Social Security is one of the richest pensions ever created. Unfortunately, it is also extremely complicated. It’s governed by over 2,700 rules, and most couples have over 500 potential filing scenarios.
As a result, over 90% of Social Security recipients receive less money than they are eligible to receive.
In general, high-net-worth (HNW) people have not paid much attention to Social Security because it's a small component of their overall financial position, and they do not rely on Social Security for income purposes in retirement.
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Furthermore, their sense is that if Social Security doesn’t pay that much, then why bother doing a deep analysis regarding what an optimal filing strategy should be?
For the HNW, the best “traditional” filing strategies do not typically translate into “optimal” filing strategies for them. HNW people have different needs and tax situations to consider.
Furthermore, it is not necessarily clear to them which Social Security filing strategies would best fit into their income tax and estate tax plans.
Surprisingly, Social Security provides greater benefits than most people realize. HNW couples will typically receive combined benefits exceeding $2 million over a 20-year retirement. They can often receive annual benefits exceeding $100,000 per year.
Social Security is also a guaranteed pension, and it is paid out as a monthly benefit for life, with cost-of-living adjustments (COLAs) applied in January of each year.
Since it is taxed as “provisional income,” Social Security is taxed more favorably when compared to other financial assets that generate ordinary income. In most cases, Social Security is also 100% exempt from state income taxes.
Why HNW people need to think differently
When HNW people seek advice regarding the best time to file for Social Security benefits, what they are typically told by their wealth managers, CPAs, tax attorneys and smart friends is to delay taking their Social Security as long as possible, specifically to age 70, to maximize their benefit amount.
Each year that they delay the start of their benefits, their amount increases at the rate of about 8%, until age 70. Therefore, for example, their benefit at 70 is guaranteed to be 32% higher than it would have been had they filed at 66.
In addition, since up to 85% of Social Security benefits are subject to federal income tax, why not defer the tax by delaying to age 70 to file for benefits?
For the HNW, however, it’s important to think of Social Security differently.
For example, although Social Security provides a guaranteed lifetime income stream, it actually provides a guaranteed “potential” lifetime income stream, since no one knows how long they are going to live and therefore how many checks they're going to receive.
If an HNW couple is expecting to receive $2 million or more in combined Social Security benefits over a 20-year retirement, but happen to pass away unexpectedly before collecting any benefits, then Social Security will keep the entire $2 million that they would have otherwise collected.
Given that, what is the “optimal” Social Security filing strategy for the HNW? To answer that question, we first have to determine “what's the smartest and best use of their Social Security benefits”?
Estate taxes and Social Security
Often, the biggest financial issue for HNW people is not income taxes but estate taxes. With the estate tax exemption in 2025 at $27.98 million for a married couple, any married couple is subject to a 40% estate tax on every dollar of their net worth above $27.98 million (or $13.99 million for single people).
One powerful Social Security filing strategy to address the estate tax issue is to leverage the value of your benefits to help pay estate taxes. For example, let’s assume a couple could receive a combined benefit of, say, $85,000 per year if they delayed filing for their benefits until age 70.
What if instead of waiting to file at age 70, this couple filed for a reduced benefit amount at age 66 and received combined benefits of, say, $65,000 a year before tax or $40,000 after tax.
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By filing early, they could then gift that $40,000 a year in after-tax benefits into an irrevocable life insurance trust (ILIT) and fund an estimated $2 million life insurance policy to be held inside that ILIT.
What they would be essentially doing is “capitalizing” (turning an income stream into an asset) the potential Social Security income stream into a guaranteed $2 million income and estate tax asset.
That life insurance can then be used to pay for estate taxes or serve as a financial legacy for children, grandchildren or perhaps for charity.
Even if they received only one check from Social Security and passed away, under this strategy, they would instantly create a $2 million death benefit payment into the ILIT.
Long-term care and Social Security
Another consideration would be to use Social Security benefits to fund long-term care insurance. LTC insurance policies can vary in design. You could use Social Security benefits to pay for premiums on a traditional LTC policy or acquire a life insurance policy with an LTC rider.
With the latter, you can use the death benefit amount (instead of just the cash value in the policy) to provide tax-free dollars to pay for LTC expenses or as a death benefit if you do not end up having an LTC event.
Since long-term care costs are not covered by health insurance plans or Medicare, you must either self-insure or acquire LTC insurance.
By leveraging the value of your Social Security benefits to fund an LTC insurance policy, or a life insurance policy with an LTC rider, you will have created a tax-free pool of money that you can draw down on to help pay for long-term care expenses.
This will allow you to avoid having to take distributions from your retirement account assets or liquidating other assets that would then trigger significant taxes.
Even for HNW people, LTC costs could be covered on a more tax-efficient basis by acquiring LTC insurance funded by Social Security benefits.
A valuable financial asset
In summary, although HNW people do not “need” Social Security, it remains a valuable financial asset that should be examined more closely. Consideration should be given to alternative filing strategies, other than simply deferring the start of benefits to age 70 to avoid current federal income taxes.
Leveraging the value of Social Security, by integrating life insurance or LTC insurance into their planning process, could turn this otherwise neglected financial asset into a valuable income and estate tax-free asset designed to strengthen their overall retirement and estate tax plan.
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