Raising a teenager often requires making tough decisions, but things can get particularly tricky when you have a teenaged child who suddenly comes into some money.
That’s the situation that Amy finds herself in with her 16-year-old son, Todd. Unfortunately, the reason for the financial influx is that Amy’s husband — Todd’s father — had recently passed away.
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Due to his father’s untimely passing, Todd has started receiving $700 every month in Social Security benefits. The Social Security Administration’s (SSA) survivor benefits are meant to help support children like Todd due to the loss of one of his parent’s income [1].
Amy, who will be managing the funds until Todd turns 18, is feeling overwhelmed with the situation and wants to be smart with the money to ensure long-term financial stability for her son.
Understanding survivor benefits
According to AARP, about 1.3 million minor children receive survivor benefits in America [2]. The SSA allows minor children to receive benefits until the age of 18, or 19 if the child is a full-time high school student.
Survivor benefits for minor children can equal up to 75% of a deceased parent’s Social Security benefit, with a maximum family payment that can be 150% to 180% if more than one child in a family is receiving survivor benefits.
In Todd’s case, assuming he’s still in high school at 19, he could receive these survivor benefits throughout the next three years, at which point Amy believes he will have accumulated roughly $25,000. With this in mind, Todd has the opportunity to earn a significant amount of money over the coming years, but it’s essential to manage these funds responsibly.
“Careful consideration must be used in determining how to use these benefits and how to prepare for the transitions that come as the child ages,” Melissa Brennan, a certified financial planner at ARS Private Wealth Management, shared with AARP.
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What Amy needs to keep in mind
Because Todd is under 18, Amy will act as his representative payee, which means she’s legally responsible for setting up his benefit deposits — into a family bank account or one owned by Todd — as well as making sure the money goes toward Todd’s current needs [2].
These needs can include food, clothing, medical and dental care, shelter, and personal care items. If the benefit funds are not needed for these purposes, the representative payee must save or invest the money for the beneficiary.
Since she’s managing the survivor benefits on her son’s behalf, there are certain things Amy should be aware of that could affect Todd’s benefits.
Potential overpayment
While Amy is managing Todd’s benefits, she’d be wise to keep a close eye on the deposits to make sure he isn’t receiving more money than he should be. Overpayments within the SSA can occur from time to time, typically because of missing or wrong information [3].
If the SSA believes an overpayment has occurred, it will send an overpayment notice to the recipient or representative payee that will explain the mistake and how it was made. After sending the overpayment notice, the SSA will give the benefit recipient 30 days to correct the overpayment before it starts collecting the money on its own.
If the recipient doesn’t correct the overpayment and pay the SSA back within 30 days, the SSA will withhold 50% of the benefit — or 10% of the recipient’s Supplemental Security Income — each month until the overpayment is paid back.
If the recipient no longer receives benefits, the SSA can get its money back in a variety of ways, including withholding the recipient’s tax refund or certain state payments, as well as garnishing wages.
To avoid this headache, it’s important for Amy to monitor Todd’s payments to make sure he doesn’t receive an overpayment, and act quickly in the event that he does. Amy would also be wise to make sure her SSA information — as well as Todd’s — is correct and up to date.
A record of spending
As part of a representative payee’s main duties, Amy must maintain a record of expenses while managing Todd’s survivor benefits.
The SSA requires representative payees to keep track of how every benefit dollar is spent. Amy is required to use the benefit funds to pay for Todd’s current and future needs, while properly saving what’s left. If the SSA were to request a report, Amy would have to provide it with proof of how Todd’s benefit funds were spent or saved [4].
How Amy should proceed
Once Todd’s current needs are met, Amy is permitted to invest the remaining benefit funds for Todd’s future.
One great option for Amy to consider is a custodial Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account, which allow adults to manage investments for a minor until they’re old enough to gain full control of the account.
UGMA accounts are primarily for cash and securities, while UTMA accounts can hold a wide range of assets, including art, real estate or jewelry [5]. The funds in a custodial account belong to the minor and will grow over time with potential tax advantages based on the minor’s tax bracket. Another advantage with these accounts is that they don’t have contribution limits.
Another investment option for Amy to cinsider is a 529 plan, which is an investment account that allows you to save money for a minor’s future education costs. If Amy prefers to save Todd’s benefit funds for college, a 529 plan is a great option since it has more tax advantages than a UGMA or UTMA account [6].
If they firmly understand the rules and manage these funds responsibly, Amy and Todd can make sure that this benefit contributes positively to Todd’s future. Consulting with financial professionals and staying informed about SSA guidelines will help them navigate this process effectively, especially during a difficult time like this.
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Article sources
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[1]. Social Security Administration. “Benefits for Children”
[2]. AARP. “7 Things Parents Need to Know About Social Security Survivor Benefits for Children”
[3]. Social Security Administration. “Resolve an overpayment”
[4]. Congress.gov. "Social Security: Representative Payees and Power of Attorney"
[5]. Thrivent. “How do UGMAs and UTMAs differ?”
[6]. Saving for College. “UTMA & UGMA Accounts vs. 529 Plans”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.