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Thayer Partners Blog

Use Social Security to Leave a Legacy to an Heir or Favorite Charity

[fa icon="calendar"] May 25, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

Use_Social_Security_to_Leave_a_Legacy_to_an_Heir_or_Favorite_Charity.jpgWhile most people will collect their Social Security benefit out of necessity, you might be one of the lucky few that doesn’t need to. Maybe you’re a big saver, or made a lot of money during your career or perhaps you’ve inherited some money. Whatever the reason, you’re living comfortably in retirement. So have you thought about what to do with your Social Security benefits?

Your Legacy, Your Way

Social Security is…secure. Once you’ve started collecting it, it’s very unlikely that this income stream will be reduced or cut; in fact, it’s more likely to increase with the cost of living. Of course, if you haven’t started collecting, there could be changes to taxation, eligibility, or benefit amounts that could affect your benefits when you do opt to collect. Once you’ve started though, the politicians are highly unlikely to change the benefit for fear of severe consequences at the ballot box, so the US government essentially guarantees this income stream.

If you’re not relying on Social Security just to get by, you can leverage it to leave a legacy to your children, grandchildren or even your favorite charity. Maybe you have grandchildren and you want to provide set up an education trust, or perhaps you’d like to leave your children something to set them up for success. Maybe you’d like to make a large donation to your favorite charity or support an educational institution in some way, such as by creating a scholarship in your name at your alma mater.

Strategize and Maximize

Most people make gifts in small amounts—a small sum as a birthday present for a grandchild, an annual donation to a charity. Instead of sprinkling little bits of cash here and there, why not leave your heirs or favorite charity something far more substantial? You can do this with your steady Social Security income and tax benefits from a life insurance policy that’s specifically designed to maximize the death benefit. 

If you’re planning to leave something to your family, use your Social Security income to fund your annual gift allowed by the IRS ($14,000/year in 2016 to each child or grandchild). If your spouse can and will participate, double the amount. Place the money into an insurance trust, and use the money pay the premium on the policy. When you’re gone, the death benefit goes to the trust, rather than your estate, and is outside of your estate and paid tax-free to the trust. The trust’s terms dictates how the money is used and by whom. 

For charities, the process is much the same: place your Social Security income into an insurance trust, on a tax-deductible basis as allowed by law. Make sure the policy you select has the largest possible death benefit. How much you give to the charity of your choice is up to you; you can certainly gift more each year than the income you receive from Social Security.

Mix-and-Match Beneficiaries and a Real Life Example

If you can’t decide who you want to give to, don’t worry: do a bit of both by setting some aside for your heirs and some for a charitable donation. Here is a real life example.

A 70-year-old couple is in average health with a standard insurance rating (non smoker). Together, they collect about $65,000 a year in Social Security, and they are in the fortunate position of not depending on this for their retirement income. If they donated $65,000 each year to a favorite charity and the proceeds were used to buy a life insurance policy, the couple could leave a legacy of nearly $2mm ($1.89mm to be precise), enough to fund several scholarships, a teaching chair, or even part of a building. And if they chose to leave a legacy to family, the after-tax Social Security proceeds of about $40,000 would allow them to leave about $1mm for their grandchildren’s education or for a down payment on their first home*.

And remember—this strategy works well for people in their 60s, 70s and 80s, assuming they are in good health, so you could decide to leave a legacy in your early 80s if your health holds up.

The Bottom Line

The question isn’t whether you can leave a legacy, but rather whether it makes sense to use Social Security to fund your legacy. From a tax planning standpoint, it most certainly makes sense, but everyone’s situation is different and will depend on your age, health, income needs, etc. But if you are in the lucky position of not needing Social Security for your retirement, this could be a great way to leave a meaningful and lasting legacy to family or a favorite charity.

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*This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.

Topics: Social Security

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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