The Intersection of Legacy Contacts and Estate Planning

Technology has obliterated Estate Planning of years past. Gone are the days of the stodgy attorney sitting in a smoke-filled room discussing arcane provisions of the Internal Revenue Code. Modern Estate Planning consists of Zoom meetings discussing cutting-edge techniques. As this article will demonstrate, technology has changed the way that we think about and approach Estate Planning. Digital assets and emerging technology require Estate Planning attorneys to change their practices. Electronic Wills have gained acceptance in certain jurisdictions, many individuals own cryptocurrency, non-fungible tokens have emerged as individuals consider their digital identity, and smartphones replaced flip phones long ago. To great fanfare in mid-December Apple released iOS 15.2 introducing the concept of the “Legacy Contact” setting. Okay, perhaps it wasn’t to great fanfare, but it certainly garnered attention in the Estate Planning world. The technology giant finally joined Google and Meta (formerly known as Facebook) in providing a way for designated parties to access the digital content of an account holder after death. Many expressed surprise that Apple took so long to release such a necessary tool.

For those who are unfamiliar with the concept of a Legacy Contact, anyone who has a Facebook account, Google account, or an iPhone can select one or more individuals (Apple allows up to five, although Google allows up to ten) to access those accounts and the digital content therein after death. Without this access, the loved ones left behind would lose the treasure trove of information contained in these accounts. While most of this information lacks monetary value, it’s priceless when considering sentimental value. Each organization has enacted different protocols regarding how much control the owner has over what gets shared after death. For example, Apple takes an “all or nothing approach” essentially allowing the Legacy Contact to access everything including messages, files, and photographs if they have the access key. Google, however, employs a more selective approach and provides options that allow the owner to tailor what gets shared after a period of inactivity, even going so far as to allow a complete wipe of the account after a certain amount of time.

Although many states have adopted some form of the Revised Fiduciary Access to Digital Assets Act (the “Act”) which gives a fiduciary access to these accounts, the Act does not apply to social media sites. To address the proliferation of these accounts, many Estate Planning attorneys began including language in their Wills and Trusts specifying that the named fiduciaries would have access to all digital assets intending that those provisions would provide the fiduciary with the required powers to dispose of the content. That did not always work. Sometimes, even with appropriately inclusive language, organizations required the fiduciary to produce a court order to access the account. Obviously, this practice caused frustration because obtaining a court order isn’t always an easy or inexpensive task. Thus, the best practice requires a proactive approach by the accountholder. The accountholder should review the policy settings for all digital assets, both monetary and sentimental, and take appropriate steps to ensure access, if desired, after death.

Most digital accounts allow set up of the Legacy Contact under “Account Information,” “Settings,” or “Inactive Account.”  As with the individuals named in your Estate Planning documents, it’s important to consider who should be named, in what capacity, and how much access you want to give that person if you have the option to limit access. Remember that not every digital platform allows you to choose what information gets shared so it’s important to review the policies and procedures for all your digital platforms and remember that the individual selected may still need to provide requested documentation or proof of their own identity. Of course, you can always provide access during life, but that creates a different issue of shared access while you are alive and actively using the account.

It’s hard to accept our own mortality; however, our digital identities give us the opportunity to continue our legacy beyond our years on earth. Even though technology moves fast enough to make your head spin, it’s vital to review the settings for your own digital assets and discuss your concerns with me.

The Evolution of our Unified Estate and Gift Tax System

Estate planning involves more than planning to avoid the estate tax, although understanding the estate tax and its impact on a plan are certainly required. Until 1916, the United States did not have an estate tax. The Revenue Act of 1916 assessed taxes on estates (“Estate Tax”) based upon the value of an individual’s assets as of the date of death when President Woodrow Wilson signed legislation creating it. The first iteration of the Estate Tax allowed an exemption of $50,000 with rates ranging from one percent (1%) to ten percent (10%) on estates over $5 million. Thereafter, the rate jumped to twenty-five percent (25%) for estates of $10 million.

Originally, the Estate Tax was imposed to fund the United States’ involvement in the first world war and even after that war ended, the Estate Tax stuck. The Revenue Act of 1924 increased the top tax rate to 40% on estates over $10 million and for the first time, added a gift tax on transfers during life (“Gift Tax”) when it became clear that wealthy individuals found a way around the Estate Tax by transferring wealth during their lifetimes. The Gift Tax was short-lived because it was repealed in 1926 while the Estate Tax rate was lowered to 1% for estates below $50,000 and 20% for those over $10 million. In the decade between 1932 and 1942, the Gift Tax was reinstated, and the Estate Tax and Gift Tax were increased while the exemption amounts were lowered. Estate Tax rates climbed to their all-time high of 77% for estates over $50 million in 1941.

After the Gift Tax became permanent, individuals again found a work-around to avoid taxation on transfers by skipping over their children and making transfers to their grandchildren. In response to this, Congress passed the Tax Reform Act of 1976 (“1976 Act”) introducing the Generation-Skipping Transfer Tax and unifying the Estate Tax, the Gift Tax, and the Generation-Skipping Transfer Tax. This unified regime exists to this day. The 1976 Act also capped the Estate Tax and Gift Tax at 70% for estates over $5 million. The Economic Recovery Act of 1981 phased in an increase in the unified tax transfer credit from $47,000 to $192,000 and a decrease in the maximum tax rate from 70% to 50% and eliminated the limits on estate and gift tax marital deductions. The Taxpayer Protection Act of 1997 phased in an increase in the amount excluded from taxes from $600,000 in 1997 to $1,000,000 in 2006.

In 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Act”) reduced the maximum estate tax rates from 50% in 2002, to 45% where it remained until 2009 while increasing the exemption amount gradually until it reached $3.5 million. The 2001 Act repealed the Estate Tax and Gift Tax altogether in 2010. In 2011, the exemption amount was raised to $5 million and adjusted for inflation, while the top tax rate was lowered to 35%. In 2013, the top tax rate was raised to 40% which is the current rate. The Tax Cuts and Jobs Act of 2017 temporarily doubled the exclusion amount from $5 million to $10 million, as adjusted for inflation, which is the current law and which is set to sunset on January 1, 2026, if not sooner.

For a short time in 2021, it appeared that sooner had come when in September, Congress released proposed legislation containing proposals eliminating the benefits of numerous tried and true Estate Planning techniques which would have had serious ramifications for many Americans. Those changes included acceleration of the reduction in the estate tax exemption amount, taxation of formerly non-taxable transactions between grantors and grantor trusts, eradication of valuation discounts, elimination of stepped-up basis at death, and increased tax rates. Those changes were eliminated and now the Build Back Better Act seems to have become a distant memory with little chance of passage.

One of the many interesting things about the Estate Tax was that it was designed to prevent dynastic fortunes. When one-third of the top 50 wealthiest Americans on Forbes’ annual list are heirs, it seems clear that the Estate Tax has failed in that respect. With the current exemption of $12.06 million at its highest amount ever, individuals can transfer substantial assets at death or during life. Last year only 1,275 estates in the entire country owed Estate Tax, despite the historic amassing of wealth by the very richest.

For those willing to talk with me and plan for the transfer of their wealth, it’s possible to pay little or no estate taxes, essentially making the Estate Tax voluntary. If you have questions about whether your estate might be subject to Estate Tax at your death, it’s vital to talk to me about your concerns. Even if your total assets fall below the current exemption amount, you should plan for the transfer of your assets to your desired beneficiaries at your death. The new year makes a great time to plan for the future and ensure your legacy.

Double Your Gifting with Spousal Gift-Splitting

It may be possible to double your gifting by using spousal “gift-splitting.” Spouses may elect to split gifts made to others. If they do so, they must split all the gifts made by the other spouse to others for that year. For example, let’s say John made gifts of $30,000 to each of his five siblings, Aaron, Betty, Charlie, Darlene, and Ed. Let’s say the gifts qualify for the annual exclusion because they are of present interests. If John makes the gifts alone, then each gift of $30,000 would be reduced by the annual exclusion of $16,000 and would result in use of $14,000 of his applicable exclusion ($12.06 million in 2022). So, he’d have used $14,000 x 5 = $70,000 for the gifts. If John’s spouse, Mary, wished to split the gifts, she may do so. However, she must split all the gifts or none of them. So, if Mary doesn’t like Ed, she cannot choose to split the gifts to Aaron, Betty, Charlie, and Darlene, but not the gift to Ed. If she chooses to split all the gifts, she’d be treated as making a gift of ½ of $30,000, or $15,000, to each of John’s siblings. Mary’s annual exclusion would cover her half of each of these gifts and neither John nor Mary would need to use any of their applicable exclusion. Mary would consent to split the gifts by signifying such consent on John’s Form 709 for the year of the gift, thus consenting to split all his gifts for the year.

Interestingly, gift-splitting is effective only for gift tax purposes, not for estate tax purposes. This can be quite important. For example, let’s say John made the gifts to his siblings in an irrevocable trust which included Mary as a beneficiary. If Mary made a gift to a trust of which she’s a beneficiary, it could cause inclusion in her taxable estate under section 2036. However, if Mary merely splits the gift made by John, it would not cause inclusion in her taxable estate because she would only be considered to have split the gift for gift tax purposes and not estate tax purposes.

Spousal gifting can be confusing. While U.S. citizen spouses can give an unlimited amount of money to each other, a gift to a non-citizen spouse doesn’t qualify for the unlimited marital deduction. Instead, such a gift would need to qualify for the annual exclusion. In other words, it would need to be a gift of a present interest. There’s also a limit for such gifts to a non-citizen spouse. In 2022 that limit is $164,000.

Spousal gift-splitting can be a useful technique to consider as you plan your gifting strategy for 2022!

Start 2022 the Right Way

Welcome to 2022! Most of us will leave 2021 without hesitation – many had high hopes that 2021 would bring the end of COVID-19 and a return to normalcy and yet we face another variant as we usher in 2022. While things may not have gone the way we hoped in 2021, we can start 2022 prepared for anything by getting our estate plans in order.

The tumultuous events that plagued 2021 demonstrate the importance of a complete estate plan. Millions became seriously ill from the coronavirus. All too many of them died and even those who lived may be suffering long-term consequences. When they became ill, those who had their estate plan in order could focus on more important things, such as spending precious time with loved ones.

While we hope 2022 will be much better than 2021, it’s important to begin the year by creating an estate plan if you do not yet have one or reviewing the plan that you already have in place to ensure it accomplishes your goals. This will provide you and your loved ones with peace of mind for anything that 2022 brings.

Simply put, an estate plan serves as a set of instructions regarding how you want your affairs handled if something happens to you. The plan sends a message to your loved ones that you care and do not want to burden them with unclear or unstated plans. A basic estate plan consists of documents that provide instructions for what happens both during your life and at death. Those documents consist of a Property Power of Attorney, a Healthcare Power of Attorney, a HIPAA Authorization, a Will, and typically a Living Trust, also known as a Revocable Trust (a “Trust”).

First, the Property Power of Attorney allows you to appoint someone as your “Agent” to act on your behalf with respect to your financial affairs. If that Agent is unwilling or unable to act, you can appoint one or more successor Agents. Through the Property Power of Attorney, you give someone else (the Agent) powers you inherently already have yourself. The Property Power could be drafted to vest immediately meaning that the Agent would have the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, you also have the option to make the Property Power of Attorney “springing” meaning that the Agent’s powers would “spring” into action only upon your incapacity. You may hear the term “durable” in conjunction with the Property Power of Attorney. This means that the Property Power of Attorney continues to be effective notwithstanding your incapacity. A Property Power of Attorney that is not durable does not allow your Agent to act during your incapacity.

A Healthcare Power of Attorney allows you to appoint an agent to make medical decisions for you if you are unable to do so for yourself. If you can make these decisions, then your agent cannot veto any medical decision you make. A HIPAA Authorization allows you to appoint an agent to access or receive protected health information.

It’s important to keep your Property and Health Care Powers of Attorney updated. Reviewing them often ensures that you always have trusted and capable individuals in those important roles and that you do not leave your loved ones wondering what to do upon your incapacity. The agents you select under your Powers of Attorney play a vital role in your incapacity plan and may have broad power during your life. Make sure you keep the right people in these roles.

A Will determines the distribution of your assets upon your death and allows you to select an individual or company to make the disbursements. If you do not have a Will, then your state’s intestacy laws will govern asset allocation at your death. Often, the state’s division would not match your own. In addition, state intestacy laws may appoint a stranger to handle these important decisions. Finally, the Will also allows you to nominate guardians to care for any minor children.

Regardless of whether you have a Will or your state’s intestacy laws determine property division at your death, the individual in charge will need to petition the court for permission to transact the business of your estate through a probate proceeding. Depending upon the laws of your state, probate can be a lengthy, costly, and public process. If you want to avoid probate and maintain your privacy, a Trust provides you the opportunity to do that. With a Trust, you transfer the assets to the Trust during your lifetime and manage them as the Trustee. You avoid probate altogether by using a Trust because the Trust contains provisions regarding what happens upon your death and vests a successor Trustee with power to make distributions from the Trust. The Trust also protects against incapacity by giving a successor Trustee the power to make distributions from the Trust for your benefit should you become incapacitated. Due to cases of fraud, institutions more readily recognize a successor Trustee acting on your behalf than an agent under your power of attorney.

Hopefully, 2022 will be better than 2021, and 2020 for that matter! Even a basic estate plan provides peace of mind regarding what’s in store for 2022. Resolve now to get your estate planning done this year, sooner rather than later.