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Social Security Changes . . . As We Do

 

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John Borsos

 

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General Background Over 31 years ago, I generally ignored individual Social Security taxes because they comprised only 7.5% of the first $7,800 in earnings - a monetary impact that was near negligible and individually endurable. At that time, high-income taxpayers were in a world of 70% income tax rates so the prime focus for social security planning was to help businesses avoid taxes - FICA, FUTA and workmen's compensation premiums.1 During the following years, as the overall FICA rates jumped to 15.3% on $76,0002 and Medicare premiums continued on all income the purposes of financial planning and taxation became to eliminate all FICA wages from taxation. Some business owners, using offsetting tax deductions, eliminated income taxes, but still found to their amazement that their income could still be subject to hefty self-employment taxes. Now in the twenty-first century, we have additional and sometimes different Social Security planning problems. This article looks at the different programs and how the legal problems of our clients may be affected by the changing law which the Supreme Court has said is the most intricate law adopted by Congress.3 In the sixties, we had a war on poverty, that some say we lost. However, as part of the initiatives of that war, we began the Supplemental Security Income and Medicaid programs, under the premise that no resident of the richest country of the world should live in poverty or without medical care - just because they were disabled.4 So the concept of a minimum income5 and health insurance for the disabled was instituted. Both of these are federally funded welfare programs (that are administered by the states) and are based on income and resources of the participants.6 Social Security programs, modeled on the German social programs of over a 100 years ago, are to protect United States workers in retirement. To understand Social Security, one must think of our capitalistic system in terms of work cessation. As the Social Security system has grown, it grew from that fundamental Calvinistic soil of the work ethic that was frustrated by the depression when the banks and the stock market failed the former wage earners who had invested in their future. The Social Security system was to be a stabilizing force in economic uncertainty and insecurity. If one is retired - at a certain age or because of disability - or because of death, benefits may be paid to oneself or one's family. So we start with the Social Security System (OASDI)7 which provides cash payments to workers, their dependents and survivors. The amount of the benefits (PIA)8 is determined by the wages credited to the workers account. Each year of earnings is indexed, and if enough wages are earned, then retirement benefits,9 disability10 benefits, or auxiliary benefits may be shared and paid to children11 and spouse.12 In addition, a divorced spouse and/or a surviving spouse may share in the retirement benefits, if their retirement benefits are too low. Retirement Planning Supposition #1: Nine years ago, Anne, a refugee from Sweden, met, married and moved to the United States with her husband, N. E. Countant, a US citizen. She worked for 9 years before retiring at 65 as a non-resident alien. Anne comes to you to do her estate plan and wonders what benefits she will get. Discussion Ordinarily, the coverage requirement for insured status13 for retirement is 40 quarters. Anne worked in the US for 9 years (36 quarters); however, under totalization treaties14 with other countries, it is possible for her to receive Social Security This allows benefits when neither country would justify enough quarters of coverage. The amount of her benefit will be determined by her PIA (Primary Insured Amount)15 but would be reduced for foreign Social Security benefits. The calculation of the PIA is extremely complicated16 but will be done by SSA upon request. Part A Medicare benefits are payable to her because she is insured for benefits and Part B Medicare benefits are available because she has lived in the US for over 5 years, is a current resident and is over 65. Estate planners should note that because Anne is not a US citizen she is limited in ability to get an estate tax marital deduction. Also, if Anne elects not to take Medicare coverage because she is covered under some other insurance, the attorney should carefully review the policy because some insurers will decline coverage if "other insurance" (such as Medicare) is in force or available. Supposition #2: Jerry Mandering retired from his state job knowing that with his ten years of self employment Social Security benefits and his state retirement, he would have the good life. Although his divorce decree specified that he would keep benefits in place for his ex-wife, Allie Kwat, instead of his current wife, Cher, Jerry named his brother the beneficiary of his retirement and survivor of his state pension and wrote to Social Security that he wanted the maximum benefit and did not want any benefits to go to his "child, wife, or former wife." Unfortunately, Jerry died two months after retirement. In doing the probate of his estate, advice is given to Allie, his ex-wife, and Cher, his widow, about the survivor portions of Jerry's state retirement (which Jerry appointed to his brother) and Jerry's Social Security survivor's benefits which he renounced. What suggestions would you make about the benefits available?17 Discussion After starting out as just retirement benefits, Social Security and related laws have established a number of programs18 for providing material needs, for reducing illness expenses, for keeping families together, and for giving children the opportunity to grow up in health and security. Over the years, survivorship benefits for spouses19 have been extended to divorced20 spouses.21 However, the spouse's benefit could be reduced if the wage earner was entitled to any governmental benefits which were not subject to Social Security taxes. In this situation, if Jerry effectively had renounced these benefits, Allie or Cher would be entitled to social security benefits. However, ERISA, under federal preemption, does not let a spouse's right in a retirement plan annuity be unilaterally waived by the worker. A solution may be to have Allie be entitled to the government benefit and no social security benefits (because she would then be subject to a Government Pension Offset (GPO) dollar for dollar against any Social Security from Jerry). Cher could then qualify for Social Security spouse's benefits - without any offset. If both claimed social security benefits... both of their benefits would be offset. Survivor and Children's Benefits Supposition #3: Ora Phan's 19 year old father, Gene Poole, (who had never married Ora's mother), died when Ora was only five months old. Although Gene had worked for only a year and a half, are there any benefits available? Discussion Although only working for a few years22, his father may be covered by Social Security. Ora (and any other children of Gene) will jointly share equally in the money until they are through high school. As each child attains nineteen or graduates from high school, their share is lost23 and the remaining amount divided among the remaining beneficiaries. The mothers of any of Gene's children can also take a share if they are not working and their child is under 16, and they are caring for that child. However, in order to take benefits, Ora needs to be acknowledged by Gene, received support from Gene, or be capable of inheriting under intestacy laws. A recent Utah case recognized the issue of a California wage earner, a Utah unacknowledged child and a 99% paternity test. Social Security argued the paternity test was not controlling. Disability Benefits Supposition #4: When they got married, Ned and Freda opened a cafe. On the advice of an attorney, to save paying duplicate FICA taxes, they reported all the income earned under Ned's Social Security number. Freda found out she has lupus at 40 years old, but is uninsured for Social Security purposes because of incorrect reporting. They sued their accountant and attorney for mistakenly preparing their income tax return and not correctly reporting the Social Security earnings. Discussion FICA24 protects only insured people. While Freda could claim a retirement benefit on her husband's Social Security, there is no equivalent disability benefit. To be entitled, Freda would have to have worked 20 quarters. For the year 2000, one quarter is worth $780, or $3120 or a tax of $477. Were this health and disability insurance benefit and its cost of $477 discussed? Did Ned and Freda authorize and properly waive this tax scheme?25 Supposition #5: A property settlement and alimony decree of Mary Vorce (a disabled individual) and Dee Vorce, specified that Mary receive alimony income of $800 per month to help her pay her medical expenses and so much of the assets of the property proceeds as would be needed for the rehabilitation process. Discussion: An eligible individual cannot have monthly countable income26 in excess of the current Federal benefit rate (FBR).27 These amounts are set by statute and are subject to annual increases as dictated by cost-of-living adjustments. As of January 2001, the FBR for an individual is $530 and that for an eligible couple is $795.28 In addition to income, an eligible individual without a spouse cannot own countable real or personal property (including cash) in excess of a specified amount at the beginning of each month. For an individual with an eligible or ineligible spouse, the applicable limit is one and one-half times as much as that for an individual without a spouse. These limits are set by statute. They are not subject to regular cost-of-living adjustments, but change from time to time. Since January 1997 figures have been $2,000 for an individual and $3,000 for a couple. If the decree specified that the $800 could only be spent on medicine or medical procedures, then it is not countable income. If the property distributed in the property settlement was given to a qualifying trust, it could be exempt from countable resources. Only low income disabled citizens, refugees and some children can qualify for Medicaid and SSI benefits. Like most welfare programs, the requirements and conditions are stringent. People have been denied one month's benefits because on the day measuring their resources, they exceeded $2000 because an uncashed rent payment had not cleared. Medicaid Benefits Supposition #6: When Earnest N. Dever developed Alzheimer's disease, his wife, Chance N. Dever, consulted her attorney because she wondered if anything could be done to avoid the nearly $45,000 a year nursing home costs from their retirement earnings and savings. Based on Earnest's age, and his illness, his estate will have to pay over $380,000. Discussion Because Medicaid29 can pay for nursing home expenses, some estate planning could be done. First the tests for resources30 can be met if the individual disposes of his property prior to entering a nursing home. Gifts within 36 months to individuals or 60 months to trusts are partially included back to determine eligibility. In addition, certain trusts which Earnest owns can be excluded as a resource. In addition, a certain amount31 of assets are allowed under provisions of Spousal Impoverishment.32 Because Utah is a "needs based"33 state, needy individuals may spend down their income34 to meet the guidelines. So Earnest can pay his pension, Social Security and other income and become a Medicaid patient of the institution for the excess medical cost. With proper planning, Earnest would be able to shelter $84,000 in a QMB trust, $84,000 in spousal division of property, and the remainder in gift to the children who then set up a trust for their mother, Chance. Supposition #7: Sir Roe Ciss, a U.S. citizen, needs a kidney, liver and pancreas transplant costing over $350,000. He has over $400,000 and is willing to pay for the operation. His doctor says that the length of the list for prospective transplant patients in his state would prevent him from receiving an operation for over three years, by which time he might be so terminally ill that no operation would be possible. He has heard that Medicaid will pay for the operation. What advice do you give him? Discussion After setting up a special medical trust, Roe qualifies for Medicaid and, as a Medicaid patient, goes to the top of the transplant list. Medicaid will pay for almost all of the operation, and for the rest of his life, Roe can enjoy the trust and only has to pay back Medicaid the cost of the operation - without interest - upon his death - and only then if Roe has any money. Medicaid eligibility is established nationally, but since it is administered by the states, each state can have its own benefits and enforcement procedures. Since retirement benefit planning is so popular, the qualification for Medicaid benefits has been the object of people having more than $2000 in resources. Countable resources do not include one's home, automobile used for medical purposes, burial plot or reasonable clothing and furnishings. Previous to 1993, a common planning technique for people anticipating large custodial or medical expenses was to give away property to beneficiaries. Since OBRA 199335, there is a waiting period of 60 months for gifts to trusts and 36 months for gifts to individuals. During this waiting period, the value of the transfer is added to countable resources and the fractional portion of the transferred property (1/60th, 1/36th) is subtracted from the value each month. Parents, grandparents or the disabled individual can now create Special Needs Trusts36 which allow the disabled person to exclude the trust created for their own benefit as a resource, as long as the Medicaid bills are repaid. With such planning, people now effectively get a loan from Medicaid for the value of medical services, while still enjoying the benefits of the trusts Ñ then pay back the cost of medical services (without interest) when they die and only if there is money in the trust! Because of the complexity of the laws, the involvement of activist congressional lobbying and the difficulty of predicting the future, Medicaid trusts, Special Needs trusts, Trigger37 trusts and Medicaid Qualifying trusts38 are risky because they can lose benefits for people if not done correctly and should only be used with care because of the opportunity for abuse by relatives. Conclusion Last year, nearly 4,000,000 people got Social Security benefits. With over 400,000,000 Social Security cards issued, Social Security benefits are affecting more and more of our clients in ways we need to pay attention to - no matter what our specialty. Footnotes 1  Businesses do not need to pay the employer portion of Medicare and FICA if they hire independent contractors. The contractor, as a self employed entity, needs to pay both parts of the FICA and Medicare premiums. 2  The amount increases annually with inflation for FICA. 3  Justice Powell stated: "The Social Security Act is among the most intricate ever drafted by Congress. Its byzantine construction as Judge Friendly has observed, makes the Act Ôalmost unintelligible to the uninitiated.' Friedman v. Berger, 547 F.2d 724, 727, n. 7 (CA2 1976), cert. denied, 430 U.S. 984 (1977)"...In footnote 14 the court goes on state: "The District Court in the same case described the Medicaid statute as Ôan aggravated assault on the English language, resistant to attempts to understand it.' 409 F. Supp. 1225, 1226 (SDNY 1976)". Schweiker v. Gray Panther, 453 U.S. 34, 43; 69 L. Ed.2d 460 at 469 (1981). 4  Social Security altered the requirement of not being able to work for addiction diseases by a 1996 amendment that precludes people with an addictive disease from receiving benefits. Also eliminated in that amendment were disabled children who were not medically disabled. 5  The amount of Supplemental Security Income that may be received by disabled people is adjusted annually for inflation and this year that amount is $530 or $550 (if they are also entitled to Social Security). If a husband and wife are both disabled and entitled to benefits, the total SSI and SSA cannot exceed one and half times the annual amount ($530 + $265 = $795). 6  As the 1965 study revealed, many disabled people never worked enough yearly quarters because their disabilities were not tolerated by employers. Also, many wives who cared for children, and therefore, did not work, had no ability to earn money or qualify for benefits when they became disabled and were divorced. 7  Old Age, Survivors, and Disability Insurance Program. 8  Primary Insured Amount. This is a complex calculation of benefits calculated by adjusting reported earnings for time and then using the index of the countable years to determine the average amount which may then be affected by early retirement or disability. The formula is found in the regulations 20 CFR 404.201-290. Pamphlets are also available at the local Social Security office or may be down loaded from www.ssa.gov. In addition, there is an interactive free software - AnyPia that may be downloaded. 9  40 quarters of coverage over a lifetime of work in the US or countries having a treaty agreement with the US. 10 20 quarters of coverage earned in the last 40 quarters before becoming disabled. 11 Paid to children under 19 and in school. 12 Paid to a non working spouse who stays home to tend minor children under 16. 13 There are special rules for people born in different years, but since January 2, 1929, the number of quarters has been 40. 14 The United States currently has Social Security agreements in effect with 17 countries - Austria (1991), Belgium (1984), Canada (1984), the Federal Republic of Germany (1979), Finland (1992), France (1988), Greece (1994), Ireland (1993), Italy (effective 1978), Luxembourg (1993), the Netherlands (1990), Norway (1984), Portugal (1989), Spain (1988), Sweden (1987), Switzerland (1980) and the United Kingdom (1985). 15 The PIA may be obtained through calling SSA at 800-772-1213, visiting the website ssa.gov and downloading a PEBES application, or downloading an interactive program AnyPIA from ssa.gov or ssas.com. 16 Inequities in the calculation were prominently demonstrated by the problem with "gap" babies who lose out on certain earnings. President Franklin Delano Roosevelt's son, who was a gap baby, argued for legislative equality in treatment. 17 Receipt of a governmental pension. A benefit payable to a spouse, divorced spouse, surviving spouse, surviving divorced spouse, or a deemed spouse may be reduced if the person receives a periodic payment based on his or her own employment that was not covered under Social Security from the Federal Government, a State or a political subdivision of a State. A periodic payment includes payment on a monthly or other than monthly basis or a lump sum that replaces a payment on a monthly basis. For governmental pension offset purposes, the definition of State includes the 50 States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Northern Mariana Islands. 18 These programs include: retirement insurance, survivors insurance, disability insurance, hospital and medical insurance for the aged, the disabled, and those with end-stage renal disease, black lung benefits, supplemental security income, unemployment insurance, public assistance and welfare services, aid to needy families with children, medical assistance, maternal and child health services, child support enforcement, family and child welfare services, food stamps, and energy assistance. The Federal Government operates the retirement, survivors, disability, hospital and medical insurance, black lung benefit, and the supplemental security income programs. 19 Surviving spouses must be married for 9 months (unless the deceased worker was killed accidentally, or the worker married knowing he or she was not expected to live 9 months) and the spouse is over 60 and retired or over 50 and disabled. 20 He or she must have been divorced after being married for over 10 years to the wage earner. 21 It is possible for a man who was married numerous times to have several sequentially divorced spouses or minor children claim against his earnings. (However not several concurrent divorced spouses). The entitled people will share in what is know as the Family Allowance and equates to a maximum of fifty percent of the worker's Primary Insured Amount. 22 Social Security requires at least 6 quarters but does not require the 20 or 40 quarters required for other older disabled and retired people. 23 The benefits may also be lost if the child earns more than the yearly exempt amount or works outside the U.S. for more than 45 hours in a month or is an alien who is outside the U.S. for more than 6 consecutive calendar months, or does not have a Social Security number and refuses to apply for one. 24 the Federal Insurance Compensation Act. 25 Similarly, an attorney/accountant structuring businesses so that losses occur would produce the same liability questions for the loss of SSDI and Medicare coverage for both Freda and Ned. 26 Countable income is earned income above $60 and unearned income above $20. 27 The Federal Benefit Rate for SSI for an eligible couple is one and one half as much as that for an individual. 28 The amount of earned income can be reduced by vocational rehabilitation expenses - Impairment-related Work Expenses - which are services and items that a disabled (but not blind) person needs in order to work. They can be deducted from earnings in determinations of SGA, even if these items and services are also needed for nonwork activities. Impairment-related work expenses (IRWE) are also excluded from earned income in determining monthly countable income. 29 The Aged, Blind or Disabled Programs are medical assistance programs for individuals aged 65 years or older, blind or disabled. Persons who receive SSI (Supplemental Security Income) or Social Security Disability benefits meet the conditions for disability. For other persons to qualify on the basis of blindness or disability, the person must have a physical or mental impairment which either (1) can be expected to result in death or (2) lasts for not less than 12 months. The impairment must be of such severity that the person is unable to do his or her previous work and cannot (considering age, education and work experience), engage in other kinds of substantial, gainful work. The income standard, after allowable deductions, is based on a percentage of the financial assistance grant level, as determined by the Utah State Legislature. 30 The asset tests are the same as for SSI, 1 person - $2,000.00; and 2 Persons - $3,000.00 For each additional person, add $25.00. 31 The assets of spouses can be apportioned. (See following footnote) In addition, the home, a car needed for medical purposes and certain burial plans are exempt (i.e. they are not counted as resources - but may be liened) and not counted for purposes of qualifying for benefits. 32 Half of the estate may be preserved or a specified amount ($16,824 minimum and $84,120 maximum). 33 Medicaid applicants whose income exceeds the monthly income standard may be considered for the Medically Needy program, sometimes referred to as the Spenddown Program. This program allows a person who is otherwise eligible either to pay "excess" monthly income to the state or to accept responsibility for a portion of their monthly medical bills. 34 Utah allows for the SSI tests of income by deducting $20.00 general income exclusion; $65.00 and 1/2 of the remaining gross earned income; health and accident premiums, and impairment-related work expenses and as stated in the prior footnote, if the income is still too high, the individual can spend down. 35 SSI regulations were not changed in 1993, but the Foster Care Independence Act of December 14, 1999 conformed the trust provisions of both laws. 36 The individual must be disabled, under 65 years old, and the trust must be established by the parent, grandparent, legal guardian or court. 37 So called because the disability event creates the transfer. 38 Actually these were really Medicaid non-qualifying trusts.