Social Security Benefits and Taxes (Part 1)
Social Security benefits are the primary source - and in some cases the sole source - of income for a majority of Americans. Many Americans have little to no retirement savings. Company pension plans have become rare and even when available, most people do not stay with a single company long enough to qualify for much. Then there are people - most often women - who were not in the work force for many years for reasons such as raising a family. On top of that, most Social Security benefits are taxable, which further reduces the amount received. This wasn’t always the case until the mid 1980’s. Trying to address a funding problem (which has not been solved but instead has only worsened over time), in 1984 Congress subjected a portion of benefits to federal income tax. (Some but not all states exempt Social Security from state income tax). Taxpayers at higher income levels pay more tax. Today, beginning at income of $25,000 for a single person and $32,000 for a married couple, 50% of Social Security benefits are taxed. Once income exceeds $34,000 for a single person and $44,000 for a married couple 85% of benefits are subject to tax. To make matters worse, these thresholds do not
What is an Insolvent Estate? (Part 3)
In my blog post last week, I explained that when the assets of a decedent are insufficient to cover all estate debts, the debt is classified by priorities. Debts are entitled to be paid in a certain order of priority. Eventually, however, in the case of an insolvent estate we will get to a category for which there are not enough assets to cover the debt. So who gets paid and in what amount? The creditors at that certain level won’t be paid 100% of their claims. There may be enough to pay them a pro rata share of their overall debt. In some cases, creditors won’t be paid at all. Because of that, the personal representative needs some assurance that the creditors can’t sue the estate or the representative for failure to pay their claims. That’s where an insolvency action is necessary. The personal representative needs a court to authorize the payment of claims so as to be able to “cut off” the unpaid claims. The personal representative lays it all out for a probate judge - all the assets and all the debts and who should be paid. The court filing is made upon notice to all known creditors. The judge reviews it and if in agreement signs a court
What is an Insolvent Estate? (Part 2)
In this week’s blog post, I continue a discussion of insolvent estates. An insolvent estate is one in which there are not enough assets to cover all of an estate’s debts. The personal representative can’t, however, simply pay the bills as they come in. That’s because New Jersey probate law determines in what order they are to be paid. At the top of the priority list are the expenses of the decedent’s funeral. Next in line are expenses of estate administration. This includes Surrogate filing fees, the personal representative’s commission and estate administration legal fees. If there is anything left after these payments, then the Office of Public Guardian bills if any are paid and following that debts and taxes with preference under federal or state laws are next. The next bills to be paid after taxes are medical and hospital expenses of decedent’s last illness. Following that are any creditors that obtained judgments against the decedent. At the bottom of the list are all other claims into which would fall credit cards and other outstanding bills of the decedent, such as unpaid utility bills, repair bills, etc. Now that we have an understanding of the order of priority, the personal representative is tasked with using the funds to pay
What is an Insolvent Estate? Part 1
As I have written about previously in this blog, estate administration involves gathering the assets of the person who died, paying all debts and taxes owing, and distributing the remaining assets to the rightful heirs - determined either by a will if there is one or by state intestacy laws if there is not. But what happens if there are not sufficient assets to pay all the debts? What happens then? When there are not enough assets to pay all the creditors, this is known as an insolvent estate. So who determines which creditors are entitled to be paid first and in what amounts? There is a law that answers that question and is the reason why I tell executors and administrators that where it is not clear that there are sufficient assets to cover all debts they should not pay bills as they come in. They must wait until all creditors present their claims. When I explain this, the next reasonable question is, “how long must we wait?”. The New Jersey statute requires that all creditors present their claims to the personal representative (ie. executor or administrator) within 9 months from the date of death. If a claim is not presented within that time frame, the personal representative
The SECURE Act’s 10 Year Rule (Part 2)
In last week’s post, I wrote about the SECURE Act, specifically the change that for most beneficiaries does away with the ability to stretch out the time period by which funds must be withdrawn from these accounts. This change will affect most children who inherit retirement accounts from their parents. Being 25 to 30 years or more younger than their parents, before the SECURE Act they could stretch out the time period by which they must withdraw tax deferred funds and pay the tax. This limited the tax hit and allowed these accounts to grow for a longer period of time without paying tax. The 10 year rule changed that by requiring that these funds be withdrawn completely by the 10th year. What was not entirely clear was whether a beneficiary must withdraw a minimum amount each year or simply make sure to withdraw it all by the end of the 10th year after the original account holder’s death. When the tax law is not clear, the IRS steps in to issue clarification. The IRS last month clarified this issue and announced how it plans to apply the 10 year rule. As with most IRA rules, the answer is complicated. That’s because different rules apply when the deceased owner
The SECURE Act’s 10 Year Rule (Part 1)
A recent caller asked me to confirm a change he said he read about relating to required minimum distributions from an inherited IRA. I wasn’t sure exactly what he was referring to so I did a little digging. Before I tell you what I found, probably a little background on the topic is helpful. I last wrote about the SECURE Act in a post on February 5, 2023, specifically about changes to the original SECURE Act. The original act passed in December, 2019. It raised the age at which one must start withdrawing funds from an IRA - known as required minimum distributions or RMDs, from 70 and 1/2 to 72. This was viewed favorably. SECURE Act 2.0, passed in 2023 then raised the RMD to 73 beginning in 2023. It will also gradually be raised to 75 by 2033. However, when the government gives us something good on the one hand, it typically takes away something else - often of greater value. In this case, it essentially eliminated the stretch IRA for most everyone except a surviving spouse and certain disabled and minor beneficiaries (although even these beneficiaries only get a limited reprieve). What Congress took away was a big deal. Before SECURE Act, if I inherited an IRA from my