Dear Liz: I want to make sure that I leave an inheritance for my son from my first marriage. I remarried 12 years ago. My husband has no children. I do have a prenuptial agreement. My husband and I are financially fine. We own our own home and have adequate investments. I wouldn’t want to leave my husband without necessary funds, and he says he’ll make sure that my son gets an inheritance. But my husband’s father had dementia, and I am concerned that if my husband develops it, he may spend all the money on impulsive purchases. He has a tendency to make impulsive purchases now that we can afford them. What might I set up to ensure that my son receives an inheritance?
Answer: If you don’t make specific plans to leave money for your son, he may not get an inheritance even if your husband doesn’t develop dementia.
To put it another way: if you don’t want your spouse’s next spouse to spend your money, then talk to an estate planning attorney about your options.
You could, for example, leave part of your estate to your son and the rest to your spouse. Another possibility is to create a trust that gives your spouse income from your assets while he’s alive and then transfers the assets to your son when your spouse dies. Yet another is to name your son as the beneficiary to certain accounts, such as life insurance or retirement funds, while leaving other accounts to your spouse.
All of these options have advantages and disadvantages. An estate planning attorney can help you evaluate the best approach for your situation and draw up the needed paperwork.
Taxes and Social Security
Dear Liz: You wrote in a column about retirement plan distributions and the effect that those have on taxation of one’s Social Security benefits. Your example was if someone made over $44,000 in combined earnings then their benefits would be taxed at 85%. Does this apply if one waits until full retirement age to start drawing Social Security? My husband also will be required to start making required minimum distributions in 2023. Are those distributions taxed differently from the rest of our income, since we are both still working? Or does it matter whether we are working or not?
Answer: The taxation of Social Security is complicated and often misunderstood, but rest reassured that you won’t lose 85% of your benefits. If you have income in addition to Social Security — whether it’s from work, retirement plan distributions or other sources — then up to 85% of your benefit might be subject to tax at your ordinary income tax rate.
The earlier column mentioned that taxes on Social Security are based on your “combined income,” which is your adjusted gross income — the figure you report on Line 11 of your 1040 tax returns — plus any nontaxable interest and half your Social Security benefits. Single filers who have combined income between $25,000 and $34,000 may have to pay income tax on up to 50% of their benefits while those with combined income over $34,000 may pay tax on up to 85% of their benefits. Married couples filing jointly may have to pay income tax on up to 50% of benefits if their combined income is between $32,000 and $44,000. If their combined income is more than $44,000, they could owe tax on up to 85% of their benefits. You can read more about how Social Security benefits are taxed on the agency’s website.
Your benefits can be taxable regardless of when you start. However, researchers have found that many middle-income people pay less taxes overall if they delay Social Security and tap their retirement funds instead. You can read more about the “tax torpedo” on the Financial Planning Assn. website.
Your husband’s required minimum distributions will be taxed as income unless he made nondeductible contributions to those retirement plans. If he did make after-tax contributions, then a portion of his withdrawals would not be taxed. Most people got a tax break for all their contributions, however, which means all their withdrawals are taxable.
A tax pro can look over the specifics of your situation, help you estimate your tax bill and make sure you have sufficient withholding to avoid penalties.
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.
This story originally appeared in Los Angeles Times.