Klitzman Law Group, PLLC

Estate Planning for Digital Wealth

Traditional business owners selling their companies upon retirement usually turn to their estate planning attorneys, accountants and wealth advisors to structure the sale and manage assets. However, today’s “cryptocurrency whale,” a person who has amassed wealth in cryptocurrencies, non-fungible tokens (NFTs) and other digital assets, is more likely to take a different approach, which often doesn’t end well.

The relatively young person with great digital wealth usually has gained their wealth relatively quickly through some risk-taking in a new asset class.  However, they don’t have the experience or knowledge of protecting wealth over time. The skills needed to create crypto wealth differ significantly from those required to preserve and protect wealth.

A recent article from CPA Practice Advisor, “How to Protect Your Digital Assets From Estate Tax,” explains the unique challenges of preserving digital assets. The regulatory environment is new and still developing, as are tax reporting and tracking rules. The anonymity of digital wealth can make estate planning complicated, not to mention the challenges for asset transfer upon death or incapacity.

There are three key threats to cryptocurrency wealth: estate taxes at death, lawsuits from creditors and predators and loss of access by poor management.

Cryptocurrency holdings could be subject to a 40% estate tax without solid estate planning. If predictions for the future value of Bitcoin hold true, for instance, heirs could potentially owe tens of millions or more in federal estate taxes. This would require the assets to be sold to pay for the taxes, depriving heirs of any future growth of Bitcoin or other cryptocurrencies.

One strategy for 2024 is to use the current lifetime gift tax exemptions to transfer as much as $13.61 million of assets expected to appreciate to a Nevada irrevocable third-party dynasty trust. Once the Bitcoin is in the trust, the value is removed from the taxable estate, and the asset won’t be taxable for hundreds of years. You’ll need to speak with an experienced estate planning attorney familiar with trusts to be sure this is created properly.

If you’re an active trader, it may make more sense to set up an LLC (Limited Liability Corporation) to hold the cryptocurrency. By gifting the LLC interest to an irrevocable trust, you may be able to avoid estate taxes on the appreciated value of the cryptocurrency. If your crypto investment exceeds the federal gift tax exemption, your estate planning attorney may advise you to sell the excess amount to the trust for a long-term promissory note. This will keep the note’s face value in your estate but not the appreciation, giving heirs significant tax savings.

Trusts protect traditional assets from creditors, and digital assets can be protected in a similar fashion. By using an LLC and an asset protection trust and placing your LLC interest in the correct trust, you can shield assets from unforeseen creditors and predators. Note that this needs to be done before litigation or creditor action occurs.

Protecting assets with estate planning may seem like an old-school task for people whose wealth has come from the newest asset class. However, it’s a wise move. Talk with an estate planning attorney about the right strategies to protect wealth.

Reference: CPA Practice Advisor (July 16, 2024) “How to Protect Your Digital Assets From Estate Tax”

Can You Prepare for the Unexpected in Life?

It often takes a dramatic event, like an accident or illness, to wake us up to the importance of planning for the future. A recent article, “Are you prepared for a life-changing event?” from the Chattanooga Times Free Press, begins with a letter from a reader who experienced a bad car accident. At age 55, he had no plan for long-term care and questioned what he needed to do to protect himself and his family.

Step one in planning to protect the family is to have term, universal, or whole life insurance. Depending upon your financial situation, you likely need personal life insurance in addition to what you receive through employment.

Long-term care is missing from many people’s plans. The best time to purchase a long-term care insurance policy is during your thirties or forties when you are likely in relatively good health. This is usually not the time that people are thinking about long term care, unfortunately. The younger you are, the less costly they will be. Ensure that any policy includes at-home care and care provided in a nursing or other skilled care facility.

You may end up purchasing a life/annuity insurance policy with a provision for long-term care coverage. Since there are fewer and fewer life insurance companies selling long-term care coverage, this may be your best option.

Planning for the future also means having an estate plan prepared by an experienced estate planning attorney. You’ll need a power of attorney for you and your spouse, so you can manage their personal affairs if they are too sick or injured to do so themselves. This is not automatically granted because you are married, so don’t overlook it. If no one is a POA and something happens, you may end up having your affairs managed by someone the court has appointed instead of a loved one.

You’ll also need to have a medical power of attorney, sometimes called a health care power of attorney, so you and your spouse can act on each other’s behalf if you are incapacitated. Being someone’s married spouse used to be enough for this, but not in today’s highly regulated (and litigious) environment.

A living will is tough to contemplate. However, it is a blessing for those you love. This document is used to state your wishes if you should become incapacitated. Do you want to be kept alive by artificial means? In what situations would you want to be resuscitated? Your estate planning attorney can explain the different options to consider.

Your last will and testament is used to distribute property in the event of your death. These documents are state-specific, so you’ll want to work with an attorney in your jurisdiction. They can be combined with trusts to help minimize federal and state estate taxes and control how assets are distributed.

Speak with an experienced estate planning attorney to clarify your wishes and prepare you for the future, in the short and long term.

Reference: Chattanooga Times Free Press (July 6, 2024) “Are you prepared for a life-changing event?”

Is Estate Planning Just for Wealthy People?

Everyone should have an estate plan. However, if you are a millionaire, you want to have one to protect your estate. Millionaire estates typically include multiple homes, business ownership, art collections, expensive jewelry and collectible cars. However, a modest estate of a home, retirement accounts and a desire to pass wealth on to family members also need an estate plan.

 

 

 

A recent article from Kiplinger, “Estate Planning for Millionaires,” divides wealthy people into several categories: Mass Affluent, with liquid assets between $100,000 and $1 million; High Net-Worth Individuals with at least $1 million; Very High Net-Worth Individuals with at least $5 million; and Ultra-High Net-Worth Individuals with at least $30 million.

Regardless of which category you fit into, you need an estate plan to appoint trusted individuals to handle your affairs in case of incapacity or death. Your estate planning attorney will know which documents are used in your jurisdiction to establish your wishes and ensure that they align with local laws.

An estate plan needs one person who is like a quarterback and can coordinate all of the trusted professionals on your team, including a financial advisor, tax professional and business attorney. These different disciplines must work together for your estate plan to be effective.

Everyone needs to have certain documents: a last will and testament, revocable trust, powers of attorney for finances, powers of attorney for health care and a living will to express wishes concerning end-of-life care. With the information in these documents, executors and family members will know your wishes, which avoids heartbreak for family members.

Once you start working with an estate planning attorney, you’ll need to name a trustee to oversee any assets placed in a trust. You may wish to name a financial institution if you don’t want a family member or trusted friend to take this role.

Business owners often do better with a professional trustee for several reasons. If the business entities are large and complex, will a family member know how to manage the assets? Can they work with the estate planning attorney, business attorney, financial advisor and accountant to steward the assets for the beneficiaries?

Estate planning for people at all levels of wealth also involves tax planning. This is especially important now, with the possible sunsetting of the Tax Cuts and Jobs Act of 2017. Estate tax exemptions are historically high, $13.61 million for individuals and $27.22 million for married couples. On January 1, 2026, those numbers will drop significantly. State estate taxes may change depending on where you live, especially if you live in a state whose estate tax levels are tied to federal estate tax exemptions.

Your unique situation will dictate what kind of trust or trusts you need. An Irrevocable Life Insurance Trust (ILIT) could be used to own your life insurance policies, with customized directions for how you want the proceeds to be distributed upon your death. Suppose you have a family member with special needs. In that case, you’ll want a Special Needs Trust (SNT) to provide financial support for them without putting their eligibility for means-tested government programs at risk.

Gifting to individuals and charities serves several purposes: taking assets out of your taxable estate, in the case of donations, earning tax deductions and letting you enjoy seeing the results of your generosity while you’re still living.

Communicating your wishes to beneficiaries while living is often a wise strategy to prevent misunderstandings and resentments. You don’t have to give specific numbers, but by sharing insights into what you hope to accomplish with your decisions, family members may be less inclined to engage in disputes. They can blame you instead of each other!

Reference: Kiplinger (July 19, 2024) “Estate Planning for Millionaires”

Can You Get Around Probate?

As any estate planning attorney will tell you, probate takes time, costs money and adds stress to settling a loved one’s estate. A reporter shares her personal experience in a recent article appearing in Market Watch, “Inheritance isn’t automatic: The probate process can take almost two years and cost thousands of dollars.”

Most people have a vague notion of what probate is. They understand it to be a process where the family must file the will with the country court and wait for it to be approved before distributing assets. If there’s no will, they may think probate is the process of settling the estate.

Others think inheritance happens automatically, with heirs receiving 35% of an estate. This is not true. One of the easiest ways for assets to go to heirs outside of probate is to make the most of beneficiary designations. Certain financial accounts offer the option to assign someone as a beneficiary, usually investment, retirement and bank accounts. After the account owner dies, the heirs apply for their inheritance with a death certificate and proof of their identity.

A recent study showed that only 2% of people understood that the average period of time to probate an estate is 20 months. While there are some jurisdictions where probate happens more efficiently, most estates take a long time to go through the process.

How can you avoid probate or simplify your estate so fewer assets go through probate? Your estate planning attorney will be able to explain how using trusts takes assets out of the estate. Another is simplifying your life. If you have assets with multiple investment companies, for instance, consolidating them into one account with one financial institution could streamline the process for your heirs.

While you’re consolidating your accounts, check on your beneficiary designations. If you opened an investment account twenty years ago, you may have named someone who isn’t in your life anymore. They may be happy to receive a surprise inheritance from you. However, your family won’t be able to get the assets, even if your will says otherwise.

For an excellent example of how to manage an estate, consider the actor Matthew Perry. Most of his estate was transferred to heirs through trusts, which avoided large assets going through probate and kept his personal business private. One bank account had no named beneficiaries, so his family went to probate court to file his “pour-over will.” This is a will where assets not already in trust are directed to be added to the trust after death. Because the will was filed in court, reporters were able to obtain information about this one account. The rest was private.

Consult with your estate planning attorney to determine how to structure your estate best to avoid or minimize probate for your loved ones.

Reference: Market Watch (July 17, 2024) “Inheritance isn’t automatic: The probate process can take almost two years and cost thousands of dollars”

Does an Estate Plan Help with Taxes for Business Owners?

The current lifetime exemption (the amount of assets an individual may transfer without paying federal gift or estate tax) of $13.61 million per person (and $27.22 million per married couple) is expected to revert to pre-Tax Cuts and Jobs Act level of $5.6 million per person and $12.2 million for married couples. According to a recent article, “3 Underutilized Estate Planning Strategies for Business Owners,” from Wealth Management, the time to take advantage of these historically high levels is now.

This is of particular importance for anyone whose wealth reaches these thresholds or who is planning on selling their business in the next year and a half if the sale could put them above these gross estate thresholds. Every dollar over that lifetime exemption will be taxed at a 40% tax rate upon death. This can be avoided with proper estate planning.

Three estate planning strategies detailed here take time to complete, and the IRS is known to scrutinize planning techniques that are done after a letter of intent (LOI) is signed. These strategies should be implemented before documenting an offer or drafting an LOI, ideally six to eight months before a transaction occurs.

The IRS has stated there will not be any “claw backs” if the estate tax exemptions fall to pre-2017 levels. This clear imperative makes this the opportune time to get these strategies underway without delay. Your estate planning attorney will know what works best for your unique situation, but these three are fairly common.

Spousal Lifetime Access Trust, or SLAT, is used to remove assets from the taxable estate so they aren’t subject to estate tax at death while retaining the ability of the spouse to access assets for the couple. This is despite not having a retained interest in the trust as long as the spouse is living and you are still married to said spouse.

A SLAT may be especially helpful for couples who aren’t ready to transfer wealth out of their estate and are concerned about having access to their assets. Remember that you’ll need to try not to use any of these funds until you’ve exhausted the money in your personal name.

A Grantor Retained Annuity Trust (GRAT) transfers the future growth of assets out of the taxable estate either outright or into a trust for descendants. The creator of a GRAT retains an interest in trust assets for a set period through the receipt of an annual annuity payment until the value of the asset originally put into the GRAT is returned. Basically, the GRAT pays back the money that went into the trust over the term of the trust plus interest. However, all future appreciation placed into the GRAT grows without being subject to federal gift or estate tax.

Sale to Defective Grantor Trust or Installment Sale is another strategy for business owners. This strategy is more effective if the timing of the business sale is not definite. Here’s how it works: business stock is sold to a trust in exchange for a promissory note. In the case of an installment sale, only the IRS-mandated interest has to be paid back annually. The outstanding principal owed to the trust creator may take place at the end of the term in a balloon payment. The principal remains in the trust longer and, ideally, will produce more growth and income than if the person used a GRAT.

Business owners need to work with their estate planning attorney to ensure that any of these strategies will be coordinated with any other estate planning strategies already in place. For most business owners, a combination of trusts and corporations is designed to achieve the twin goals of protecting assets and minimizing taxes.

Reference: Wealth Management (July 15, 2024) “3 Underutilized Estate Planning Strategies for Business Owners”

Do Single Parents Need an Estate Plan?

Raising a child or children by yourself is challenging on many levels. Single parents have very little spare time or resources, making planning for the future even more important than if another parent was involved. This includes estate planning, as discussed in a recent article from The News-Enterprise, “Single parents must be deliberate in estate planning.”

Two key decisions to be made with minor children are who to name in a will as their guardian, the person who will raise them if the parent dies or is incapacitated, and who will be in charge of their finances. If another biological parent is involved in their care, things can get complicated.

Whether or not the other parent will be named as a guardian who will take custody of the child(ren) depends on whether or not they have any legal custody of the children. If the parents were married at one time but the marriage ended after the child was born, there is likely to be a separation agreement addressing custody.

If both parents share custody, the surviving parent would take custody of the child. This is standard practice, regardless of who has primary custody.

But if the parents never married and no one pursued an order of paternity or entered a custody order recognizing the legal rights of the noncustodial parent, or if a parent has lost any legal rights to the child, the parent needs to name a guardian and an alternate guardian.

Even if there is a surviving parent, you’ll want to name at least one guardian and one contingent guardian. There are instances when the noncustodial parent prefers not to become the custodial parent, even if the child’s other parent has died. There are also cases where the noncustodial parent is not fit to raise a child, so having other potential guardians named is a better idea.

Separate from the guardianship issue is the decision of who should manage the assets left for the child. You have a right to name the person of your choice to oversee these funds, regardless of whether or not the other parent is living. In most cases, there are two general options:

Conservator: This is a court-appointed person who is responsible for any assets left outside of a trust or any income received by the child. The conservator can be the same person as the guardian, but it does not have to be the same.

Trustee: A best practice in estate planning for a child is to leave the property in trust to be distributed for specific purposes, like education, health care, and general support. Assets can be left in trust through a last will and testament or through a trust set up while the parent is living to benefit the child.

An estate planning attorney should be consulted to determine how best to structure planning when there is only one parent. This protects the child and gives the parent peace of mind.

Reference: The News-Enterprise (July 5, 2024) “Single parents must be deliberate in estate planning”

Top Estate Planning Mistakes Can Easily Be Avoided

The music icon Prince was far from the only celebrity failing to have a will, the most significant estate planning mistake of all. Tobacco heiress Dorothy Duke named her butler the executor of a $1.3 billion estate, and her family spent millions on legal costs before the estate was settled. You don’t have to be wealthy to make an expensive estate blunder, says a recent article from Microsoft Start Money, “Seven Estate Planning Mistakes You Can’t Afford To Make.” Regular people also make costly mistakes.  However, they can easily be avoided by following these steps.

Procrastinating until the “right” time. Making decisions when you’re under a time constraint because of an unexpected event is a bad time to do estate planning. Leaving a mess for your children to figure out will almost always end badly. Fighting among family members, assets lost to cost battles and unnecessary stress are just a few of the headaches. It’s not how you want to be remembered.

Not updating your estate plan. Wills are like pets—they require ongoing care. If a new child is born and your will isn’t updated, you’ve effectively disinherited the child. If you remarry and don’t update your estate plan or beneficiary designations, your new spouse will have little recourse to what you might have left them. The same goes for major changes in your financial life, up or down.

Putting your head in the sand about taxes. In the last 15 years, there have been many tax changes. Failing to address tax changes with estate planning in mind can lead to financial disasters. Remember, you may not be near the federal estate tax threshold. However, if your state levies estate taxes, you’ll need to plan for them.

If the lifetime estate and gift tax exemption reverts to pre-2017 tax law levels, “average” wealthy people with estates worth around $6.46 million will pay federal estate taxes. If this is your situation, start talking with your estate planning attorney now to address this change.

Ignoring incapacity. We’re not sure which is harder to consider, incapacity or death. Neither is pleasant to consider; one is likely, and another is certain. Having the right plan in place means having the power of attorney, health care directives, HIPAA release forms, do not resuscitate, living wills and other documents specific to your state are all part of estate planning.

Forgetting to plan for non-cash assets. If you own a home, what do you want to have happen to the home upon your death? If you become incapacitated, who will take care of your home, your pets and any property requiring upkeep? Classic cars, antiques and art collections must be disposed of in a planned manner.

Neglecting digital assets. More and more of our lives are now conducted online. Bank accounts, social media, photos, online businesses and cryptocurrencies are not included in household assets by your will. You’ll need to provide a tech-savvy person with information on your accounts, create an inventory and direct the person to serve as your digital executor.

Trying to do it yourself. Creating an estate plan without the help of an experienced estate planning attorney is asking for trouble. Here’s just one example: a family thought it was a good idea to retitle the house to Joint Tenancy with Right of Survivorship for the parent and an adult child. They didn’t know about the child’s serious debt situation. The child now had an asset, and creditors moved swiftly to put a lien on the house. The family eventually lost the house to the creditors.

Reference: Microsoft Start Money (June 23, 2024) “Seven Estate Planning Mistakes You Can’t Afford To Make”

Do Single Childless People Need an Estate Plan?

A single person without children can focus on their personal goals, including philanthropy. However, it takes planning to ensure that their assets are distributed according to their wishes. A recent article, “I’m an Estate Planner: 8 Ways Single and Childfree People Can Manage Their Assets” from AOL, provides tips for singles with no children and notes that they need an estate plan.

One of the challenges facing singles is the need to have an estate plan in place earlier in their lives than marrieds or parents. If the state is unable to identify a next of kin, the state will take the assets as unclaimed. This is probably not what anyone has in mind for their property.

Consider the people and organizations that have meaning for you. Have an estate plan prepared by an experienced estate planning attorney, who will help you clarify who might be a suitable heir. It may be a close friend, charitable organization, niece, or nephew. Remember to update your will as life changes occur.

For some singles, the preferred option is to “die with zero.” The concept is not to leave any generational wealth behind but to live their lives to the fullest, including philanthropy and gifting while they are living. This lets them see the good work done by charities and the benefits to those they choose to give assets to.

A challenge for some singles is identifying a person to serve as their executor, who will administer their estate, including distributing assets, after their death. If no executor is named in a will or there is no will, a court will name an administrator, and assets will be distributed according to the state's laws.

Do single people need to establish trusts? Trusts are extremely useful in the event of incapacity, which no one wants to think about but needs to be addressed. If you become incapacitated, the trustee can use the funds in a trust to keep your bills paid and your household running. There are also trusts used in charitable giving to meet your philanthropic goals or trusts to protect assets if you need long-term care.

Designating people to serve as your Power of Attorney and Healthcare Proxy is especially important for singles with no children. This way, people of your choosing can oversee your day-to-day financial and legal matters and be involved in your medical decisions.

Finally, don’t leave any of this to chance. Have conversations with people you’ve chosen to fulfill various roles, including executor, power of attorney, healthcare proxy and trustee. Make sure that they understand what you are asking them to do, and be sure they are willing to take on the tasks.

A consultation with an estate planning attorney is the first step to implementing a plan.

Reference: AOL (June 7, 2024) “I’m an Estate Planner: 8 Ways Single and Childfree People Can Manage Their Assets”

Estate Planning for Digital Assets

Almost every state has by now enacted laws giving executors the right to manage digital assets, including computer files, web domains and cryptocurrencies, reports a recent article from Forbes, “Smartphones, Email, Other Digital Assets And Your Estate Plan.” Another law, The Uniform Electronic Estate Planning Documents Act, is making its way through statehouses and would recognize electronic and digital signatures on trusts, wills and other estate planning documents, making paper and ink signatures a thing of the past.

 

Neither of these laws gives anyone, executor, spouse, or best friend, the legal right to access email, text messages, social media accounts and any other digital assets, unless the power to do so is given expressly in a will, trust, power of attorney, or court order. Without express permission, the digital door is permanently shut.

Making matters even more complicated, each digital platform has its own rules about allowing people other than the account owner to access digital assets, even if they have the username and password.

Another factor further complicating digital estate planning is the two-factor authentication many websites use today. This is done via biometrics, i.e., facial recognition or a code sent by text or email to the original owner's cell phone or email address needed for access.

Cyber thieves are aware of the problems facing unskilled executors, and stealing the identities of recently deceased individuals has become a fast-growing crime. When identity theft occurs online, the assets are often compromised before executors and survivors can access the decedent’s assets.

There are steps to take that will prevent your executor from grappling with these problems.

First, create an inventory of devices, including cell phones, tablets, laptops and desktop computers. If you have old devices that you no longer use, delete your personal data and label them as not in use. A tech-savvy person could use an old device to access your accounts.

Next, create an inventory of all your digital accounts. This includes everything from social media to websites, photo storage, device access, shopping sites, subscriptions, video games, cryptocurrency, bank accounts, investment accounts, medical portals and frequent flier miles. Add notes regarding two-factor authentication: Will your texts need to be accessible to gain access to the account, or have you activated facial recognition?

Go through each item and decide who you want to access each item. Your will, trusts and POA should include notes on who should have access to each of the digital assets. Without it, your executor will take far longer to complete their task.

Some online services allow you to name a legacy contact and give someone you name access to your accounts and phone after your death. For now, Apple, Google, Facebook and Instagram have these features. Set them up and include them in your digital inventory.

Your will needs to state very clearly who you want access to which accounts. However, it should not include any details about the account, especially not your username and password. If you don’t want your executor to access everything, you’ll need to specify which ones you want them to access and which you don’t want them to access. If that’s the case, you’ll want to have whoever does have access to review emails and other accounts regularly and share any information needed with the executor.

Digital assets are still a relatively new asset class. However, they require as much care as traditional assets.

Reference: Forbes (June 19, 2024) “Smartphones, Email, Other Digital Assets And Your Estate Plan”

How to Protect Wealth over Generations

The Gilded Age was a time of rapid economic growth, creating extraordinary new wealth, materialistic excess, political corruption and terrible poverty and struggle for the lower economic classes. Famous families from this era, including the Rockefellers, Carnegies, Vanderbilts and Astors, had huge wealth. Nevertheless, not all benefited from multi-generational estate planning, says the article “Estate Planning to Protect Generational Wealth Transfers: Lessons From The Gilded Age” from mondaq.

The Vanderbilt family's wealth came from shipping and railroad empires. In 1877, the family’s wealth was estimated at $200 million—$105 billion in today’s value. The family name continues, but with every generation, the size of the wealth dwindles. While the exact terms of the Vanderbilt estate plan are unknown, it’s understood that the family had no strategic long-term plan.

The Pulitzer family is best known for the Pulitzer Prize and the founding of the Columbia Journalism School. Two generations after Joseph Pulitzer's death, a grandson lost most of the massive fortune in a single bad investment. Without a multi-generational plan for wealth transfer, the fortune evaporated.

The Rockefellers are known as one of the Gilded Age families that got estate planning right. They used irrevocable trusts to protect assets from wasteful spending by heirs over multiple generations. The Rockefellers created business succession plans and incorporated philanthropic goals that are still used today.

Your family can benefit from trust and estate plans, even if you’re not worth $100 billion. Creating a strategic plan to protect and transfer wealth over many generations can happen with the skilled experience of an estate planning attorney. Teaching financial literacy and shared family values, including understanding the importance of stewarding wealth and philanthropy, is as important as the money itself.

Generation-skipping trusts (GSTs) are just one means of preserving wealth transfer. With a GTS, a grandparent can leave assets in the trust to grandchildren and other beneficiaries at least 37.5 years younger. By skipping a generation, federal estate taxes aren’t paid twice on inherited assets. Trusts have also been used to offer creditor protection for generations. Divorcing parties can’t access funds in a trust.

If appropriate, there are some states where perpetual trusts are permitted. An estate planning attorney will be able to make recommendations as to whether these are appropriate for your family.

Selecting trustees and successor trustees is extremely important for wealth to last over many generations. Your estate planning attorney will also guide you in choosing either individuals or institutions to ensure trustee power is in the right hands.

Reference: mondaq (June 18, 2024) “Estate Planning to Protect Generational Wealth Transfers: Lessons From The Gilded Age”