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Navigating Digital Assets in Estate Planning
In today’s increasingly digital world, our lives are intricately interwoven with the virtual realm. From social media profiles and email accounts to online banking and cryptocurrency investment, our digital footprints often leave behind a treasure trove of valuable assets. However, while we may be well-versed in managing our digital lives, the implications of these assets on estate planning are often overlooked. In this blog post, we delve into the world of digital assets, exploring their legal significance, the challenges they pose, and how estate planning professionals can navigate this ever-evolving landscape.
The Legal Landscape of Digital Assets
From a legal perspective, digital assets are considered property, just like any tangible assets. In the U.S., the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA or Act) is a crucial legal framework that acknowledges the rights and authorities of fiduciaries over online digital assets. This Act recognizes the significance of digital property, defining digital assets as “an electronic record of which an individual has a right or interest.” This comprehensive definition encompasses a wide array of assets. Those include email accounts, virtual documents (i.e., Word/Excel/GoogleDocs), photos and videos on digital devices like computers and phones, virtual currencies (i.e., Bitcoin), social media accounts (i.e.,Facebook, Instagram, TikTok, etc.), and more.
The Challenge for Custodians and TOSAs
Custodians, the entities that manage our digital accounts, often have their own rules, known as Terms of Service Agreements (TOSAs), which dictate the access and management of digital assets. These TOSAs can create challenges for digital fiduciaries, who are the individuals appointed to manage these assets in the event of incapacity or death. While some TOSAs grant limited access or licensing agreements to digital assets, others totally restrict third-party access. This poses a significant issue when fiduciaries require access to digital assets for administrative, sentimental, or security reasons.
Selecting a Digital Fiduciary
Selecting a digital fiduciary is a crucial step in digital asset estate planning. This individual should possess both legal and technical expertise, allowing them to effectively and efficiently manage and secure digital assets. Furthermore, the legal documents appointing the digital fiduciary should grant specific authority to access online accounts, electronic devices, and other digital information. This role should be integrated into the overall estate planning strategy, ensuring a smooth transition of digital assets while upholding the asset holder’s individual wishes.
Understanding Fiduciary Access
The RUFADAA distinguishes four types of fiduciaries:
- Agents acting under a durable power of attorney,
- Personal representatives appointed by Will or intestacy,
- Trustees of a Trust, and
- Court-appointed guardians or conservators.
Each type of fiduciary has varying degrees of access to digital assets, reflecting the specific nature of their respective role. For instance, personal representatives and trustees often have default access, whereas conservators require specific court authorization. The Act also emphasizes the importance of user consent for disclosure, which can be managed through an online tool or estate planning documents.
Custodians’ Roles in Disclosure
Custodians play a pivotal role in disclosing digital assets to fiduciaries. They can grant full or partial access to digital assets, as well as provide copies of the digital content. Custodians may request additional documentation from fiduciaries before disclosing assets and may impose reasonable administrative charges for their services. Compliance with fiduciary requests is essential, as fiduciaries can seek court orders to ensure compliance within 60 days.
The Future of Digital Asset Estate Planning
As the digital landscape continues to evolve and become more complex, the importance of integrating digital assets into estate planning cannot be overstated. The RUFADAA’s adoption by a majority of states signifies the legal recognition of digital assets as a critical component of an individual’s estate. Financial planners must stay well-informed about the specific provisions of RUFADAA in their state, ensuring they can provide comprehensive guidance to clients seeking to secure their digital legacies.
Canadian Legislative Developments That Impact the Administration of Digital Assets by Fiduciaries
Saskatchewan became the first Canadian jurisdiction to enact legislation aimed at tackling some of the digital asset issues on June 29, 2020 – when it passed the Fiduciaries Access to Digital Information Act (FADIA). The purpose of the FADIA is to ensure that executors, attorneys for property, and property guardians have access to digital assets. In order to obtain access to digital assets under the FADIA, the fiduciary is required to provide a written request to the online service provider that maintains the digital assets, along with an original or certified copy of the document which authorizes that access. Once these documents are provided, the service provided must comply with the request within 30 days.
One of the greatest obstacles to the effectiveness of the FADIA is the issue of the territorial scope of the FADIA, including unresolved issues around legal conflict. While one can assume that the FADIA is intended to deal with account holders’ resident in Saskatchewan, it is unclear which service providers must comply with the FADIA. Although the FADIA requires service providers to provide access to the account within 30 days after the required documents are provided, many of these companies are located outside of Saskatchewan, notably in the United States. That makes it unlikely that they would comply with the FADIA and likely that they would instead require a Court order from their home jurisdiction.
Since the 2020 introduction of the FADIA, several other Canadian provinces have introduced similar legislation. However, there are still many Canadian provinces that have not yet introduced legislation regarding digital assets, and many questions remain regarding the existing legislation.
In conclusion, the digital revolution has transformed the way we live, work, and interact. But it also means that we may leave behind a trail of digital assets that deserve careful consideration in the estate planning process. Understanding the legal framework, challenges, and opportunities surrounding digital assets is essential for both individuals and estate planning professionals. By incorporating digital assets into comprehensive estate plans, individuals can ensure the seamless transfer of their digital legacies while safeguarding their wishes for the future. Please contact Cardinal Point to discuss how best to deal with the digital assets within your own estate plan.
A Comprehensive Guide to Understanding Property Ownership in U.S. Estate Planning
Estate planning is a critical aspect of securing your financial legacy, and among its various components, property ownership stands out as a foundational yet often overlooked consideration. Properly aligning asset ownership with your estate plan can make or break your intended objectives. It’s not enough to have a well-crafted estate plan; the way you own your assets and how they are transferred both play a vital role in the successful execution of your wishes. In this guide, we’ll delve into various types of ownership and their implications in estate planning, while considering income tax, gift tax, and estate tax considerations.
Summary and Takeaways
The crucial role that property ownership plays in U.S. estate planning is often misunderstood and overlooked – and the type of ownership can significantly affect such things as state and federal taxation, claims from creditors, and whether the property is subject to probate. But there are ways to leverage particular types of ownership, as well as strategic transfers of property to others, in order to minimize future tax liability. The appropriate proactive approaches to estate planning can also help ensure the optimum value for loved ones who are your designated beneficiaries.
Key Takeaways
- Solely-owned property can be gifted to others during your lifetime, but upon your death the gifts are subject to probate, creditor claims, and taxes.
- With joint tenancy with the right of survivorship, ownership passes to the surviving joint tenant, bypassing probate, but may be subject to creditor claims.
- Spouses may use tenancy by the entirety to ensure protection from creditors and that the property passes to the surviving spouse.
- There are many estate planning options, each with potential pros and cons. It is highly recommended that a qualified estate planner familiar with all the options be consulted to ensure proper planning and desired outcomes.
Overview: The Significance of Asset Ownership
Asset ownership is the cornerstone of estate planning, influencing how property is transferred and the coordination of your estate planning endeavors. It’s crucial for financial planners to comprehend the intricacies of property ownership and its connection to asset transfer. The form of ownership determines how property can be transferred at death and what limitations may apply. Effective estate planning requires harmonizing both asset titling and property transfer strategies.
A financial planner’s understanding of income tax, gift tax, and estate tax implications is critical. Leveraging suitable asset ownership techniques alongside prudent income, gift, and estate tax strategies creates an efficient estate plan aligned with your unique estate objectives.
Sole Ownership: A Simple Approach
Sole ownership is the most straightforward form of property ownership. It grants the owner absolute control over the asset during their lifetime and upon their death – assuming that the necessary estate documents are in place. This type of ownership conveys outright control, allowing for gifts and bequests. However, assets under sole ownership are susceptible to creditor claims, which is an important consideration. Solely owned assets become part of the owner’s gross estate and must undergo probate upon death.
Income Tax Implications
With sole ownership, all income generated from the asset is attributed to the owner and reported on their federal and state income tax return(s).
Gift Tax Implications
An individual can gift solely owned assets to individuals or charities during their lifetime, subject to gift tax rules.
Estate Tax Implications
Upon death, the full fair market value of the asset is included in the owner’s gross estate and is subject to probate. However, probate is bypassed if a “will substitute” is employed. Generally, an asset receives a step-up in basis to its value on the date of the owner’s death, unless the six month alternative valuation date is utilized.
Tenancy in Common: Shared Ownership
Tenancy in common involves co-ownership of the property where tenants own undivided rights. Each tenant possesses a fractional interest, and ownership can be equal or unequal. Tenants in common retain control over their fractional interest and can transfer it as gifts or bequests. However, it might be more challenging to sell or transfer fractional interests.
Income Tax Implications
Income is attributed and taxed based on each individual’s fractional ownership share.
Gift Tax Implications
Converting individual ownership to tenancy in common or making gifts of fractional interests triggers gift tax considerations.
Estate Tax Implications
Upon death, the decedent’s fractional interest in the property held as tenants in common is included in their estate. The fractional share receives a step-up in basis.
Joint Tenancy with Right of Survivorship: Joint Ownership
Joint tenancy with the right of survivorship grants co-owners undivided rights to enjoy the property. Upon a joint tenant’s death, their interest automatically passes to the surviving joint tenants. This type of ownership bypasses probate but may interfere with specific estate planning goals.
Considerations During Lifetime
Joint tenants can sever ownership or transfer their interest, but sales or loans against the property require consent from other joint tenants. Creditors can reach a joint tenant’s interest.
Considerations at Death
Upon death, a joint tenant’s interest passes directly to surviving tenants, bypassing probate. However, it might not align with the decedent’s estate plan. There can also be liquidity challenges for the decedent’s estate.
Joint Tenancy with Right of Survivorship with Spouses
When spouses jointly own property, each spouse’s interest is presumed to be equal, regardless of their contribution. This form of ownership differs from joint ownership between non-spouses.
Income Tax Implications?
Jointly owned asset income is attributed equally for married couples filing jointly.
Gift Tax Implications
Transferring property to joint tenancy between spouses who are U.S. citizens triggers the marital gift tax deduction.
Estate Tax Implications
One-half of the property’s value is included in the decedent spouse’s estate, subject to the marital deduction. Any mortgage on joint property affects estate tax.
Joint Tenancy with Right of Survivorship with Non-Spouses
All joint tenancies, whether between spouses or non-spouses, involve equal ownership among joint tenants.
Income Tax Implications
Income from jointly held property is distributed equally among joint tenants, facilitating income splitting.
Gift Tax Implications
Converting individual ownership to joint ownership triggers taxable gifts.
Estate Tax Implications
The Internal Revenue Code states that the value of a decedent’s gross estate shall include the entire value of the property that the decedent held at the time of their death, with two exceptions:
- The joint property holder (survivor) contributed to the purchase of the property
- The decedent and the remaining joint property holder(s) received the property by inheritance or gift
This means that the entire fair market value of the property will be included in the first decedent’s estate, unless it can be proved that the surviving owner contributed to the purchase of the asset. This is known as the Contribution Rule, which applies only to property owned jointly with non-spouses’ right to survivorship.
Tenancy by the Entirety: Spousal Co-Ownership
Tenancy by the entirety applies exclusively to spouses, offering protection from creditors’ claims. Tenancy by the entirety is similar to joint tenancy. It ensures the right of survivorship between spouses with respect to income, gift, and estate tax considerations. When one spouse dies, the property owned as tenants by the entirety automatically passes to the surviving spouse. One-half of the value will be included in the decedent’s gross estate, subject to a marital deduction in the decedent’s estate. The surviving spouse will receive a step-up in basis on one-half of the value of the property.
However, unlike a joint tenancy with the right of survivorship, while both spouses are alive and married to each other one spouse cannot terminate a tenancy by the entirety without the consent from the other spouse. The advantage of this type of ownership is that the creditors of one spouse cannot attach the other spouse’s interest in the property. This is in contrast to joint tenancy with the right of survivorship, where a creditor of one owner can attach the debtor’s interest in the property. Although a lien can be attached to property held as tenants by the entirety, a creditor cannot force liquidation of the property, and any claim against the property can only be satisfied when the property is sold.
Life Estates and Remainder Interests: Split Ownership
Split ownership divides the property into a life estate (temporary ownership during the lifetime) and a remainder interest (ownership after the life estate ends).
Life Tenant’s Interest
Life tenants retain usage rights and responsibilities for the property. The remainder interest is protected from creditors.
Remainder Beneficiary’s Interest
Remainder beneficiaries have vested ownership but can’t claim full ownership until the life tenant’s death.
Income Tax Implications
Life tenants report income from the asset, while remainder beneficiaries report income upon receiving property.
Gift Tax Implications
Gifts involving life estates and remainder interests entail taxable gifts. The annual exclusion can be used to offset the value of the taxable gift for the life tenant However, the annual exclusion will not be available to offset the gift of the remainder interest, because a remainder interest is a future interest in the trust.
Estate Tax Implications
If someone creates a life estate for themselves, and they retain the right to the property until death, the fair market value of the property will be included in their gross estate at death. The remainderman will receive a full step-up in basis of the property upon the life tenant’s death.
If someone instead receives a life estate and they do not have any control over the disposition of the asset at their death, the value of the life estate would not be included in the life tenant’s gross estate at death. The remainderman will still receive a full step-up in basis of the property at the life tenant’s death.
Ownership Type | How Passed at Death? | Included in Probate? | Included in Gross Estate? | Qualifies for Marital Deduction? | Beneficiary Cost Basis |
---|---|---|---|---|---|
Sole ownership |
Will/intestacy |
Yes – 100%, unless designated beneficiary |
Yes – 100% of FMV |
If passed to a qualifying spouse |
FMV at death or Alternative Valuation Date |
Tenants in common |
Will/intestacy |
Yes – % owned, unless designated beneficiary |
Yes – % of FMV owned |
If passed to a qualifying spouse |
% of FMV at death or Alternative Valuation Date |
Joint with spouse |
Operation of law |
No |
Yes – 50% of FMV |
50% of FMV |
50% of FMV at death or Alternative Valuation Date + Beneficiary’s basis |
Joint with non-spouse |
Operation of law |
No |
Yes – 100% of FMV (unless can prove the other joint tenant contributed) |
No |
% of FMV at death or Alternative Valuation Date + Beneficiary’s basis |
Tenants by the entirety |
Operation of law |
No |
Yes – 50% of FMV |
50% of FMV |
50% of FMV at death or Alternative Valuation Date + Beneficiary’s basis |
Create a life estate |
Automatically to the remainder beneficiary |
No |
Yes – 100% of FMV |
If passed to a qualifying spouse |
FMV to the remainder beneficiary |
Receive a life estate |
Automatically to the remainder beneficiary |
No |
No |
No |
FMV to the remainder beneficiary |
Navigating the various options of property ownership is essential in creating an effective estate plan. Each form brings distinct tax considerations and implications that can significantly impact your financial legacy. To make more informed decisions, consult with your financial planner at Cardinal Point and estate planning professionals who can guide you toward strategies that best align with your particular goals.
Thank You – Cross-Border Estate Planning Contact
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Why Choose Cardinal Point Wealth Management?
Cardinal Point is one of only a few cross-border financial advisors licensed to provide both Canadian and U.S. investment management and financial planning services on both sides of the border.The overwhelming majority of Canadian advisors are solely authorized to provide advice on Canadian investment accounts or to a Canadian domiciled client. The same is applicable in reverse for U.S.-based advisors.
With offices in Toronto, Ontario; Boca Raton, Florida; and Irvine, California, Cardinal Point legally provides Canadian and U.S. investment management and financial planning services that streamlines cross-border finances and enables clients to focus on their families, professions, and life goals.
There is no “one size fits all” cross-border financial planning and investment strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management.
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