 Hello there! If you are reading this, I am busy advising tech leaders in Washington, D.C. and cannot accept new clients. If my availability changes, this blog post will be updated accordingly.   11/2/2018 A number of people in Washington, D.C. and Maryland are leaving virtual currencies such as bitcoin to their heirs. While the future value of any given virtual currency remains uncertain, it may soon be common for people to inherit login credentials alongside more traditional assets like real estate.
Planning for the disposition of virtual currencies presents unique legal and logistical challenges. You will want to get advice from somebody who is deeply familiar with the underlying blockchain technology that makes bitcoin possible as well as the governing legal frameworks. As a lawyer, I have been dealing with new technologies for most of my career. I presently advise a council in Washington, D.C. with Fortune 500 tech companies. When my private clients ask me to plan estates that include virtual currencies, this is some of the advice I give them: 1. Keep physical records of all credentials and transactions. If you lose access to your bitcoins, it is the same as losing money. Billions of dollars have been lost due to poor recordkeeping. Some people make a living by helping investors try to regain access to their lost virtual currency, but even then success hinges on what information a client can provide. Keeping records in paper and ink can sidestep unique risks of digital storage. You should keep records of all virtual currencies you own, where and when they were purchased, the amounts in which they were purchased, and information on how to access your virtual currency. You should keep all your records in a safe place. Depending on the value of your currencies, you may want to invest in secure storage such as a bank safety deposit box. 2. Make sure your representative/trustee can access your virtual currency. Because it is often helpful for the person handling your virtual currency to be tech savvy, some people appoint a special representative or trustee specifically for digital assets. The person handling the disposition or maintenance of your digital assets will need access to your accounts. This may include login information, private keys, passwords, backups of your information such bitcoin wallets, etc. 3. Arrange for Power of Attorney over virtual currencies. Suppose you are incapacitated and unable to handle your own finances. Virtual currencies are incredibly volatile and failure to manage them quickly can have very big consequences. You may therefore want to consider giving somebody you trust power of attorney over your virtual currencies, and perhaps other assets as well. The legal document should specifically grant access to necessary information systems and documentation necessary to faithfully implement your investment priorities. 4. Understand the Prudent Investor Rule. Both Maryland and Washington, D.C. have adopted versions of the prudent investor rule, which may require your personal representative or trustee to get rid of highly volatile assets such as bitcoin in cases where holding onto the assets would generally be perceived as too risky. Even though anyone reading this article has probably read many true stories about people who made millions of dollars thanks to bitcoin, a liability-conscious representative or trustee may feel a need to play it safe. A solution is to indemnify your representative or trustee against liability when he or she acts in accordance with your wishes by express provisions in your will or trust agreement. In granting indemnity, you can ensure the person you trust feels confident implementing your investment strategies consistent with your own personal risk tolerance and opinions about the virtual currency market. 5. Hire a professional to help you save taxes. Because bitcoin is often used in the same way as money, many people imagine it gets treated the same for tax purposes. However, the IRS classifies virtual currency as property when doing your taxes. The classification of bitcoin as property has important legal implications. An experienced attorney or tax professional can help you understand many issues involving taxes on virtual currency assets, such as the following: · Income taxation · Capital gains taxation · Gift/Estate taxation · Step-up in Basis and Step-down in Basis issues · State of Maryland inheritance taxation  5/10/2018 The current state of affairs where less than 0.1% of Americans pay the federal estate tax is unlikely to last forever. But some people may have found a way to lock in the benefits of today's law: Giving away some of their assets early to benefit their loved ones now, rather than in some hypothetical future.
The goal for those who choose this strategy is to leave behind a smaller estate, which they believe is less likely to be taxed. At least one upside of this approach is clear: You get to see the joy on a grateful loved one’s face with your own eyes. Nobody can promise that this strategy works. In theory, the government could attempt to “claw back” some or all of the tax money you try to save. That said, attorneys who have examined the legislative history of the 2017 tax reform law believe the chance of retroactive taxation is quite low. 1. Practical Considerations Before Making a Big Gift Putting aside the issue of whether taxes can be avoided, each client should consider his or her personal needs before making this irreversible decision. Once you make a gift, you cannot change your mind. If you worry about not having enough money to live a comfortable life, you may want to keep your assets for your own use. If you think the recipients of your generosity may someday make poor choices, then you should probably think twice before making an outright gift. You may want to create a trust with conditions for beneficiaries that encourage good choices. Gifts to irrevocable trusts can often have the same tax advantages as gifts to living persons. It is also worth noting that, in some cases, avoiding the estate tax by giving gifts will result in a higher capital gains tax, provided the gifts are sold during the recipient’s lifetime. The cost basis for gifts is that of the donor; he or she may have obtained the assets at a value significantly below their present value. The basis for assets transferred through a will, on the other hand, is the fair market value at the time of transfer, which means an asset’s increase in value prior to the time of transfer is not taxable as capital gains. While in most cases the benefits of avoiding paying the estate tax outweigh losing the step-up in basis for the capital gains tax, this is not the case for everyone, particularly where low-basis assets increase in value dramatically (e.g. Washington, D.C. real estate purchased decades ago may have increased in value manifold). Unless you are a financial expert, it is worth discussing your specific situation with a qualified financial advisor. For example, an advisor well-versed in wealth management may be able to help you evaluate whether, based on your investment plans, tax savings realized in the present have more value than tax savings realized in the distant future. 2. The Possibility of Tax Clawback for Big Gifts Put simply, if you make a sizeable gift to your loved ones before 2026 and pass away during or after that year, there is no law on the books. This fact introduces an element of uncertainty when making long-term plans for how and when to distribute your assets. Some lawyers worry the government may try to retroactively impose taxes on gifts of a size not currently taxable. Last year’s tax reform legislation explicitly sought to avoid this outcome by instructing the Treasury Department to issue regulations that preclude clawback. But some lawyers believe the Treasury Department lacks sufficient authority to safeguard the taxpaying public against future confiscatory tax policies. Several influential politicians have called for a 70% federal tax on inherited wealth above the lifetime exemption. So, suppose that someone who has exhausted the lifetime exemption chooses to leave you a gift of $10,000. If some politicians have their way, the government could demand as much as $7,000. One would hope lawmakers refrain from this course of action even if they perhaps have legal authority to pursue it. 3. How has Tax Clawback Been Handled Before? About five years ago, the issue of clawback taxation for estates briefly made headlines. It was unclear then, as it is now, whether a gift made in the past can give rise to new taxes based on new laws enacted after the gift was made (just because the donor happens to be alive). A Senate bill was introduced to forbid clawback taxation, due in part to the sentiment that the government should not reach back in time to tax people for past actions; but many commentators on both sides of the political aisle felt the legislation was insufficiently detailed to address complex legal issues. Rather than attempt to create detailed legislation, Congress deferred to the IRS. Congress has asked the IRS to create regulations that carry out the purposes of the tax code as written, but there is no widespread agreement about what those purposes are. My own reading of the legislative record and of the law itself suggests that there should be no taxes on lifetime gifts in excess of the taxes that existed at the time when those gifts were made. But other lawyers would argue that the legislative record, which is naturally quite muddled given the convergence of viewpoints necessary for any substantial tax deal, creates room for alternate interpretations. We cannot be sure until the IRS makes an official determination. Conclusion Taking action sooner rather than later may be advisable, since lawmakers have the power to lower the federal exemption threshold anytime they want. It is possible that the IRS may attempt to retroactively tax gifts using some kind of clawback rule. However, many attorneys, myself included, believe such action would most likely fall outside the IRS’s authority granted to it by Congress. So, while you should plan for the possibility of a retroactive tax (e.g., have money on-hand if the IRS asks for it), chances are your beneficiaries will derive substantial benefits from avoiding the tax. Even if the IRS does apply taxes on gifts retroactively, appreciation of the gifts since the time they were received would not be taxable. Moreover, because Washington D.C. and Maryland have no local or state gift tax, residents can probably avoid estate or inheritance taxes at the local or state level by gift-giving. Therefore, if you want to make life better for those you love and you are in possession of assets which you can live happily without, now is perhaps an opportune time to make the big gift of a lifetime or the first in a series of planned gifts. 1/24/2018 The Tax Cuts and Jobs Act has potentially sweeping implications for the American economy, which will take years to fully understand. But, as of this moment, we can already examine a number of the consequences for Washington, D.C. and Maryland residents.
First, let's take a look at some of the provisions that have been popular among my clients:
Now, for some of the less popular provisions:
Of course, there are countless other ways tax reform can affect your investments. That is why it is important to consult someone who not only understands the law but also takes the time to learn about your unique circumstance. 11/27/2017 Later this week, we will find out whether federal tax reform has any real chance of happening in time for 2018. Compared to most Americans, people in Washington, D.C. and Montgomery County, Maryland—and other highly taxed jurisdictions—have a lot more to lose or gain, depending on the final contents of the new legislation.
Almost half of my clients have expressed their concerns that tax reform might cause their federal taxes to go up; the main culprit is the inability to deduct state and local taxes. Several popular deductions may disappear depending on last-minute negotiations. For example, the House proposed to cap the property tax deduction at $10,000, whereas the Senate’s latest proposal eliminates deduction completely. Also, we could lose the mortgage interest deduction for newly purchased properties worth more than $500,000. People with existing mortgages need not worry, however, unless they are planning on buying a new home, as their current deductions would be grandfathered in under the proposed law. Of course, it is by no means clear the tax reform bill will garner support from a minimum of 50 senators. Even if the Senate can push through reform without significant defections from the House GOP rank and file, it remains to be seen whether the House and Senate versions of the bill can be reconciled. Since the details of tax reform are still being hammered out, I cannot opine on whether I think it is a boon for the American public as a whole or to D.C. and Maryland residents specifically. But there are at least three provisions (in both versions of the bill) that I think most of my clients would be happy about: 1. Federal estate tax exemption increased to over $11 million for individuals (over $22 million for couples). One of the big reasons to hire an attorney who is experienced with estate planning is to minimize or avoid this tax. It has often been the case that well-to-do people avoid the tax entirely, whereas someone whose estate barely qualifies for taxation (and whose family could really use a tax break) passes unexpectedly in some kind of accident, and the law punishes his or her heirs. Not surprisingly, most Americans consider the tax unfair—including people who are usually supportive of taxes on the wealthy. Many people feel the estate tax amounts to double taxation and should be repealed for that reason. Moreover, the tax can discourage potentially hardworking individuals from being productive, since they cannot give their earnings directly to loved ones. The House version of the bill would eventually repeal the estate tax entirely. 2. 1031 exchanges would still be allowed. Also known as a “Like Kind Exchange” or “Starker Exchange”, Section 1031 of the Internal Revenue Code allows a taxpayer to defer capital gains and related federal taxes when swapping certain properties. By doing this, you can more easily finance a new investment because the IRS realizes you are not yet cashing out, so all of your gains are merely paper profit. This was an item of concern for the real estate industry. Indeed, two separate clients told me that if these exchanges were repealed it would cause significant burdens for their businesses. For smaller investors, a 1031 exchange can be the difference between growing their business and being economically stationary. 3. Businesses would continue deducting state and local taxes. Although state and local deductions would be eliminated for individuals under the proposed reform, the good news for businesses owners and entrepreneurs is that businesses would still be able to deduct state and local taxes, including property taxes. I wish to emphasize that all of this analysis may be void in a few days. The reason I waited so long to comment on issues of tax reform is that I know how quickly legislation can change at the last moment due to deal making and compromise. I will be prepared to discuss the latest developments in detail with my clients as more information arises later this week. 9/15/2017 Many people have asked me how estate planning might change if Congress repeals the federal estate tax. As you can imagine, predictions of this kind are highly speculative. But most people who need an estate plan under today’s laws will still need one in 2018 and onward. Here are the principal reasons why:
(1) Even if the estate tax is repealed it can come back. The estate tax has changed many times over the past 90 years. It is one of America’s most controversial laws and you can be sure that a constituency will exist for rolling back any successful reform, especially if the reform lacks bipartisan agreement. (2) Washington, D.C. and Maryland impose taxes on sizeable estates. As mentioned in my previous blog post, D.C. and Maryland are increasing their estate tax exemption to be more competitive and attract investors and taxpayers from neighboring states like Virginia. If your net worth exceeds the current federal exemption indexed for inflation, however, an estate plan may be necessary to prevent your beneficiaries from overpaying. (3) An estate plan is about more than taxes. Many people are primarily interested in legal protections or making sure that a responsible party is managing finances on behalf of loved ones. Therefore, while the need for particular services may change, there will still be people who need a plan. 8/27/2017 Congress is debating changes to the federal estate tax exemption, and some lawmakers have called for outright repeal. The decision carries particular weight for D.C. and Maryland residents because the D.C. Council and Maryland General Assembly have decided that starting in 2018 and 2019 respectively their local/state estate tax exemptions will match federal law.
If no changes were made to federal law, the District of Columbia in 2018 would exempt $5.49 million from the local estate tax (or about $11 million for couples who file the right paperwork), effectively repealing the tax for most people. However, if the federal government increases the exemption or gets rid of the federal tax completely, this will have implications for District of Columbia. Following suit, Maryland will increase its exemption to $4 million in 2018 and then plateau at $5.49 million in 2019, assuming no changes to federal law. But like D.C., Maryland's 2019 rates could be influenced by choices made within coming months by Congress. For the remainder of 2017, D.C. will continue to tax estates with a gross value of more than $2 million and in Maryland the exemption is $3 million. Laws and budgets can change. So, please always make sure your information is current before making any decisions. |
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