Case Study

• Maximizing Social Security
• Avoiding WA estate tax
• Passing on inheritance

In their early 60s, Jim and Linda approached us with concerns about maximizing their Social Security benefits and managing potential estate taxes. Jim, who plans to retire at 65, has built an IRA worth $1.2 million. On the other hand, Linda has been a homemaker most of her life and will rely on spousal Social Security benefits. They have a jointly held brokerage account worth $750k, a paid-off house worth over $1 million, and two other rentals worth over $410k each. They've expressed interest in leaving their two grown children inheritance without burdening them with tax.

1. Social Security Timing:  Jim and Lida were unsure when to begin claiming Social Security. Jim considered starting at age 65 so he wouldn't miss out on using the government's money. But if he waits until age 70, benefits could grow by 8% annually, resulting in a higher lifetime benefit. Linda planned to start taking the spousal benefit when Jim did.
2. WA Estate Tax: They also had estate tax concerns. With their combined assets and potential growth, Jim and Linda worried about the possibility of estate taxes when passing their wealth on to their children. While the federal estate tax exemption is currently high at 13.61 million, their estate could potentially be subject to the Washington State Estate tax at a much lower 2.193 million exemption, which is taxed at 10%-20%.

1. Delay Social Security: To optimize Social Security for their situation, we proposed that Jim delay his retirement until age 67. One reason for the delay is to reduce income for a few years so they can do Roth conversions at a lower income tax bracket. Waiting until age 67 will benefit Linda more if anything happens to Jim because she will get to keep the larger of two benefits. We didn't recommend that Jim delay his Social Security until age 70 because he needs to start drawing Social Security before Linda can receive her spousal benefit (but not her personal benefit). Linda's Social Security income maxes out at age 67. We also recommended that Linda start taking her personal Social Security benefit based on her work history earlier at 62 and then at full retirement age of 67, and switch to the spousal benefit when they both turn 67. Linda's benefit at that point is increased by the difference between her spousal benefit if she waited and her personal Social Security amount if she waited until age 67 to start. This strategy will boost her lifetime Social Security income and allow Jim the cash flow to delay his benefits.
2. Annual gifting: To address estate tax concerns, we recommended Jim and Linda meet with an estate planning attorney to review their estate plan. Their attorney established updated wills with a testamentary bypass trust, a trust used to drop their estate tax liability, significantly doubling their estate tax exemption from 2.193 million to 4.386 million. We also introduced the idea of annual gifting, allowing them to gradually reduce the size of their estate by gifting up to $17,000 (under the current 2024 tax law) per year to each child, which helps lower the value of their taxable estate without incurring gift taxes. 
3. Retirement Projections: We used comprehensive financial planning software to test various scenarios, including market downturns and high inflation, gifting, and estate tax, to ensure their retirement nest egg would last. They're on track for a comfortable retirement based on their current spending and investment strategy.  
4. Optimized Investments: We restructured their investment portfolio to match their risk tolerance, ensuring they had enough growth potential to maintain their purchasing power against inflation and safety from a market crash while maintaining liquidity for retirement expenses. We also recommended diversifying their investments, protecting against market volatility as they are near retirement. We also devised a strategy of doing Roth conversions once Jim retires. This strategy helps Jim and Linda meet their goals of maximizing Social Security, reducing taxes, and ensuring their estate is passed to their children in the most tax-efficient manner. 

1. Estate Planning: We've worked with their attorney to ensure their estate takes advantage of a bypass trust on the first spouse's death for the WA state estate tax exemption amount. So far, this will save them over $250k in estate taxes when the second spouse passes. They continue to give gifts yearly to their children to lower their estates.
2. Social Security: We recommended that Jim delay Social Security to lock in a higher benefit for Linda if anything happened to her. Linda will start benefits earlier and take the increase at full retirement age. This strategy allows for better Roth conversion opportunities.
3. Investments: We've reduced the volatility in their portfolio, which continues to grow and be a source of retirement income for them, along with their two rental properties. With our Roth conversion strategy, we've traded a portion of their taxable investment income for tax-free.