Author Archives: Robert Mondo

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!

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.

As 2021 draws to a close and the New Year dawns, we need to think of…tax planning! Some years Congress tweaks the laws more than other years. While 2021 held plenty of events: a coronavirus vaccine, new coronavirus variants, a new President, etc., it was a relatively quiet year for legislative changes impacting planning. At first, it seemed as though there could be substantial tax changes. But those changes were watered down, deferred, and may never materialize. Still, even in a quiet year, some things change due to inflation increases, etc.

Estate Tax Planning

Applicable Exclusion rises from $11.7 million in 2021 to $12.06 million in 2022.

GST Exemption rises from $11.7 million in 2021 to $12.06 million in 2022.

Annual Exclusion for present interest gifts rises to $16,000 in 2022.

Annual Exclusion for gifts to a Noncitizen Spouse rises to $164,000 in 2022.

In a few years, at the end of 2025, the Applicable Exclusion and the GST Exemption will revert to one-half of their current levels, in other words to $5 million, adjusted for inflation from the 2011 base year. This isn’t relevant for most Americans. However, if you have well over these amounts, you may want to consider removing these amounts from your estate while you still have the temporarily doubled Exclusion and Exemption to cover the transfers. You still have a few years before the law is set to change, unless Congress changes things dramatically before then.

Income Tax Planning

Standard deduction amount:

Married, filing jointly, increases from $25,100 in 2021 to $25,900 in 2022

Single, increases from $12,550 in 2021 to $12,950 in 2022

Head of household, increases from $18,800 in 2021 to $19,400 in 2022

State and Local Tax (SALT) deduction cap remains at $10,000 in 2022, though proposed legislation could increase that cap significantly.

The income tax brackets creep slightly higher, as well.

As you plan for 2022, remember to keep your receipts for expenses and charitable contributions. With the high standard deduction amount and the cap on State and Local Tax deductions remaining at $10,000, fewer taxpayers are itemizing. In fact, the percentage of taxpayers itemizing is less than half what it was before the Tax Cuts and Jobs Act of 2017. Now, less than 14% of taxpayers are expected to itemize. Before then, over 31% of taxpayers itemized. If you give to charity, you may want to group your charitable contributions into one year and itemize them in that one year. You can do this by giving to a donor-advised fund in one year. Then you can make grant recommendations from your donor-advised fund each year. This way, your tax planning won’t impact your favorite charities.

Let’s look at an example. John and Mary make $15,000 of charitable contributions to their church, alma mater, or other charities each year. They have state and local tax deductions above the $10,000 limit. They have a total of $25,000 of deductions and they’d be better off taking the standard deduction ($25,900 in 2022). Rather than giving $15,000 for each of three years to charity, they could give 3 x $15,000 ($45,000) in one year and they’d get a much better tax result. If they gave $45,000 in year 1 to a donor-advised fund, combined with their SALT deduction of $10,000, they’d have $55,000 of deductions instead of the standard deduction of $25,900. In years 2 and 3, they’d just have the SALT deduction of $10,000 and no charitable deduction but could still take the standard deduction ($25,900 in 2022). The charities would get their funds each year just as usual. John and Mary would get a much better tax result. In year 1, they’d have $55,000 of deductions instead of $25,900, an increase of $29,100. Their deductions in years 2 and 3 would not change. If John and Mary are in the highest income tax bracket, this increased deduction could save them over $10,000 in federal taxes.

A little planning can produce a much better tax result. Have a happy, healthy, and prosperous.

September usually brings the start of a new school year, cooler temperatures, football, and a time for reflection in the final quarter. This year, September brought concern, bordering on panic, over proposed changes to the Internal Revenue Code (“Code”) when Congress released legislation containing several proposals eliminating the benefits of many tried and true Estate Planning techniques. Estate Planning attorneys scrambled to understand the potential modifications to the Code that 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. Former clients worried about prior transactions and anxious new clients rushed to utilize expiring techniques and the higher estate tax exemption amount. Once again as it did in 2020, the last quarter of the year threatened to overwhelm Estate Planning attorneys as they spent hours reviewing the Build Back Better Act (the “Act”), attending educational seminars, digesting articles, blogs, and opinion pieces about the Act, and calming nervous clients about the consequences of pending and prior transactions. The Act contained retroactive enactment dates giving attorneys and clients little opportunity to plan for the sweeping changes and underscoring the feeling that the sky was falling.

Estate planning went mainstream and even those with modest estates were apprehensive as newspapers and magazines published article after article scaring everyone into thinking that the Act would permanently and detrimentally alter the Estate Planning landscape. Temporary relief appeared at the end of October when the House Rules Committee released a revised version of the Act (H.R. 5376) eliminating the most egregious provisions including the higher individual and capital gains tax rates, the lower estate tax exemption amount, the rules taxing transactions between grantors and grantor trusts, and keeping both valuation discounts and stepped-up basis at death. As of this writing, the Act sits before an evenly split Senate. Critics of the Act point to rising inflation as an impediment to the Act becoming law, while proponents argue that the economic benefits that the Act would provide to lower income families would ease inflation long term. The Act seems to have stalled in 2021 even though this version reflects measured changes to the Code affecting mostly the wealthy: well-paid executives, athletes, entertainers, entrepreneurs selling a business, and non-grantor trusts.

The Act could pass sometime in 2022, but it’s likely that would require significant changes. Perhaps more likely, the Act will die altogether, although President Biden continues to express confidence that the Act will become law. Regardless of the status of the Act two things are clear: the sky is not falling and Estate Planning should be top of mind for all individuals. For clients with a taxable estate or in the top tax brackets, it makes sense to begin or complete planning sooner rather than later. Individuals can do this by utilizing the estate tax exemption amount prior to 2026, at which time it will be halved. Everyone should review their current plan with the aid of a qualified Estate Planning attorney to ensure that it still accomplishes their objectives. Your plan should focus on long-term goals rather than potential policy changes. The last three years have shown us that policy changes are inevitable; however, a flexible plan offers the best protection against future legislation and the unknown.

When you gather with family and loved ones for the holidays, talk about your collective values and how each individual views and measures success. What you learn might surprise you and cause you to reconsider your estate plan. Talk about steps everyone can take to achieve your collective and individual goals as support may come from untapped resources. Remember that when generational wealth transfer fails, it’s not always because of poor planning or failed investments, it’s often a breakdown of communication and trust. Engaging in these conversations at holiday gatherings may seem counterintuitive, but the festivities tend to reduce tension and encourage more frank discussions. You may consider creating a family statement or theme that provides an opportunity for everyone to feel included in decision-making. Consider how the plan you have implemented or failed to implement will look in six months, one year, five years, or even ten years. This may help unmotivated individuals complete Estate Planning or may cause you to revise your plan. If you have a family business or charitable intent, these suggestions may help uncover and resolve underlying issues and concerns.

After all the fuss surrounding the Act, it’s comforting to know that the Estate Planning world will continue mostly as it was. Even Jeopardy! has acknowledged that Estate Planning has gone mainstream with the following answer in the category “What Does It Prevent” on the December 9, 2021, episode: “A Living Trust: This court procedure to carry out the terms of a Will.” That answer, What is probate?, of course! The last two years have been some of the most tumultuous for Trusts and Estates attorneys and clients, alike. Let’s hope the New Year will bring a new calm to our world. 

Estate Planning attorneys have long recommended the use of closely-held entities such as family limited partnerships (“FLPs”) and limited liability companies (“LLCs”) to provide flexibility in allocating rights to profits and capital, to shift income and property appreciation from one generation to the next, and to provide asset protection. Individuals transfer assets to the entity in exchange for membership or partnership interests, which provide management control and income distribution rights, but which may be subject to certain restrictions set forth in the governing documents. These restrictions limit new owners to a class of individuals, usually the descendants of the original members or partners, although sometimes a spouse may be included. Limitations like this insulate owners from liability, provide concentrated management in one individual, and allow the owners to carry out their business and tax objectives. The manager of an entity owes fiduciary duties to the other members which protects the business from claims of ex-spouses, creditors, outsiders, or even adversarial family members. Family entities can be used in conjunction with other estate planning techniques that leverage discounts for minority interests or freeze values by allowing appreciation to escape taxation at death.

Many states use partnerships as the default for two or more individuals in business together. Sometimes the partners have a formal agreement called a partnership agreement, and sometimes it’s just a handshake. LLCs and limited partnerships, on the other hand, require more formal intent. For example, with an LLC, the members file Articles of Organization to establish the LLC and use an operating agreement to govern the day-to-day operation. The operating agreement generally contains provisions regarding when distributions of profits will be made, who will manage the company, who can own an interest in the company and under what circumstances, the duration of the entity, and what happens upon dissolution. Often, the operating agreement will include provisions that dictate what happens upon the death of an owner. These provisions may override the provisions of an individual member’s estate planning documents, although they should work in conjunction with one another. Questions can arise though when the provisions of estate planning documents conflict with provisions in the entity agreements. Let’s review an example based on facts from a real case.

Assume that Shirley and Warren created an LLC for their family business. The operating agreement (“Agreement”) gave each sibling a 50% membership interest (“Interest”) in the company which consisted of the right to distributions, allocations, information, and the right to vote on matters before the Members. Shirley and Warren included language in the Agreement that a member could transfer all or any portion of his or her Interest by obtaining the prior written consent of all the other Members unless certain limited exceptions applied. The exceptions included a transfer of Interest outright or in trust for the benefit of another Member and/or any person or persons who are members of the “Immediate Family.” The Agreement defined Immediate Family as living children and the issue of any deceased child of a Member. If the Member failed to transfer the Interest during life in accordance with the provisions of the Agreement and failed to dispose of the Interest through the Will, then the Agreement provided that upon the death of such Member, the Interest would pass to and immediately vest in the Immediate Family of the deceased Member. Shirley and Warren ran the business together for two years until Warren’s untimely death. Warren left behind four adult children, and his estranged wife, Annette.

Upon Warren’s death, his Will was admitted to probate and Letters of Administration were issued to his son, Benjamin. The Will did not dispose of Warren’s LLC interest but instead directed that his assets be poured over to his trust which distributed everything equally to his four adult children and named Benjamin as successor Trustee. Shortly before his death, however, Warren amended his trust to include a distribution of his home to his friend, Faye. The amendment also gave Faye his Interest. Benjamin, as Personal Representative and Trustee, refused to transfer the Interest to Faye citing the provisions of the Operating Agreement. Faye sued Benjamin and won in the trial court but lost when Benjamin appealed.

The appeals court focused first on determining whether it was the terms of Warren’s estate planning documents or the terms of the Agreement that would control the disposition of his Interest. That court determined that the laws of the state where the contract was made permitted the Agreement to dictate how the Interest would pass at death. As such, the Agreement vested title to Warren’s Interest in his adult children immediately upon his death thereby overriding the provisions of his estate planning documents and his true intent.

The example above greatly oversimplifies the case; however, it provides universal lessons. First, if you have an interest in a family entity, ensure that you transfer that interest in accordance with the terms of the governing instrument. In the facts above, Warren needed to obtain Shirley’s consent to transfer his Interest to Faye. Second, make sure that your estate plan works with the governing instrument for your entity. Here, Warren would have needed to transfer his Interest to Faye during life and obtain Shirley’s consent in accordance with the terms of the Agreement, rather than relying upon his estate planning documents at his death. Finally, if you are unaware of any governing instrument, understand the impact of local law on your interest in the entity and your overall estate plan. The opinion for the case did not indicate whether Warren’s estate planning attorney reviewed the Agreement, but it’s best to start with a review of the entity documents when dealing with any closely-held entity. Remember that even if you set up the business without the services of an attorney, the business is a legal entity, as is the transfer of your interest in it.

Family entities serve a vital role in accomplishing numerous estate planning goals like asset protection, shifting appreciation and income to the next generation, centralized management, stability, and continuation of business upon death. Family entities also provide the opportunity to leverage the benefits of other techniques to achieve more significant results during life by excluding assets from the gross estate and increasing valuation discounts. To achieve these benefits, it’s vital to operate the entity in accordance with its governing documents. If you have a business, now is a great time to ensure that your estate plan and business plan work together to accomplish your goals and to explore any options that you have.

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.

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.

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.

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. 

Knowing and understanding the complexities of the Internal Revenue Code (“Code”) allows estate planning practitioners to provide advice regarding potential tax consequences of a transaction while creating inventive ways to avoid or reduce that taxation. One example of that creative planning led to the enactment of the “Kiddie Tax” which was born with the overhaul of the Code in 1986. The Kiddie Tax was designed to discourage wealthier individuals from transferring investment assets to a child to utilize that child’s considerably lower tax bracket. By holding those assets in the child’s name, rather than the parent’s name, the income generated by those assets would be taxed at the child’s lower marginal rate thereby saving significant tax dollars.

As originally enacted, the Kiddie Tax applied to the investment income of a child under age 14 by imposing the parents’ marginal rate to that income, effectively limiting the benefit of transferring the investment to the child. Divorced parents and parents filing using the “married filing separately” status posed unique complications in determining the amount of tax due. The Kiddie Tax has been modified several times since its enactment, sometimes with particularly unpleasant results. In 2018 and 2019, the Kiddie Tax saw its most draconian application to date. As part of the Tax Cuts and Jobs Act of 2017, the brackets and tax rates normally applicable to estates and trusts were applied to the unearned income of children. As you can imagine, that resulted in income taxation for a child’s unearned income at rates even higher than those of the parents in some cases. That change was met with considerable backlash which led to the passage of legislation that returned the Kiddie Tax to parents’ rates. Note that families who paid the Kiddie Tax in 2018 or 2019 have the option to file an amended return and apply the parents’ rate to the child’s unearned income during those years. If you believe that this could apply to you, you should consult with a qualified advisor to determine whether you have time to amend.

In its current iteration, the Kiddie Tax applies to unearned income for any dependent under age 18 at the end of the tax year and college students aged 19-23. If a child has unearned income that exceeds $2,200, then that income will be taxed at the parents’ marginal income tax rate, rather than the child’s rate. For a child with unearned income that does not exceed $11,000, that child’s parent may elect to report the child’s unearned income directly on the parent’s Form 1040 without filing a separate return, as long as no withholdings or estimated tax prepayments have been made for the child. If, however, a child earns more than $12,400, between earned and unearned income that child needs to file their own return. Regardless of whose return reflects the unearned income, it will be taxed at the parent’s rate. For a child with both earned and unearned income, the rules become more complex. The Code creates exceptions to the Kiddie Tax for a child with earned income totaling more than half the cost of their support and for any child that uses the filing status “married filing jointly.”

Taxable interest, dividends, capital gains, taxable scholarships, income attributable to gifts from grandparents (such as inherited IRAs), and income attributable to custodial accounts established under the Uniform Gifts to Minors Act all qualify as unearned income. The Code exempts income attributable to wages, salary, tips, and self-employment from the Kiddie Tax. The tax-deferred interest earned on 529 plans and custodial 529 plan accounts are also exempt. As noted above, the Code subjects investment earnings from other custodial accounts to the Kiddie Tax; however, those investments may be converted to custodial 529 plans to take advantage of the inherent tax benefits attributable to 529 plans.

Let’s review an example to see how the Kiddie Tax works in application. Assume that Goldie established a trust for the benefit of her minor dependent daughter, Kate, in 2020, naming Kurt as Trustee. Goldie funded the trust with assets that produced $1,100 of income that year and Kate had no earned income of her own. Because the standard deduction for Kate is the greater of $1,100 or $350 plus her earned income, neither Kate nor Goldie has any income tax consequences. If we change the facts so that the income from the trust was $2,200, then the first $1,100 would be covered by the standard deduction and the $1,100 over the standard deduction would be taxed at Kate’s marginal rate. If the trust earned $2,500, then the additional $300 would be taxed at Goldie’s marginal rate, rather than Kate’s, because it exceeds the allowable $2,200 of unearned income. As this example demonstrates, the unearned income to a child impacts the parents’ tax return much more significantly than the child’s return and this occurs even if the parent truly intended to make a gift to the child.

It’s easy to overlook unearned income when considering whether to establish a trust for the benefit of a child and most often that conversation focuses on the estate and gift tax consequences, rather than potential income tax consequences. As this article makes clear, though, unearned income and the potential application of the Kiddie Tax needs to be part of the total consideration when establishing a trust for the benefit of a child. If you have concerns about the application of the Kiddie Tax to you or your children, or if you want to consider whether amending your 2018 or 2019 income tax return may result in a refund for you.