An Introduction to Dynasty Trusts

When people create estate plans, they typically focus on handing down their money and property to their children, grandchildren, and other living heirs. But some people want to leave behind a more enduring legacy. For those interested in multigenerational wealth transfer, a dynasty trust could be the answer. 

A dynasty trust is an irrevocable trust that offers the tax minimization and asset protection benefits of other types of trusts, but unlike a trust that ends with outright distributions to your children or grandchildren, a dynasty trust can span more than two generations. Also known as a perpetual trust, a dynasty trust theoretically can last forever—or at least for as long as trust money and property remain. Because the trust could last for many years, and the rules generally cannot be changed once the trust is created, a dynasty trust must be set up with great care. 

How Does a Dynasty Trust Work?

A dynasty trust starts the same way as any other trust. The trust’s creator (i.e., the grantor) transfers money and property into the trust, either during their lifetime or at the time of their death, in which case the trust is a testamentary dynasty trust. Regardless, as an irrevocable trust, once the dynasty trust is funded, it is set in stone. It cannot be revoked, and the rules the grantor sets for the trust can only be altered under certain state statutes governing trust modifications. 

Who Should Serve as Trustee of a Dynasty Trust?

One role that the grantor must seriously consider is who will act as the trustee. It is common for the grantor of a dynasty trust to name an independent trustee, such as a bank or trust company, to serve in this role, because they can administer the trust for as long as it lasts. 

While it is possible to choose a beneficiary of the trust to serve as the trustee, this raises potential tax and creditor protection issues. A beneficiary-controlled trust can have income and estate tax consequences depending on the terms of the trust and the scope of the beneficiary’s powers. Not only does a beneficiary’s ability to control the trust affect the degree of asset protection the trust provides the beneficiary, but it also risks family wealth to misappropriation. In addition, a corporate trustee, like the dynasty trust, has an indefinite legal life, allowing for uninterrupted administration across generations. Corporate trustees typically charge an annual fee based on the amount of money and property in the trust. 

Who Should Use a Dynasty Trust?

Estate planners like to remind people that trusts are for everyone, not just the wealthy. However, an exception to this general rule can be made for the dynasty trust. While you do not need to have the dynastic aspirations of the Medici family or the House of Windsor to set up a dynasty trust, most of the time, it is used by families with significant wealth. 

There is no law that says you need a certain amount of money to set up a dynasty trust. But practically speaking, a dynasty trust only makes sense if you have money and property that will last for two or more generations (although this depends on the monetary needs of your beneficiaries and how fiscally responsible they are). Grantors who are thinking about multiple generations after their children set up dynasty trusts. 

Another way to utilize a dynasty trust, other than handing down money to future generations, is to keep a family business in the family. Anyone who owns a family business is probably familiar with the dismal statistics about their longevity (e.g., 40 percent transition to a second generation, 13 percent make it to a third generation, and just 3 percent survive to the fourth generation or beyond). Using a dynasty trust, the grantor can place shares of the business in the trust to benefit multiple generations of beneficiaries. The trustee could be a professional trustee that can manage business affairs and maintain continuity of operations, while the beneficiaries benefit financially from the business. The grantor can include terms that help ensure the business is run competently, such as requiring the trustee to have an advisory council that effectively serves as a board of directors. 

Tax Benefits of a Dynasty Trust

Part of keeping your legacy in the family is keeping your hard-earned money from being taxed. The federal estate tax exemption amount of $12.06 million per individual in 2022, or twice that amount for couples) can be used to fund a dynasty trust so that the money and property transferred directly to your grandchildren will not be subject to gift or generation-skipping transfer (GST) taxes. By placing accounts and property in a trust and timely filing a gift tax return to allocate appropriate tax exemptions to the trust or pay some amount of wealth transfer tax, those items are not included in your taxable estate. This goes for your beneficiaries as well, as long as the trust is fully exempt from GST tax. 

Trust funds may be used to pay a beneficiary’s living expenses or invested in a home for the beneficiary’s benefit without contributing toward the beneficiary’s taxable estate. Even better, creditors and divorce courts cannot reach accounts and property that you leave to your loved ones in a properly drafted dynasty trust. You and your beneficiaries will not receive these benefits if you give them money outright. 

Dynasty Trusts Not Available in Every State

The rule against perpetuities is a common law rule that limits the duration of controlled property interests, including interests in trusts. Although not written specifically with trusts in mind, the rule against perpetuities effectively prevents people from using legal instruments such as deeds and trusts to control the ownership of property for many years after they have died. But the rule is notoriously difficult to decipher, leading many states to modify it to extend the applicable term or get rid of it altogether. Keep in mind, though, that you may be able to set up a trust in a state that you do not reside in with the help of an experienced estate planning attorney. 

Creating Your Dynasty

If you think a dynasty trust might be right for you, the next step is to speak with an estate planning attorney at our firm. Among the items to be discussed are the selections of the trustee and beneficiaries, tax and creditor protection considerations, state laws on perpetual trusts, and how a dynasty trust fits into your overall estate plan. To start planning your legacy today, please contact us.


Footnote

  1. Family Business Facts, SC Johnson Coll. of Bus., Cornell Univ. (last visited Sept. 20, 2022), https://www.johnson.cornell.edu/smith-family-business-initiative-at-cornell/resources/family-business-facts/.

Will Our Child Have to Handle Multiple Trusts after Our Deaths?

When a married couple creates an estate plan using a revocable living trust, they have the option of creating a single joint trust or two separate individual trusts. While the pros and cons of each are beyond the scope of this article, spouses may choose to create separate trusts for a variety of reasons including the following: 

  • the desire to leave property to different beneficiaries or for greater asset protection from the financial risks of one spouse
  • the ability to keep inherited or individually owned property separate from jointly acquired property, or
  • the need for greater flexibility or more certainty with respect to tax planning after the death of the first spouse. 

Whatever the reasons for creating separate trusts, when the ultimate beneficiary is the same for both spouses’ trusts (often the couple’s child or children), the question that inevitably arises is whether the beneficiary of these separate trusts will always have multiple trusts to deal with? Keeping track of the property owned and invested by each trust and filing tax returns for multiple trusts can be an administrative headache. The good news is that, in general, if multiple trusts have similar terms and neither the trust agreement nor state law prohibits the consolidation of the trusts, then the trusts can usually be combined into one. 

Under section 417 of the Uniform Trust Code (UTC), which has been adopted (either completely or in some form) in thirty-five states and the District of Columbia as of the date of this writing, a trustee, after giving notice to the qualified beneficiaries, may combine two or more trusts into a single trust, “if the result does not impair rights of any beneficiary or adversely affect achievement of the purposes of the trust.” Keep in mind that this provision of law would be overruled by any contrary provision in the trust agreement, so it is essential to know and understand what the trust agreement provides. 

While the UTC does not require that the trust terms be identical to be combined, the more that the terms governing distribution of trust property of the trusts to be combined vary, the more likely it is that the rights of a beneficiary would be impaired as a result of the combination. Therefore, it would be less likely that the combination would be approved. Where the trusts to be combined are the separate trusts of a married couple, which likely have identical or very similar provisions, there should be little to no impediment to combining trusts.

In fact, if the trusts do have identical provisions, it could be argued that the trustee has a responsibility to combine the trusts to provide for a more efficient and economical trust administration. Combining trusts could result in the reduction of trustee fees, filing one trust tax return instead of two or more, and more effective investing opportunities.

The UTC does not require a trustee to obtain consent of the beneficiaries or a court prior to combining multiple trusts. It does, however, require that the trustee give the beneficiaries notice prior to doing so. And, although the law may not require the consent of either the beneficiaries or a court, if the terms of the trusts to be combined vary significantly, a prudent trustee would seek the consent of the beneficiaries or the court prior to combining the trusts.

For married couples who are considering or have chosen separate trusts as part of their estate plan, the good news is that their child does not always have to handle multiple trusts after their death. Rather, if the terms of the trusts or state law permit the combination of trusts, the trustee may do so, thus taking advantage of certain economies in trust administration. If you have questions about whether your separate trusts can be combined into one for the benefit of your beneficiaries, please give us a call.

Three Celebrity Probate Disasters and Tragic Lessons

One would assume that celebrities with extreme wealth would take steps to protect their estates. But think again: some of the world’s richest and most famous people enter the pearly gates with no estate plan, while others have made estate planning mistakes that tied up their fortunes and heirs in court for years. Let us look at three high-profile celebrity probate disasters and discover what lessons we can learn from them. 

1. Prince

The court battle over musician Prince’s estate was a probate disaster. 

  • When the ‘80s pop icon died in early 2016, he left no estate plan (reportedly due to some previous legal battles that left him with a distrust of legal professionals). 
  • The probate court had the task of determining Prince’s heirs among all of the people who stepped forward claiming an interest in Prince’s money and property. In 2017, the court ruled that his five half-siblings and his sister were to inherit from Prince. 
  • The court battle among Prince’s potential heirs cost millions of dollars, and all matters involving Prince’s money and property took about six years to resolve. 

Lesson learned: Accurate legal documentation protects your legacy. Do not let a general distrust or a bad experience propagate through generations, leaving your loved ones to fight or lose their inheritance.

2. Whitney Houston

Whitney Houston’s failure to update her estate plan ended up leaving her daughter with more than she probably intended.

  • Whitney Houston executed a will in 1993 and died in 2015 without making any updates to the distribution instructions in her will.
  • Her will left everything to her nineteen-year-old daughter, Bobbi Kristina Brown.
  • According to the will, one-tenth was to be given to Bobbi at age twenty-one (about $2 million), another one-sixth at age twenty-five, and the remainder at age thirty. 
  • Unfortunately, Bobbi died in 2015 at the age of twenty-two, of drowning.
  • Many people have speculated that Bobbi was not mature enough to have received $2 million when she turned twenty-one.

Lesson learned: Naming your child in your estate plan is not enough. You must periodically review the documents and assess whether your original plan to leave your money and property is still in the best interest of your child.

3. Michael Crichton

  • Michael Crichton, author of Jurassic Park, had a will prepared and died leaving behind a daughter from a previous marriage and his surviving wife. His surviving wife had signed a prenuptial agreement and was not considered an heir when he died. She was, however, pregnant with his son.
  • He did not update his will to provide for his soon-to-be-born son.
  • A court battle was fought between his daughter and his wife, on behalf of her son, to determine what share he was to receive. Was he to split the inheritance fifty-fifty with his half-sister, or a smaller amount as a pretermitted (omitted) heir?
  • His son ultimately inherited from his father, but the cost of the litigation reduced the inheritance, the process took a considerable amount of time, and the conflict most likely damaged familial relationships.

Lesson learned: There are four major events that should trigger a review of your estate plan: a birth, death, divorce, or move. These milestones could have a lasting impact on your estate plan. When they occur, review your plan and contact an experienced estate planning attorney to make the necessary changes.

These celebrity probate disasters serve as stark reminders that no one’s wealth is exempt from the legal trouble that can occur without proper estate planning. As always, we are here to help you protect your loved ones and legacy. Give us a call today to discuss protecting your hard- earned money and property and your loved ones.

Three Tips for Overwhelmed Executors

While it is an honor to be named as a trusted decision maker, also known as an executor or personal representative, in a person’s will, it can often be a sobering and daunting responsibility. Being an executor requires a high level of organization, foresight, and attention to detail to meet responsibilities and ensure that all beneficiaries receive the accounts and property to which they are entitled. If you are an executor who is feeling overwhelmed, here are some tips to lighten the load. 

1. Get help from an experienced attorney.

The caveat to being an executor is that once you accept the responsibility, you also accept the liability if something goes wrong. To protect yourself and make sure you are crossing all the “t’s” and dotting all the “i’s,” hire an experienced estate planning attorney now. Having a legal professional in your corner not only helps you avoid pitfalls and blind spots, but it will also give you greater peace of mind during the process. In fact, in some states it is a requirement that an executor be represented by competent legal counsel, so it is always a good idea to discuss your responsibilities with an attorney before you take action. It is also important to note that the expense of hiring an attorney does not have to be borne by you. As an executor, you are allowed to hire professionals to assist you in carrying out your responsibilities, and they can be paid from the deceased person’s money. This includes professionals such as financial advisers and certified public accountants.

2. Get organized.

One of the biggest reasons that you may feel overwhelmed as an executor is that the details can come at you from all directions. Proper organization helps you conquer this problem and regain control. We will advise you of what to do and when. You will need to gather several pieces of important paperwork to get started. It is a good idea to create a file or binder so you can keep track of the original estate planning documents, death certificates, bills, financial statements, insurance policies, and contact information of beneficiaries. Bringing all of this information to your first meeting will be a solid start. As you continue with the administration process, you may be required to open or manage the deceased person’s bank accounts. It is important that you keep records of all transactions that occur because you will be required to account for how money has been spent. It is also important that you keep all of the deceased person’s finances separate from your own. Do not deposit money into your personal account.

3. Establish lines of communication.

As an executor, you are the liaison between multiple parties involved in the probate process: the courts, the creditors, the Internal Revenue Service, the beneficiaries, and the heirs. Create and maintain an up-to-date list of everyone’s contact information. Also, retain records such as copies of correspondence or notes about phone calls you make as executor. Open and honest communication helps keep the process flowing smoothly and reduces the risk of disputes. It is worth repeating because it is so important: keep records of all communications, so you can always recall what was said to whom.

If you have been appointed as an executor and are feeling overwhelmed, we can provide skilled counsel and advice to help you through the process. We can also help you draft your own estate plan so your family can avoid the stress of probate. Give our office a call today for an appointment. We look forward to hearing from you.

Things to Consider Before Accepting Your Inheritance

The news that you will be receiving an inheritance is often bittersweet because it means that somebody close to you has passed away. But you might also have mixed emotions about your inheritance for reasons that have to do with the actual accounts or property you are inheriting. 

On the one hand, you might not want to reject your inheritance out of respect for the person who put you in their will or trust or named you as the beneficiary of an account or policy. On the other hand, depending on what you have been gifted, an inheritance might pose unintended logistical or financial difficulties that you are unable—or unwilling—to take on. 

An inheritance, like the loss of a loved one, can be life-changing. While there is no law that requires you to accept an inheritance, there are sometimes good reasons for doing so. And if you choose to turn down a gift, that does not mean it will end up in the hands of the state. Prior to accepting or rejecting an inheritance, you might want to seek legal and tax advice about the implications of either decision. 

When Estate Planning Does Not Go To Plan

An estate plan contains instructions for distributing a person’s money and property when they pass away. Some families discuss who will receive certain accounts or property. For example, maybe all of the kids are asked if they would like to inherit an item from mom’s collection of family heirlooms. 

In an effort to be fair, most testators (i.e., persons who have made a will or created an estate plan) or trustmakers divide their money and property equally among heirs. There are cases where one child or heir may be given a larger inheritance based on a larger caregiving role or contribution of their time to the family in some other way. But typically, there are family talks about such matters to ensure that everyone is in agreement and the unequal inheritance does not spur intrafamily resentment and conflict. 

However, unexpected inheritances are not out of the question. Testators or trustmakers are under no legal obligation to be fair. Generally, they are entitled to divide up their assets however they see fit. Furthermore, family dynamics can shift and force changes in an estate plan. 

For instance, maybe there are three siblings, and two of them have rocky marriages. The testator may have a provision in their will that gives the executor discretion to address this situation and keep their assets out of the hands of a sibling’s soon-to-be ex-spouse, such as by disinheriting a sibling or reducing their inheritance if their marriage is on the verge of failing at the time of probate. Or, a testator could simply decide to write an heir out of the will altogether and assign their share of an estate to somebody else. 

Similarly, the death of an heir could result in estate assets being reassigned. Indeed, there are many situations that could result in a surprise inheritance. Maybe you have a childless uncle or friend who wanted to surprise you with a windfall. Up until the moment a person passes away, a person is free to amend their will. Heirs usually have some idea of what they will be inheriting from whom, but estate planning does not always go according to plan. 

Weighing the Pros and Cons of an Inheritance

Accepting an inheritance is a free and voluntary act that is also affected by personal circumstances. If you were informed that you have an inheritance coming your way, you will have to decide whether to receive or reject it. Here are some factors that may impact your decision: 

  • Outstanding debt. Your inheritance could include a big ticket item, such as a house, car, or RV, that carries outstanding debt. As the inheritor, you may be responsible for servicing the loan or mortgage and will have to figure out if you can afford to pay it off or refinance and continue making the payments.1 You could always sell the item, but if more than one heir inherits a home, that would have to be a group decision. Also, keep in mind that real estate and other valuable property will need to be insured, at added cost to you. 
  • Oversized items. You could inherit a car, truck, RV, or other large item or collection that comes with no debt obligations but poses a storage problem. This is particularly true if you do not have your own home or if you live in an apartment or condo with limited space. Paying for additional storage is an option, but if you do not really want the item in the first place, storing it may not be worth the cost. 
  • Logistics. Taking possession of an item might sound good in theory but turn out to be a logistical nightmare. You might have to travel a long distance and pay for a trailer to haul it. Shipping may be an option, but who will pay for the transport? The money could come out of the estate or out of your own pocket. 
  • Tax consequences. Six states impose an inheritance tax on beneficiaries: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.2 In addition to a potential inheritance tax, which ranges from 1-20 percent of the value of the assets you inherit,3 income-producing assets such as real estate, securities, and retirement accounts can increase your taxable income and could even place you in a higher tax bracket. Be clear on the tax implications of your inheritance and how inherited assets may affect your overall financial situation. 
  • Personal considerations. Perhaps you just do not want to take possession of an item that somebody left to you in their will. You may also realize that somebody else in the family really does want it and would feel hurt if you got it instead. Inheritances can produce hurt feelings and irritate existing tensions. To squelch conflicts before they get out of hand and lead to legal disputes, consider taking the high road.

Whichever path you choose—acceptance or refusal—be prepared to file documents stating your intentions. Another thing to keep in mind is that if you refuse an inheritance, you will have no say in who receives it. If the will does not name a backup (contingent) beneficiary, it will pass back to the estate and on to the next beneficiary according to state law. To make sure that a specific person receives what you are rejecting, you have the option to accept it and then gift it to them. However, as the giver, giving a gift comes with possible tax implications. 

Managing Your Inheritance and Planning for the Future

An inheritance could be a pleasant surprise, but most people expect to receive an inheritance at some point in their life. Whenever that day comes, you will want to make the most of your inheritance. Working with a trusted advisory team can help you assess your finances, preserve your wealth, plan for the future, and establish an estate plan of your own. For wealth and estate planning advice, reach out to our office to schedule an appointment.


Footnotes

  1. Victoria Araj, Inheriting a House with a Mortgage, Quicken Loans (Sept. 17, 2021), https://www.quickenloans.com/learn/inheriting-a-mortgage.
  2. Anna Hecht, Millennials Will Inherit $68 Trillion by 2030—Here’s What to Know If You Receive a Windfall, CNBC: Make It (Jan. 16, 2020), https://www.cnbc.com/2020/01/16/receiving-an-inheritance-four-things-experts-say-you-should-know.html.
  3. What Are Inheritance Taxes?, Intuit TurboTax (Oct. 16, 2021), https://turbotax.intuit.com/tax-tips/estates/what-are-inheritance-taxes/L93IUc3sC.

Harmless Error Statute—A Saving Grace

When somebody dies without a legally recognized will, their money and property are typically subject to default state rules that determine who will receive it. To assert control over who will receive their money and property and who will wind up their affairs, many people choose to have a will prepared. In order for a will to carry out the person’s wishes, it must be properly prepared and executed or else the terms of the will may not be followed. However, for individuals who live in a state that has adopted a harmless error statute, even a document that does not meet all of the formal legal requirements of a will may still be considered valid and admitted to probate if they intended it to serve as their will. 

What is the harmless error rule?

Normally, in order for a will to be legally valid and enforceable, it must meet the following criteria: 

  • It is in writing.
  • It is signed by the testator (the person who made the will).
  • It is signed by at least two witnesses (most states require at least two witnesses; some require three) who observed the testator sign the will.

These rules are contained in section 2-502 of the Uniform Probate Code (UPC), which standardizes state laws about wills, trusts, and the probate process. Although intended to be adopted by all fifty states, fewer than half of the states adopted the UPC in its entirety. As a result, there are significant variations in probate law by state. 

In 1990, a harmless error provision was added to the Uniform Probate Code in section 2-503. It states that a document that is not executed in compliance with UPC section 2-502 can be treated as though it was executed in compliance if the noncompliant defects can be overcome by “clear and convincing evidence that the decedent intended the document” to serve as their will. 

The American Bar Association (ABA) notes that the harmless error rule was primarily expected to address two types of defects that could prevent a will from being officially recognized: 

  • Defective attestation (e.g., no witnesses or not enough witnesses)
  • Testator additions or amendments to a will (for example, the testator crosses off a gift or name in their will and writes in a different gift or name)

The ABA goes on to say that “the rule as drafted is not limited to these problems and has been applied more broadly.” It adds that clear and convincing evidence is a high standard of proof, and that courts are much more likely to excuse missing attestation than a missing signature. 

The Legal Information Institute at Cornell Law School notes that the harmless error rule sometimes excuses defects related to the signature and attestation requirements of executing a will, but the requirement that the will be in writing is usually not excused. 

Which states have a harmless error statute?

As of today, twelve states have adopted a version of the harmless error statute: Hawaii, Michigan, Montana, New Jersey, South Dakota, Utah, California, Colorado, Ohio, Virginia, Oregon, and Minnesota. 

Some of these states follow UPC section 2-503. Other states have accepted the rule with modifications. For example, California, Ohio, and Virginia require the decedent’s signature. Oregon does not require the decedent’s signature but adds requirements such as giving notice to heirs and providing a twenty-day period for anyone receiving notice to object prior to the court’s ruling. 

Minnesota’s harmless error rule was a direct response to COVID-19 and the social distancing rules that made it difficult to meet traditional will execution formalities, in particular the requirement that two witnesses provide a signature verifying that they witnessed the testator’s signature. 

In states where the harmless error statute has not been adopted, alternative workarounds to COVID-19 restrictions were adopted. New York, for instance, authorized residents to use video witnessing to satisfy attestation requirements. And in Texas, the requirement to execute a will before a notary was suspended and videoconference notarization was permitted. 

When might the harmless error rule be invoked?

Dying intestate—or without a will—is far from ideal. When that happens, state laws about intestate succession are followed, and a court takes charge of probate. Typically, this means that money and property are passed down to heirs based solely on their relationship to the deceased, with the surviving spouse and children taking precedence. 

Although this arrangement may not be a problem in many families, it operates independently of the decedent’s final wishes. The decedent is left with no say over the allocation of specific assets to specific family members. And if a decedent has no surviving family members, the state is the sole beneficiary of the estate. Having a will in place avoids these issues. 

Dying intestate can mean not only dying without a will but also dying without a will that is recognized by the court. The latter scenario can potentially be addressed by invoking the harmless error statute in a state where such a law is on the books. Surviving family members and estate planning attorneys may have to rely on this backup plan if they possess a document that expresses the decedent’s intentions but contains defects the court may be willing to overlook if clear and convincing evidence is produced. 

Unfortunately, there is no exact definition of what types of evidence a court would consider clear and convincing, although state legal precedents can offer clues. In Colorado, the harmless error rule was not applied in a case involving a signed note attached to a birthday card that a surviving spouse attempted to probate as a will. In Michigan, a court ruled that a suicide note left on a phone was sufficient to permit probate of the decedent’s estate. 

COVID-19 was an unusual and unpredictable occurrence that posed unique complications for executing a will. But the need to prove testamentary intent can arise for many reasons that have nothing to do with viruses and social distancing. Somebody could be on their deathbed and fail to sign the will before their passing. They could have most of a will in place and die unexpectedly. It could be a handwritten note that was signed, dated, and filed away, or a computer document typed up in a person’s final moments. 

What constitutes a harmless error is ultimately up to the courts where the decedent lived to decide. Ideally, a person’s will is recognized as legal prior to their death. If forced to rely on the harmless error doctrine as a plan B for a loved one’s will, you should consult with an estate planning attorney to ensure that their final wishes are carried out.

Three Things You Need to Know about Cryptocurrency and Your Estate Plan

Cryptocurrency’s popularity has rapidly increased in recent years, with more people buying and selling it. Here are three things you need to know about cryptocurrency in relation to your estate plan.

Beware of the Tax Consequences

Transferring your cryptocurrency to other people, either during life or at your death, could have income, estate, and gift tax consequences that are important to be aware of.

  • Potential income tax consequences. Essentially, the position of the Internal Revenue Service (IRS) is that the sale or exchange of a “convertible virtual currency” (a virtual currency that has a corresponding value to a real currency such as the US dollar or the euro) may result in taxable gain or loss just as the sale or exchange of other property would. Whether the gain or loss is characterized as a capital gain or loss depends on whether the convertible virtual currency was a capital asset in the hands of the taxpayer, like stocks, bonds, or other investment property. If the virtual currency was not a capital asset in the hands of the taxpayer, such as inventory or other property held for sale in a business, the taxpayer would realize ordinary gain or loss. 
  • Potential estate and gift tax consequences. The IRS considers virtual currency to be property, so federal gift and estate tax laws apply. Because (until quite recently) cryptocurrency has been quickly increasing in value, many people, whose estate would otherwise have a value less than the estate and gift tax exemption amounts ($12.06 million for individuals and $24.12 million for married couples in 2022), must now include in their estate plans provisions for minimizing gift and estate tax consequences. 

If you own cryptocurrency that has substantially increased in value, or that you anticipate will substantially increase in value, it is important to discuss with your estate planning attorney ways you can minimize potential income, estate, and gift tax consequences.

Laws Governing Cryptocurrency Are Slowly Inching Along

It is hardly a secret that technological advances are moving faster than the law.

At the same time, as cryptocurrency increases in popularity, more people have cryptocurrency holdings that must be considered part of their estate. Because cryptocurrencies are generally stored in such a way that no personally identifying information is tied to them, owners of cryptocurrency must inform their beneficiaries that these assets exist, or they could be lost forever at the owner’s death. Further, owners (and their estate planning attorneys) must provide specific instructions for accessing the cryptocurrency, or the information could also die with the owner. Finally, because managing cryptocurrency requires some level of technological expertise, it is important to appoint trusted decision makers that have some basic cryptocurrency knowledge. 

All of these factors create unique challenges when it comes to dealing with cryptocurrency in your estate plan. A comprehensive estate plan ensures that you and your beneficiaries know about and control what happens to your cryptocurrency upon your death.

How You Hold Cryptocurrency Affects Your Plan

The way you store cryptocurrency adds an additional layer of complexity to the issue. How you store your cryptocurrency is one of the most important considerations because, if you have no plan for how to pass on your cryptocurrency, it could be lost after your death.

  • Custodial wallet. A third party, such as a crypto exchange, holds your cryptocurrency, similar to how a bank keeps your money in a checking account. While this is the most convenient option and there is no worry about “losing your keys,” the downside of leaving your crypto in another party’s possession is that they could freeze your funds or be attacked. With this type of wallet, your beneficiary can work with customer support to have the crypto transferred after your death.
  • Cold wallet. A cold wallet is a physical storage device, such as a USB drive, that stores your crypto offline. The downsides of this option are the cost of the hardware and that the device may be a small object that is easy to misplace, but it is also the most secure option for storing crypto because it cannot be stolen by hackers when it is offline. You will want to ensure that your trusted decision maker or beneficiary knows where to find the cold wallet and has detailed instructions for accessing the stored crypto.
  • Hot wallet. A hot wallet is a desktop, web-based, or mobile app that stores your crypto online. While a hot wallet is convenient, the big drawback is that crypto stored online is at the greatest risk of being hacked and stolen. Your estate plan will need to include instructions on how to access the hot wallet.
  • Paper wallet. A paper wallet is a printout of keys, usually in the form of characters and scannable QR codes. It provides a great amount of security because it stores your crypto offline, but it is the least convenient, and there is also the risk of losing the paper wallet. 

No matter how you store your cryptocurrency, it is critical that your trusted decision-maker knows how it is stored, where it is stored, and how to access it, including how to access all security keys, seed phrases, usernames, and password information. 

Because cryptocurrency and the estate planning laws surrounding it are rapidly evolving, it is essential that you work with an estate planning attorney who understands the unique challenges involved in planning for crypto. Get in touch with our team today.

Questions You Should Ask Your Estate Planning Attorney

Creating an estate plan is a personal and often emotional undertaking, making the selection of your estate planning attorney of the utmost importance. Here are some questions you should ask your estate planning attorney to determine if they are the right person for the job.

Why did they pick estate planning as their practice area?

At its core, estate planning is a personal endeavor. Many estate planning attorneys have personal experiences that influenced their decision to specialize in this area. Asking this question can help you get to know your attorney and their reasons for practicing the way they do. These attorneys are passionate about their work and happy to share their background and the experiences that brought them to choose estate planning as their practice area. If the attorney you are considering has no particular reason for choosing estate planning, then perhaps you should keep looking.

What is their process?

If you have never done any estate planning before, the unknown of the process can be somewhat intimidating. Getting an answer to this question may help alleviate some of your fears because you will know exactly what is going to happen. The estate planning process can vary quite a bit depending on the attorney and their level of planning. For example, some attorneys may meet with a client only once prior to signing documents and then do not have any additional contact with their clients after signing the documents unless the client initiates it. Other attorneys have multiple meetings prior to signing the documents and additional follow-up meetings afterwards. Knowing what the attorney’s process looks like will help you determine whether the level of service they will provide is consistent with your expectations, know how long the process will take, and understand what to expect along the way.

What information do they need from you?

Estate planning relies heavily on you providing complete and accurate information. In fact, the failure to disclose certain information, such as all of the accounts and property that you own, debts or other obligations, or the existence of family members, can completely derail an entire estate plan. Some attorneys will rely on the information they glean from conversations with you while other attorneys will want to see supporting documentation, such as copies of deeds, account statements, insurance policies, etc. It is important that the attorney communicate what information will be needed and provide you with adequate time to collect the information.

Do other people have to be involved?

Because estate planning is such a personal process that requires the disclosure of highly sensitive information, it is good to know whom your attorney plans to involve in the process. Some people are very uncomfortable discussing their private affairs with others and want to limit the disclosure of this information to as few people as possible.  If you are married, then your spouse will need to be involved in the process. There is really no way of getting around this, as many laws require the disclosure of certain information to one’s spouse. 

Beyond your spouse, there are few other people who have to be involved. You may have trusted advisors, such as a financial planner, a certified public accountant (CPA), or an insurance agent, who have information that can help in the estate planning process and whom you may want to involve in the process to ensure that it goes smoothly. For example, a successful estate plan requires the proper coordination of the legal documents prepared by your estate planning attorney and the beneficiary designations on your accounts (such as retirement accounts) and insurance policies. Your attorney can work together with your financial and insurance advisors to ensure that your beneficiary designations are correct and make any necessary updates to them. Your CPA can also be invaluable in helping you understand the interplay of income, estate, and gift taxes and working with your attorney to ensure that your tax savings are maximized to the fullest extent possible. Although these advisors can play an important role, your attorney may be able to limit the amount of information that they share if there are specific details about your estate plan that you do not want divulged to your advisors.

Children do not need to be involved, and in some instances, should not be involved. Although it can be helpful to give adult children an overview of what your estate plan looks like and how it will work after your estate plan is completed, it is not necessary that you involve your children in the decision-making process. And if your adult children have strong opinions or if siblings do not all get along, then your children should not be involved in the estate planning process, as this will only be an invitation to challenge your estate plan on the grounds of undue influence later on.

Asking these questions of your potential estate planning attorney will help you get to know the attorney and better understand their process, the level of service they will provide, and their professional experience. Ultimately, the answers to these questions can help you determine whether the attorney is a good fit for you and your needs. If you are interested in moving forward with your estate plan, please give us a call and let us answer these questions for you.

Pour-Over Will: Not Your Average Will

Wills and trusts are the two basic legal instruments that people use to pass accounts and property on to their loved ones at death. Although a revocable living trust is often used in place of a will, the two are not mutually exclusive. You can have both a will and a trust, and in fact, a special kind of will—known as a pour-over will—is commonly used alongside a living trust. 

A pour-over will adds peace of mind to your trust-based estate plan. If you neglect to transfer any accounts and property into a living trust during your lifetime, or fail to designate the trust or anyone else as a beneficiary at your death, the pour-over will ensures that those assets end up in the trust after you die. If you do not set up a pour-over will to go along with a living trust, any money or property that does not pass to the trust or other beneficiaries at your death and therefore remains outside the trust at the time of your death could be treated as though you had died without a will and will pass to your heirs under the default laws of your state.

What Is a Pour-Over Will? 

If your estate plan is based around a living trust, you are probably familiar with the benefits that the trust provides over a standard will. Avoiding probate, reducing attorney’s fees, and providing privacy for you and your loved ones are the primary benefits of using a living trust. 

Ideally, you transfer all of your accounts and property into the living trust while you are still alive by changing ownership from you as an individual to you as the trustee of the living trust or naming the living trust as the beneficiary of items such as life insurance or a retirement account. The trust, in effect, is a legal entity that is separate from your estate (the money and property you own). Since you create the trust while you are alive and you will most likely name yourself as the beneficiary, you will continue to use and enjoy the accounts and property. But if you do not transfer those accounts and property into the trust, they remain owned by you as an individual and are part of your estate. Without a will, when you pass away, your accounts and property will be distributed according to state law—which could end up being very different from how you want them to be distributed. 

A pour-over will prevents this scenario from happening. The pour-over will names your living trust as the beneficiary, which allows any money or property still owned by you individually at death to be transferred, or poured over, into your living trust upon your death. When used in tandem with a living trust, a pour-over will acts like a safety net to capture any accounts and property that you forgot—or did not have time—to place in the trust. 

How Does a Pour-Over Will Work? 

There are four parties involved in a pour-over will and the related trust: 

  • The testator (the person who creates the will)
  • The beneficiary (the person or entity who receives the accounts and property that are owned solely by the testator when they die)
  • The executor or personal representative (the person who carries out the testator’s wishes as stated in their will)
  • The trustee (the person who controls trust accounts and property)

When you create a pour-over will, you (the testator) name a beneficiary. The beneficiary receives any accounts and property that you own in your name alone at the time of your death. This person is usually the trustee of your living trust. They may also serve in the triple roles of beneficiary under your will, trustee of your trust, and executor. 

However, if the beneficiary and the trustee are the same person, your pour-over will must be drafted very carefully. Referring to the trustee by name, and not as your trust’s formal trustee, could result in your accounts and property passing to them as an individual instead of to the trust. 

You will also name an executor of your pour-over will. The executor is legally responsible for ensuring that your accounts and property end up being owned by the trust per the instructions in the will. 

If these distinctions are confusing, think of a chain of command: you are telling your will’s executor to move your accounts and property into the trust at your death. From there, the trustee is in charge and controls the distribution of the accounts and property because they are now owned by the trust. Again, the executor and the trustee could be the same person, but they do not have to be. You can split these roles among different people to create checks and balances in the chain of command so that one individual does not control the entire asset transfer process. 

Does Using a Pour-Over Will Avoid Probate? 

Probate is the court-supervised proceeding in which the court oversees the transfer of your accounts and property to beneficiaries. Only accounts and property owned solely in your name at your death are subject to probate; trust accounts and property are not. Thus, even though a pour-over will directs that accounts and property become trust accounts and property, the “leftover” accounts and property that you did not get around to transferring to the trust are subject to probate. In other words, they do not pour over to the trust until after probate wraps up. This can result in beneficiaries having to wait longer to receive their trust distributions. 

On the plus side, since the accounts and property that pass through probate on the way to becoming trust accounts and property are likely to be of relatively low value, the estate may qualify for small estate probate, which is generally faster, simpler, and less expensive than standard probate. The threshold value that qualifies an estate as small varies by state. Some states also allow small estates to skip the probate process altogether. 

Trusts should be updated regularly to reflect changing circumstances, but personal accounts and property might remain outside the trust for a variety of reasons. A pour-over will is a valuable addition to a living trust that acts as a safety device to protect your beneficiaries. Our estate planning attorneys can help you create a living trust and a pour-over will to accompany it. We can also discuss other trust and will options that might be better for you. To explore the different ways we can help secure your legacy, please schedule an appointment.

Three Steps You Can Take Now to Protect Your Artistic Legacy

Although your death is probably a long way off, it is important that you have a plan to ensure that your affairs are settled in the way that you want. An estate plan crafted by an experienced estate planning attorney is a legally enforceable set of documents that allows you to name who will have the authority to make decisions for you in the event you cannot (agent under a financial or medical power of attorney); who will take care of your minor children (guardian); who will wind up your affairs upon your death (personal representative, executor, or successor trustee); and who will receive your accounts, property, and artwork (beneficiaries).

You have various options regarding who will receive your artwork. You could

  • instruct your personal representative, executor, or successor trustee to sell any of your artwork in your possession at your death;
  • designate specific individuals to receive it;
  • have it held by a trust or foundation to be lent or licensed after your death; or
  • provide instructions to donate your work outright to a museum, university, or other organization that might benefit from it.

Steps You Can Take to Begin the Process

The first step is to catalog your artwork, including pieces that you have sold. Make sure to specify to whom they were sold and for how much. This information can be helpful in valuing artwork that has not sold and providing a list of potential buyers for when you pass away. You should also include any pieces of artwork that you have lent. This knowledge will be helpful for your loved ones to determine who has the artwork and under what circumstances it will need to be returned. Your list should also include any pieces that have been licensed to someone else. It will be important for your loved ones to know about this stream of income, which could continue after your death. Also consider including a list of pieces that you have gifted to individuals or donated to charities. Be sure to include any pieces that you have kept for yourself. 

After you have compiled a list of your artwork, it will then be important to determine the value of any piece that has not already been appraised and that is still considered yours (having been neither donated nor sold). This process can help you understand the value of everything you own (an important step in the estate planning process) and determine if you have adequate insurance to cover your artwork’s value. Just like other pieces of tangible personal property, your artwork can be susceptible to theft and destruction and needs to be protected.

The last step is for you to meet with us to start or review your estate planning. During this meeting, we can discuss whom to put in charge of your affairs at your death as well as during any period in which you cannot make or communicate your own decisions. We will also discuss your wishes regarding your artistic legacy. We can discuss your fears, concerns, and objectives to craft a unique plan.

Remember Your Copyright

A copyright protects “original works of authorship” such as books, movies, songs, computer software, photographs, and architectural works. These works do not have to be published to be protected, but they generally have more commercial value after publication. If you own the copyright to your artwork, both the work and its copyright should be included in your estate plan. If the copyright is not specifically mentioned in your will or trust, it will transfer to your heirs by a residuary clause, which distributes all property not already addressed. As a result, one person could end up with the work and another with the copyright.

However, it is important to note that a copyright includes your right to terminate most transfers or licenses of the copyright at a future date. You cannot waive or transfer this right to someone else during your lifetime, and it passes to your surviving spouse and children when you die. It includes the ability to terminate a transfer of a copyright to a trust. An exception to this rule is transfer of the copyright by a will, which cannot be terminated by your spouse and children. 

We Are Here to Help You and Your Legacy

We understand how overwhelming it can be to think about what to do with your prized artwork at your death and to make other important decisions about your care and the care of your loved ones. We are passionate about working with you to create your next masterpiece: a comprehensive estate plan. Call us to schedule an appointment.