Cryptocurrency and Digital Assets

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This is my second blog post dealing with the increasing Brave New World of “digital assets” and how these assets fit with a person’s estate planning. Below are a few of my brief comments about cryptocurrency:

(1)  In the cryptocurrency world, a person’s “private key” is the crucial element separating access to one’s cryptocurrency and its loss (likely permanent). The private key is analogous to a password. My strong point here is to keep a backup of your private key, and let trusted family members know where they can find your private key in the event you are unable to provide it (your death, disability, etc.). There are hundreds of web references to individuals having permanently lost millions of dollars in cryptocurrency due to lost private keys.  Click here for an example from Wired magazine referring to a CEO who recently died;  and no one can find his private key to an estimated $137 million in cryptocurrency;

(2)  The above access / backup problem is particularly elusive, and difficult, as many cryptocurrency users are extremely private about this subject, often to the intentional exclusion of their family members, etc.;

(3)   As a related aside, the IRS, no doubt, is interested in your cryptocurrency.  IRS Notice 2014-21 is its first published guidance in the form of answers to frequently asked questions.  Click here to read this notice;

(4)  The above IRS Notice includes a great deal of information. Two points likely a surprise to most readers are:  (i) the IRS is treating cryptocurrency transactions for income tax purposes as a “sale or exchange”. For example, if you use $50,000 of  cryptocurrency to purchase an item;  you will trigger gain or loss on the $50,000 depending on your cost basis in your cryptocurrency, etc. I purposely do not include more detail about this gain / loss treatment for this post; and (ii) Notice 2014-21 expressly states the IRS will treat cryptocurrency as property, not as currency.  For estate tax planning purposes, this means cryptocurrency will be inludable in the owner’s estate at death, with a stepped-up (or stepped-down) cost basis based on the cryptocurrency FMV at the person’s death;

(5)  Finally, I strongly recommend an express provision dealing with crypocurrency be included in a person’s estate planning documents (trustee, executor, power of attorney powers, etc.). Below is my current draft of possible language for dealing with cryptocurreny (again, this is merely my example language for this post;  no reader may rely on this provision as legal or any other advice from me or my law firm):

“To handle on my behalf any of my digital asset “cryptocurrency“, defined for purposes of this DPOA [durable power of attorney] as digital assets that are exchanged electronically and based on a decentralized network or exchange, with such exchanges not requiring a reliable intermediary and managed using distributed ledger technology. In broad terms I give my agent under this DPOA the power to accept or pay on my behalf any cryptocurrency, digital asset currency, funds, or other value that substitutes for currency from one person to another person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. The above term “other value that substitutes for currency” encompasses situations in which the transmission does not involve the payment or receipt of cryptocurrency, but does include, but is not limited to, my private and public keys, blockchain and ledger information, bitcoins, bitcoin addresses, and any other cryptocurrency user or account data or information related to such transactions or to any convertible currency related thereto on my behalf. My intent also is that my reference to “cryptocurrency” under this paragraph be read together as broadly as possible in the broad context of my reference to electronic communications content and the definition of “digital assets” under O.C.G.A. Section 53-13-2 (as amended) included in paragraph (gg) below;”

Borderline Incapacity; A Family’s Greatest Estate Planning Threat

Ponder, for a moment, who is the winner in this kind of litigation?

A family not willing to plan for incapacity may later find itself hemorrhaging from substantial legal fees and litigation costs.  I see nasty disputes arise when a family member becomes incapacitated, often the problem is Dad in his second marriage. I also remain steadfast with my belief that incapacity, especially borderline incapacity, is the greatest threat we all face in the context of our estate planning.

Here also is a difficult question. That is, who do we trust and who will we designate as the person or persons who will step into our shoes for overseeing our affairs and property if we become incapacitated?

These names (your agents under a power of attorney, trustees, executor) must be trustworthy, self-starters, financially well-versed, and non-procrastinators. Using your own family members is fine. But, you still need to consider these characteristics.

Here are some additional key comments:

  • The term “conservator” typically refers to an entity or individual appointed by a court to manage and oversee an incapacitated person’s property. By contrast, a “guardian” is an individual appointed by the court to oversee an incapacitated person’s emotional and physical well-being, care, education, health, and welfare.
  • But, the goal is to have documents in place now (often revocable living trusts) for the management and oversight of your property to stave off getting a court involved in the event of your incapacity.
  • This means you must now have sufficient written documents as part of your estate planning that help defend against a court stepping-in and mandating a conservatorship or guardianship on your behalf.
  • The lawyer assisting you with this defensive planning must know the relevant procedural, evidentiary, declaratory judgment, and other important court / litigation rules so as best to block a court from becoming the arbiter in determining your incapacity.
  • Absent this planning, a Georgia court (my law office is in Atlanta) overseeing the fray as to a person’s possible incapacity is required to conduct a court proceeding (e.g., a trial) to determine whether incapacity exists. The litmus test is whether the person lacks sufficient capacity to make or communicate significant responsible decisions about the management of his or her property.
  • And, here is the kicker. If the court concludes there is incapacity, the court is not bound to name a family member as the conservator or guardian of the incapacitated person. Instead, the court has the power to name any conservator or guardian the court concludes is in the best interest of the incapacitated person. This might end up being the local county administrator or some other entity or person completely outside the family circle.
  • As to a court’s power to choose, click here merely as an example of a Georgia case where the son, whose mother was found to be incapacitated by the court, lost in his effort to be named by the court as his mother’s conservator. This case is In re Hodgman, 269 Ga. App. 34, 602 S.E.2d 925 (2004). The local county administrator was appointed by the court as the conservator. The son unsuccessfully argued that his having already been named as agent by his mother in her financial power of attorney and in her health care directive supported a conclusion that the court was bound to name the son as the conservator.

I have no personal knowledge of the following Georgia case that I include here as an example of what you hope to avoid. Click here. This case is In re Copelan, 250 Ga. App. 856, 553 S.E.2d 278 (2001), and illustrates what appears to have been a very expensive, time-consuming, painful ordeal for the family and for the mother who ultimately prevailed against her children seeking to have her deemed incapacitated.  Note there was a jury trial at the superior court level that the mother lost; she then successfully obtained a reversal of the jury verdict on appeal.  My guess is the angst and litigation expenses for these family members were substantial.

Finally, the court in this Copelan opinion pointed out that one of the sons had left a voice-mail message with another sibling threatening their mother with “embarrassment” in the community and referring to a lawyer who was ” ‘chomping at the bit’ to take the case.”

The QTIPable By-Pass Trust; A Crystal-Ball Perspective

Estate planning documents that include built-in flexibility enabling an opt-in / opt-out approach to future changes in the law or circumstances are products of excellent work. The drafter needs to keep a crystal-ball perspective as to what might reasonably occur in the client’s future in order to move in the direction of this kind of excellent work. On the other hand, it is much easier to prepare an average, static, mediocre document.

There are dozens of reasons to maintain this crystal-ball perspective, and here is simply one important example:

As a broad proposition, I find no reason for using the old “By-Pass Trust” design for a married couple’s estate planning. This is the garden-variety “By-Pass Trust” that has been part of a married couple’s A-B trust estate plan for the past 30-plus years.

Rather, I prefer a QTIPable By-Pass Trust that provides essential income tax planning options not available with the above old By-Pass Trust design.

Why this importance of income tax options?

Because I am convinced our estate tax regime is continuing to move in the direction of the Canadian system where property gains will be taxed at death for income tax purposes, regardless of whether a person is over or under the threshold for estate tax. The QTIP trust likely will provide an optimal, effective response to reducing this income tax exposure.

As an example of these income tax headwinds we face, the federal government’s February 2015 “General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals” includes dozens of possible changes in the income tax law at death for certain taxable “deemed realization” events. Click here to see these 2016 revenue proposals.

Some practitioners by personality are simply not comfortable with the notion of change. Some also will continue to argue for the old-style By-Pass Trust as being necessary so that the surviving spouse’s children and descendants are included with the surviving spouse as beneficiaries of the trust. But, as an important aside, my 20+ years of lawyering make me conclude most children and descendants try and overreach whatever is available to them from the By-Pass Trust, especially when their mother is the surviving spouse. To the contrary, I prefer that the surviving spouse possess the utmost in independence and financial autonomy without this kind of overreaching.

But, again, my predominant objection to this 30-year old By-Pass Trust approach is that it simply does not provide income tax planning options.

Income Tax (estate) Planning with the Delaware Tax Trap

Click here for my newsletter.  This is my recent March 30 leimbergservices.com newsletter that illustrates the increasing importance of income tax planning as part of estate planning.  Although this newsletter is directed at tax practitioners already familiar with the Delaware Tax Trap, my newsletter also includes an excellent primer on the Delaware Tax Trap.

There are Various Types of Defective Trust Rules

This short blog post follows by March 2, 2015 post and is for those readers who desire a bit more technical discussion. Therefore, keep in mind the tax law and trust rules for creating a defective trust for income tax purposes relative to the person who creates the trust (such as being defective as to the settlor [creator] of the trust) are different than a defective trust for income tax purposes relative to a beneficiary.

There are also design distinctions where the trust is either:

  • defective for income tax purposes but not includible later for estate tax purposes [with this design Jane in my previous March 2 post would not get a stepped-up basis for the credit-shelter trust assets at her later death]; or
  • defective for income tax purposes and also later includible for estate tax purposes [this is the example in my March 2 post for Jane), or
  • not defective for income tax purposes, but later includible in the estate [this is, for example, a DING trust for income tax purposes where the trust is purposely designed to be subject to state tax jurisdictions in a targeted state with no income tax].

Estate / Income Tax Planning with the Stepped-Up Cost Basis. Part 1 of 3.

This is 1 of 3 blog posts on this subject of stepped-up cost basis.

Congress in early 2013 essentially converted our federal estate tax system into an income tax system.   For most people not in the wealthiest top 1%, they will face at death greater income tax exposure, with the corresponding benefit of paying no estate tax. The top 1% will likely pay estate tax.

Here is a question this 99% group needs to ask their advisors: “Does my estate planning include income tax savings features?”  If not, your planning misses the mark, in my opinion.

One highly beneficial income tax-savings feature for estate planning is to build-in flexible options for maximizing the stepped-up cost basis when each spouse dies. This flexibility ideally also must give the surviving spouse, at the time of the first spouse’s death, the ability to opt-out of this income tax planning.

Why?

This income tax savings is beneficial only if the married couple will pay no estate tax. Essentially, it can produce significant income tax savings as long as the married couple remains in the no-estate tax 99% group. More pointedly, this stepped-up basis is crucial in reducing the taxable gain for income tax purposes when the after-death property is sold, including, very powerfully, property that has been depreciated.

This next point is important.

This stepped-cost cost basis treatment for income tax purposes has different results if you receive, for example, property from John Doe as a gift versus receiving property from John Doe when John dies. Death transfers under the tax law are better for reducing the income tax on this gain situation. Gift transfers typically do not produce this income tax savings. I will illustrate these two concepts in my next blog post.

My recent email alert, titled “The Sky is Really Falling”

Click here for my July 9, 2014 email alert.   I am aware this still-early stage of everyone digesting the new income tax paradigm for estate planning may make my repeated concerns about this income tax exposure seem like nothing more than an acorn dropping.   But, the reality is the sky is really falling for a failure to address this income tax exposure as part of core estate planning.

A Certainty and an Uncertainty for 2012

I start this blog post with one uncertainty and one certainty.

The uncertainty is whether many of us (yes, including me) will this year review and put our estate planning in order, or will we put it off for another year.

The certainty is that we will at some point die, and prior to death possibly have a period of incapacity.

Many of us believe we ultimately will one day feel like taking on the task of our estate planning. My experience, however, is that expecting this feeling is illusive and most of us will continue feeling like not taking on this task. Realistically, the key is simply to push through with the necessary effort and get it done, and behind you. This year 2012.

My January 2012 newsletter is intended to help you move this estate planning process to the finish line.   Here is the link to the newsletter.