Your child, or grandchild is a minor. When a child is entitled to Social Security benefits, the Social Security Administration (SSA) will appoint a representative payee to receive benefits on behalf of the child. Usually this is the parent. The representative payee collects the benefits and pays the child’s living expenses until the child turns 18 (or indefinitely in the case of a disabled adult child).
An older father with minor children, may be eligible for Social Security … and so may be his minor children, even dependent grandchildren which may be more common.
Another case is where a father (or mother) dies and a child becomes entitled to survivor benefits, the mother (or father) (also entitled to survivor benefits) would be the representative payee. (Even divorced survivors taking care of dependent children may be eligible).
In any case, the child’s Social Security checks would be deposited into the mother’s (or father’s, or grandparent’s) household account and they would use the funds to meet the child’s basic needs. Or they might have the checks deposited into a special account for the child which is set aside for college.
While either approach is acceptable—spending the funds as they come in on the child’s basic needs, or setting the money aside for future education expenses—SSA wants to make sure that representative payees are using the money strictly for the beneficiary. As such, they require an annual accounting of how the funds were used. When the child turns 18, they sometimes send a letter stating that any unused funds must be turned over to the child. We’ve even seen letters asking for any unused funds to be returned to SSA. Parents who are simply taking care of their children and trying to do the right thing with the Social Security funds are sometimes caught off-guard by these communications. Here’s my best advice, in the words of one Social Security agent: “Don’t worry about it.”
First, remember that SSA has an obligation to make sure that people acting as representative payees are not committing fraud against the system. Not all representative payees are loving parents who are committed to taking care of their children; some are distant family members, or even hired agents, who manage the Social Security benefits of elderly disabled people. The Office of the Inspector General, the entity responsible for fighting fraud and abuse, lays out these Responsibilities of a Representative Payee.
Some of the duties of a Representative Payee include:
- Determining the beneficiary’s total needs and using the benefits received in the best interests of the beneficiary
- Maintaining a continuing awareness of the beneficiary’s needs and condition, if the beneficiary does not live with the Representative Payee, by contact such as visiting the beneficiary and consultations with custodians
- Applying the benefit payments only for the beneficiary’s use and benefit
- Notifying SSA of any change in his or her circumstances that would affect performance of the payee’s responsibilities
- Reporting to SSA any event that will affect the amount of benefits the beneficiary receives and to give SSA written reports accounting for the use of the benefits
Again, parents taking care of their children need not be intimidated by SSA’s implied suspicion of representative payees. They should comply with all requests for accounting of funds, but unless they are living it up while their kids go hungry, they have nothing to fear. The brochure, A Guide for Representative Payees, uses more reader-friendly language:
“First, you must take care of the beneficiary’s day-to-day needs for food and shelter. Then, you must use the money for the beneficiary’s medical and dental care that’s not covered by health insurance. You can also pay for the beneficiary’s personal needs, such as clothing and recreation. You must save any money left after you pay for the beneficiary’s needs, preferably in an interest-bearing account or U.S. Savings Bonds.
After you’ve provided for the beneficiary’s basic needs, you may spend the money to improve the beneficiary’s daily living conditions or for better medical care. You could use the money to arrange for the beneficiary to go to school or get special training. You may also spend some money for the beneficiary’s recreation, such as movies, concerts, or magazine subscriptions.”
The brochure goes on to say that a representative payee can make special purchases for the beneficiary, including a home (i.e., using the funds for a down payment), furniture, even a car. Any money left over after meeting the beneficiary’s needs must be saved. “The preferred ways of saving is U.S. Savings Bonds or an interest-paying bank account that’s insured under either federal or state law. Interest earned belongs to the beneficiary.”
Parents who are serving as representative payee can have the child’s Social Security checks deposited into “a common checking account for all family members living in the same household” showing a parent or spouse as the owner of the account. Children’s savings, however, must be kept in a separate savings account for each child, showing the child as the account owner.
All representative payees, including parents, must file annual reports showing how the funds were used. Basically, they need to report the amount of Social Security benefits received, expenses for food and housing, and expenses for clothing, medical/dental, personal items, recreation, and miscellaneous. SSA will provide forms and instructions. The filing can also be done online. If a parent is setting aside the child’s Social Security income for the child’s education and meeting the child’s basic expenses from the parent’s own income, this is an accounting choice; it could just as easily be done the other way, with the Social Security being spent on day-to-day expenses and the parent setting aside funds for the child’s education. The parent would still list expenses for food, housing, etc., to equal the amount of the Social Security income.
Children’s benefits are taxable to the child—although most children do not have enough other income to cause their Social Security income to be taxable. Under the usual formula, adjusted gross income, plus tax-exempt interest, plus one-half of the Social Security benefit (provisional income) would have to be more than $25,000 in order for Social Security benefits to be taxable. See these FAQs from the IRS for guidance.
Claim early to get children’s benefits?
Besides survivor benefits following the death of a parent, children may also be entitled to dependent benefits based on the earnings record of a parent who is still living, if that parent files for Social Security. And that’s the question: Should a parent file early in order to get dependent benefits?
I analyzed this awhile back for my 2013 newsletter, Claim at 62 to get dependent benefits? and found that when you take children’s benefits into account the breakeven age rises from 78 to 81 when you are comparing claiming at 62 vs. 70. (It’s 82 if he suspends from 66 to 70, but file-and-suspend no longer an option today.) This does not justify early claiming because at least one spouse is highly likely to live past age 81. This is especially true if the client is on a second marriage to a younger spouse. Please read “You’ll probably live much longer than you think you will” which basically says that if you think you won’t reach those ages mentioned above, there’s a good chance you’re wrong about that. And if not you, what about your spouse?).
And remember that all benefits received before Full Retirement Age are subject to the earnings test, so if the parent is still working, which most parents of young children must do, both his benefits, and the children’s benefits, will be withheld for the earnings test.
However, when you compare claiming ages of 66 and 70, the breakeven age rises to 86. Although there’s still a good chance one spouse will outlive this higher breakeven age (see my posts on Social Security as longevity insurance and Social Security survivor considerations), clients may prefer to have more income now, even though claiming at 66 could result in lower lifetime benefits and less income for the surviving spouse after age 86 compared to claiming at 70. This is a close call. If you have clients in this situation I would recommend providing these insights and letting the client make the call.
- Benefits for Children
- Information You Need To Apply for Children’s Benefits
- What Every Parent Should Know About Social Security
Most of this post was originally written by Elaine Floyd, CFP®, Director of Retirement and Life Planning, Horsesmouth, for a 3 Nov 16 adviser newsletter (I schedule posts for the future). I have added additional material and links as well.