Dear Liz: My husband is 75 and started Social Security at 62. I am 68 and started Social Security at my full retirement age of 66. My Social Security benefit is the higher of the two. My financial planner says the rules on survivorship have changed. She believes that if I die first, while my husband can still claim my benefit, it will be reduced since he took benefits early. I have not heard of this before. Is this true?
Answer: No. His early start won’t affect his survivor benefit should you die first, because you were the higher earner. Had he been the higher earner, though, his early start could have penalized you.
It’s the higher earner’s benefit that determines what the survivor gets. When one of you dies, the smaller of your two benefits goes away. The survivor gets the larger of the two checks instead.
Obviously, losing a benefit can mean a significant drop in income. A larger survivor benefit can really help the remaining spouse make ends meet. That’s why it’s so important for the higher earner to delay filing if possible.
Your husband accepted a permanently reduced benefit when he applied for Social Security at 62. You got your full, unreduced benefit by waiting for your full retirement age. If you’d put off your application a bit longer, though, you could have received “delayed retirement credits” that would have boosted your check — and the eventual survivor benefit — by 8% each year until your benefit maxed out at age 70.
Abundant research has shown that most people are better off delaying Social Security if they can. In a November 2022 study for the National Bureau of Economic Research, three economists found that virtually all American workers ages 45 to 62 should wait beyond age 65 to collect and more than 90% should wait till age 70.
One of the three economists, Laurence J. Kotlikoff, has also written a book for the general public about Social Security claiming strategies, “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” Make sure to get the updated version because Congress changed some claiming strategies in 2015 (but not the ones that affect survivor benefits).
You might consider getting a copy for your advisor, or at least sending her a link, because she definitely needs to strengthen her knowledge of this vital program for retirees.
Tax consequences of a CD bequest
Dear Liz: I currently have a certificate of deposit with what I consider a reasonably high balance. I’ve named a beneficiary in the event something were to happen to me. Would there be tax consequences for the beneficiary upon receipt?
Answer: There’s no federal inheritance tax, but six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — do assess inheritance taxes. Spouses are typically exempt and the tax rate is generally lower for close relatives.
Capital gains on inherited property
Dear Liz: You recently advised the heir to a triplex that they’d have to pay capital gains tax if they sell the property, but if they keep it and bequeath to their children, there would be no capital gains for the children. How does that work?
Answer: The original letter writer inherited the property from a parent in 2007. The inherited property got a favorable “step up” in tax basis to the fair market value at the date of the parent’s death. As a result, all the appreciation that happened during the parent’s lifetime was never taxed.
If the heir sells the property, however, the heir will face capital gains taxes on appreciation since 2007. If the heir holds the property until death, the property will once again get a tax basis step up to the market value at that point. The appreciation that happened during the heir’s lifetime won’t be taxed.
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.