Don’t Be A Turkey – Use Your Annual Per Donee Exclusion Amount

As the Thanksgiving holiday approaches, we will gather with our family, friends, and loved ones to give thanks for our blessings and consider all that has transpired in 2021. It’s been a wild year that started with a riot in our nation’s capital, saw Elon Musk become the richest man in the world, surpassing Jeff Bezos (query whether his space expedition played a role in his fall from the top spot), the Delta variant sweep the nation, the United States end its longest sanctioned war in Afghanistan, Peter Thiel reveal the value of his Roth IRA exceeds $5 billion, and Congress flirt with legislation which would make drastic changes to the Internal Revenue Code (the “Code”), which has yet to pass. Despite the tumultuous year in which we continued to feel the impact of the COVID-19 virus with shortages and supply-chain issues, it’s easy to find reasons to be grateful. Folks have reunited with their families and loved ones and travel has begun to resume to pre-pandemic levels. This time of the year offers a special opportunity to show our loved ones just how much we care as gifts accompany the holiday season.

Let’s make this year the year we give gifts with dual purposes, gifts that benefit both the recipient and the donor. Annual exclusion gifts provide a benefit not only to the recipient, but also to the donor because they allow the donor to make gifts to multiple individuals without incurring any transfer tax consequences provided that the total gifts to an individual do not exceed the threshold amount. Code Section 2503(b) sets the amount that an individual taxpayer can gift to any other person at $15,000 for 2021. Beginning on January 1, 2022, that amount will increase to $16,000. Giving now can be a great way to reduce the value of the taxable estate without impacting the lifetime exclusion amount, $11.7 million in 2021 and rising to $12.06 million in 2022, while at the same time, providing the opportunity to divert potential appreciation on that asset to the beneficiary, thereby removing it from the donor’s taxable estate.

The Code imposes no limit on the number of annual per donee exclusion gifts per taxpayer meaning that an individual taxpayer may gift up to that $15,000 amount to an unlimited number of individuals without ever worrying about estate or gift tax consequences. Gifting the funds or assets removes them from the donor’s taxable estate without ever impacting the lifetime exclusion amount. It’s one of the few totally “free” estate planning techniques. Because annual gifts reduce the size of the taxable estate, they also reduce the potential tax liability. For married couples, the benefit doubles because each spouse can gift the annual per donee exclusion amount to the same individual and if the recipient has a spouse, that presents another opportunity to double the impact. Let’s review an example that demonstrates the effectiveness of annual exclusion gifting.

Assume that Mike and Carol recently became empty nesters after Cindy married her long-time love, Nikki, on New Year’s Eve, 2021. At the wedding Mike and Carol announced that they had spoken with their estate planning attorney who advised them to begin making annual exclusion gifts to reduce the value of their estate. Mike and Carol distributed 12 envelopes, each containing $30,000 cash, to each of Greg, Marcia, Peter, Jan, Bobby, and Cindy, and their spouses. As the clock strikes midnight, the family rings in 2022, and Mike and Carol hand out another set of envelopes, this time, with $32,000 cash.

In the example above, in twelve hours, Mike and Carol gave away nearly $750,000 without incurring any estate or gift tax consequences. Mike and Carol each gave $15,000 to each of their six children and their spouses, totaling $360,000 in 2021, and Mike and Carol each gave $16,000 to each of their six children and their spouses, totaling $384,000 in 2022, for a total of $744,000. In fact, Mike and Carol could each also gift $15,000 to a grandchild in 2021 and $16,000 to that same grandchild in 2022. The foregoing example demonstrates how quickly these gifts add up and make a huge impact on an estate. In addition to using the annual exclusion gifts, the Code gives taxpayers a tax-free pass when they pay the medical bills of another individual or pay the tuition bills of a student. The Code imposes no limit on the amount of these medical and tuition gifts, as long as the amounts are paid directly to the provider. The Code also allows contributions to charitable exempt organizations. The Code imposes no limit on the amount of these contributions for gift tax purposes, which provides another easy option for those who want to do some easy estate planning. Such contributions may also qualify for an income tax deduction, up to certain percentages of the taxpayer’s income.

The looming holiday presents the perfect time to consider these and other estate planning issues. Giving now, rather than waiting until death provides several estate planning opportunities in the form of tax-free distributions, reduction of the gross estate, and appreciation outside of the taxable estate, not to mention the benefit to the recipient that the donor will witness while alive. Options may exist for use of the annual exclusion gifts in conjunction with trusts and a long-term estate plan. In this case, it really is better to give than to receive.

Living in a Digital World and the Importance of Planning for Cryptocurrency

As the world moves toward increased reliance on all things digital, it’s only natural that this has included digital currency, otherwise known as cryptocurrency (“crypto”). You can use crypto just like money, to buy goods and services, trade, or simply invest and collect. Many companies issue their own crypto, called tokens. Much like the tokens that you would receive at an arcade or casino, the tokens have no independent value until traded for actual currency. Although there are over 13,000 different publicly traded cryptocurrencies, Bitcoin remains the most well-known. Crypto bears a close resemblance to publicly traded stock: it has initial offerings called “initial coin offerings” and fluctuates based upon market indicators. Unlike the publicly traded stock on an exchange, crypto remains decentralized, meaning that there is no oversight or regulatory body governing this asset, although numerous exchanges exist for buying, trading, and selling crypto. Note that H.R. 3684 Infrastructure Investment and Jobs Act contains new reporting requirements for crypto brokers and includes as a broker anyone who, for consideration, makes a transfer of digital assets. Although not yet law, the bill has been presented to President Biden for signature. It remains to be seen how it will impact crypto; however, it’s clear that crypto warrants special consideration and presents unique issues for estate planning attorneys which will be explored in this article.

Crypto uses a decentralized technology called blockchain to manage and record transactions. Each block in the chain records information that cannot be changed. With every transaction that occurs, the chain adds another block to the individual investor’s ledger; however, the blockchain contains no personally-identifying information. Instead, the investor receives a seed phrase which is used to create a key. A series of letters and numbers comprise the key, known only to the owner. This allows the holder to access, transfer, and otherwise dispose of the crypto. This technology makes hacking or cheating the system difficult because each block contains numerous closed transactions and only the owner knows the key. Likewise, this makes the asset challenging for purposes of estate planning because crypto has no certificate of title, deed, or account statement that proves ownership. If the investor alone knows the key and becomes incapacitated, the crypto can be lost forever without a solid estate plan.

The investor stores the key in a wallet, but not the leather kind that holds your bank and credit cards. Crypto wallets come in two varieties, a hot wallet, or a cold wallet. Hot wallets include web-based wallets, mobile wallets, and desktop wallets that are connected to the internet and provide the fastest access to your crypto. While faster with easier to access your crypto, hot wallets are more vulnerable to online attacks. By contrast, cold wallets are offline storage devices like a USB drive, computer, telephone, or tablet not connected to the internet, making the cold wallet more secure. Investors trade easy access for increased security by using a cold wallet. A potential hacker needs physical possession of the cold wallet along with the key to access the crypto. Clearly, a mix of hot and cold wallets provides the greatest protection and ease of access for those wishing to maintain crypto themselves but also leaves the owner more vulnerable to loss of the crypto if the owner loses access to one of the parts and makes a transfer of the crypto upon the owner’s death more challenging.

Now that many of the major financial institutions allow crypto investments, investors who desire exposure to crypto, but prefer working with an established institution have options. Although most institutions do not allow for “spot” investing, they offer other solutions such as smart contracts, non-fungible tokens, stablecoins, trading shares in trusts holding large pools of crypto, and other innovations. These ever-expanding options make understanding and planning for digital assets even more important for a comprehensive estate plan. The Internal Revenue Service has long considered crypto an asset rather than the currency which means that the estate plan needs to consider tax implications, many of which are addressed in Notice 2014-21, 2014-16 I.R.B. 938. Planning for crypto, much like planning for any assets involves consideration of what occurs both during incapacity and at death. The constant evolution and volatile nature of crypto will require flexibility in planning.

To properly plan for crypto, someone other than the original investor needs to know that it exists, where to find it, and what to do with it. If someone happens upon the key but doesn’t know what it means, then it’s worthless. Perhaps letting the named fiduciary know where to find the key and how to access the crypto works for those with a modest amount of crypto. For those with significant amounts of crypto, perhaps that means sharing the seed phrase and private keys with a trusted family member or friend. If privacy concerns remain paramount, perhaps spreading the seed phrase and private keys among multiple individuals thereby preventing any one person from controlling the digital assets provides comfort. If none of the foregoing options works, then the investor could set up a dead man’s switch app that will trigger the transfer of the crypto if the investor fails to timely check-in. Regardless of the amount of crypto you have, working with an estate planning attorney to create a comprehensive estate plan that references the crypto and provides the fiduciary with the information and tools necessary to access the same has become necessary in this digital world.

Neither Age Nor Health Determines Whether You Need an Estate Plan

There’s an oft-cited, paraphrased quote attributed to George Bernard Shaw: “Youth is wasted on the young.” In many ways it’s true. When we are young, we rarely appreciate the beautiful gift of youth. We waste our talents and time on unworthy endeavors, at least most of us. There are a select few on whom youth is not wasted. Olympians belong in that select group. Olympic hopefuls devote hours upon hours to training, travel long distances to compete, and do it with injuries that would sideline the rest of us. In addition to the foregoing, Olympic hopefuls face other unique issues that mere mortals do not. Over the course of their athletic career, they will need a coach, manager, one or more doctors, and, perhaps, a public relations team. Olympians need to understand the myriad rules for their individual sport and must comply with the Olympic Charter and the rules of the International Federation governing their sport. Finally, those elite athletes medaling at the Olympic games will need a qualified tax professional to understand the rules regarding how the Internal Revenue Code (“Code”) views their winnings. These are heavy burdens for the young that disprove, or at least question, Shaw’s famous quote.

The International Olympic Committee awards the gold, silver, and bronze medals, but it does not distribute cash prizes to the winning athletes. The United States Olympic & Paralympic Committee (“USOPC”), along with similar committees in other nations, gives money to the medal-winning competitors. The USOPC awards a gold medalist $37,500, a silver medalist $22,500, and a bronze medalist $15,000. Athletes receive cash prizes on a per medal basis, thus an Olympian receiving three gold medals would take home $112,500 total cash along with three gold medals. Interestingly, the medals themselves have little monetary value. Perhaps unsurprisingly, for many years the Code included the value of any medal awarded together with any prize money as income under Code Section 74 for federal income tax purposes.

That changed after the Olympic Games in Rio de Janeiro in 2016 when the Obama Administration decided to reward the personal sacrifice involved in training and representing the United States on an international stage. As amended, Code Section 74 imposes a “victory tax” on any athlete earning more than $1 million in income after deductions at a top marginal rate of 37% but excludes from income the earnings and medal for athletes whose income is below that amount. Thus, more famous Olympians such as Roger Federer, Serena Williams, and Michael Phelps would be subject to the victory tax, while others, such as the relatively unknown pole vaulter, Katie Nageotte, may owe nothing on their Olympic winnings.

Generally, the host country has special tax treatment rules for non-resident athletes that do not require payment of taxes in that country; however, some countries impose other requirements, like “donating” a portion of the prize winnings to charity. Unfortunately for the athlete, donating Olympic prize money to a charity in that situation does not provide a tax benefit to the athlete because prizes and awards donated to charity are excluded from income only if “the recipient was selected without any action on his part to enter the contest or proceeding” pursuant to Code Section 74(b).

Notwithstanding that taxes may not be owed in the host country or the United States as long as the athlete’s income level does not exceed $1 million, Olympic athletes still need to determine if they owe taxes to their resident state or any other state in which they competed. Athletes should seek out a qualified professional to help them determine whether they can deduct any travel, training, or other expenses incurred on their way to Olympic glory. Once an athlete has achieved that elusive gold medal, the athlete will, no doubt, need more help to navigate endorsement deals and contracts that will likely result from their newly found success. It’s not often that young individuals in peak physical condition would think to seek out an Estate Planning advisor, but as the above demonstrates, it’s become a necessity. The attorney can advise the athlete regarding their winnings and help the athlete create a plan for those winnings and their other assets.

Frankly, it’s not just Olympic athletes that need to be thinking about Estate Planning. With the loosening of rules allowing college athletes to monetize their name, image, and likeness, they, too, need to consider Estate Planning. Those rules are new, complex, and likely will evolve quickly. This makes tax planning important for not just Olympic athletes, but college athletes, as well. It’s a good idea for anyone aged 18 to have at least the basic Estate Planning documents that include a Will, or Will substitute also known as a Revocable Trust, a Property Power of Attorney, a Health Care Power of Attorney, an Advance Health Care Directive / Living Will, and a HIPAA Authorization. These documents should clearly lay out who should make decisions if the young adult cannot and who should have access to their protected health information.

Although Olympic athletes may be unpaid athletes competing for the love of the sport, the recently relaxed rules regarding amateurism and sponsorships allow athletes to be compensated for their efforts and achievements. With these relaxed rules comes the opportunity for taxation and planning. Youth need not be wasted on the young, young adults should be encouraged to consider their own Estate Planning needs. From those elite athletes competing on an Olympic stage to a college freshman leaving the nest for the first time, these individuals should have a comprehensive Estate Plan. It’s never too early to start this process, and as the last two years have taught us, preparation is the key to avoiding crisis.

It Can Be Scary to Die Without an Estate Plan…the HORRORS of Intestacy

October brings fall, pumpkin-spiced everything, and macabre things. Ghosts, ghouls, and goblins may Monster Mash through your mind; however, when I think of something truly terrifying, it’s dying without an estate plan. Although the pandemic encouraged people to consider what would happen at their death, many folks believe that they “have time” or are overcome with feelings of superstition and dread when considering planning for the end of their life, as if by planning for death, they invite it. The chilling truth is that most of us have no idea how much time we have and when we will depart our mortal coil. Accidents happen, and an alarmingly high number of people die without an estate plan, which can lead to disastrous results.

The excuses for failing to create a plan run the gamut, from being young or childless to being single or refusing to face mortality. Many people believe that if their assets do not exceed a certain amount, then they needn’t worry about an estate plan. Whatever the reason, failing to create an estate plan causes chaos at your death, leaving your loved ones in the lurch. Inevitably, assets will need to be transferred and, without a clear set of instructions that a comprehensive estate plan provides, you are leaving a mess for those grieving your demise.

Dying without a will or trust is called dying intestate. It’s so common that states have created statutes to address the issue of intestacy. Wills and trusts address numerous issues such as who will care for minor children or pets, how and when assets will be distributed, who will oversee the distribution of those assets, and how taxes will be paid. If you die without any estate planning documents in place, state statutes will determine how and to whom your assets will be distributed without any input from you or the loved ones you leave behind. Many states’ intestacy laws give only a portion of assets to the surviving spouse and give the remainder to descendants, without regard for the needs of individual recipients. This includes those who may have special circumstances, such as receiving governmental benefits.

If you die intestate, then your estate will likely need to go through probate. An individual will petition a court for appointment as executor, personal representative, or administrator, which will give that individual legal authority to collect and distribute your assets. That individual likely will need to retain an attorney to understand and navigate the complex court system. A judge oversees the many steps involved in this public probate process. The judge will issue Letters of Administration or similar documents that give the executor power to marshal the assets of your estate. If your family disagrees about who should serve in that capacity, then the court will make that decision and could appoint a total stranger. Usually, statutes entitle the executor to take a commission or fee as compensation for their services. Imagine, a stranger and the public knowing your personal business and then that stranger being paid out of your money to give your assets to the people whom you didn’t even select. There’s something incredibly unsettling about that.

The treat in this tale of woe is that you control your own destiny, at least concerning your estate plan. By contacting an attorney, you can accomplish your goals, keep your estate out of probate and die testate, that is with an estate plan such as a Will or trust. As part of the estate planning process, your attorney will guide you through the perils of failing to plan and make suggestions and recommendations about the legal documents necessary to accomplish your goals. Most people feel relief and well-being upon executing their estate planning documents. Creating an estate plan allows you to determine who will care for your minor children, how your assets will be distributed to those children, who will control those distributions, when those distributions should be made, and whether distributions should be made to individuals, charities, schools, or museums. A comprehensive estate plan prevents disputes among beneficiaries and provides for tax planning, if appropriate. Working with a qualified estate planning attorney will allow you to determine what will happen to your children, your pets, and your property after your death.

Dying without a Will can haunt your family years after your demise. Even if this ghoulish endeavor gives you the chills, it’s important to undertake this task before it’s too late. Financial trouble, delayed distribution of assets, and stress are just a few of the frightening things in store for your family if you die intestate. Most individuals find the probate process as torturous as touring a sanitorium; however, you can circumvent it. Avoid the tragedy of intestacy by creating a set of instructions regarding what you want to happen when you die, otherwise known as an estate plan.