being done to address these challenges?

Both reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public.

You can view a combined summary of the 2018 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

From "Amy & Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com). He has practiced law in Loudoun County since 1980.