There was some relatively good news to report as 2010 gave way to 2011, and of course at the top of the list was the extension of the Bush era tax cuts. And though the debate will be retooled for the next election cycle, estate planning professionals were relieved if not overjoyed to see the estate tax rate reduced and the exclusion increased.
Other changes included in the tax measure that impacted estate planning include an increase in the gift tax exemption to $5 million along with a decrease in the rate to 35% to match the estate tax. The generation-skipping transfer tax also was altered to match the estate and gift taxes with a $5 million exemption and 35% rate. And the estate tax is now portable so the unused exemption of a deceased spouse can be used by the surviving spouse.
In addition to these changes that could be described as positive there was a rule passed by the Social Security Administration that eliminated a useful opportunity that previously existed. For those who are not aware you can choose to accept a reduced Social Security benefit when you’re 62 years old. Your full retirement age varies depending upon the year that you were born, but if you were born between 1943 and 1954 that age is 66. If you were born within this span and you chose to delay receiving Social Security benefits until you turned 70 you could be eligible for delayed retirement credits that would increase your annual benefit by 8% per year or 32%.
It had been possible for one to accept a reduced benefit at age 62 and receive these payments until you reach 70 years of age. At that point you could withdraw your original application for Social Security at the reduced rate and pay back everything you had received. You then reapply as a 70-year-old and receive your maximum benefit. While you were receiving the reduced benefit you could have invested it and turned a profit before you had to pay it back.
Due to a new rule that was passed on December 8th this “interest-free loan” will no longer be available. Applicants will only be allowed to withdraw their application for Social Security within a 12 month period after originally filing and they may only do this once, effectively putting an end to what was once a very interesting opportunity.