Following our Protect Your Pet Via Estate Planning blog last September, our estate planning attorneys in Orange County have received a number of comments and questions about how to make arrangements for pets in an estate plan. We decided to write this follow up piece to answer all of our reader’s questions, and provide a deeper insight into the process of making an estate plan that accounts for your pets.
In the US, the law classifies pets as tangible personal property, meaning that pets cannot own or directly inherit property. In fact, any money or property you leave to your pet in your estate plan will be included in your residuary estate. One of the ways to ensure your pet will continue to live a good life after you die is to make special provisions in your estate plan.
To include your pet in your will/estate plan you can either make a simple, non-legal arrangement, create a complex trust, or leave your pet with an animal welfare organization, such as the North Shore Animal League America. To include your pet in your estate plan, you first need to find a person or organization that would be willing to care for your pet after your death. Once you find a potential caretaker, you should have a candid conversation with the potential caretaker in order to address key issues such as budget and restrictions, if any.
It is worth noting that, if you decide to leave your pet to an animal welfare organization, you may need to sign some sort of agreement, as well as leave a specific amount of money to pay for your pet’s expenses. Once you find the right caretaker for your pet, you can make any of the aforementioned arrangements in your estate plan. Here is a detailed look at each of these arrangements.
A legacy arrangement is basically a program that would adopt your pet after you pass away, provided you make the necessary arrangements in advance. While these programs typically rely heavily on donations, they try to accommodate as many pet owners as possible. Examples of such programs include the SPCA, private animal shelters and rescue organizations, and veterinary school programs. If you decide to enroll your pet in such a program, include this information in your estate plan along with the contact details for the program.
A pet trust is a stronger, albeit more complicated and expensive arrangement. With a pet trust, you would not only be able to leave your pet money if it outlives you, but also a legal obligation to care for it. This means that if the caretaker fails to adhere to your instruction, he or she can face legal action. Additionally, a pet trust would ensure that the caretaker properly accounts for the money you allocate to meet your pet’s expenses. However, it is important to know that a pet trust has some disadvantages too. For instance, a pet trust is generally inflexible, meaning it is extremely difficult to alter when circumstances change.
The Tax Cuts And Jobs Act, signed on December 22, 2017, made the most significant changes to the United States tax code in recent memory. Notably, the Act doubled the base tax exemption on estate taxes, GST (Generation-Skipping Transfer) taxes, and gift taxes until 2025.
All three of the above exemptions have increased from a base amount of $5,000,000 to a base amount of $10,000,000, starting on January 1, 2018. They are currently set to revert to the previous base of $5 million starting in 2025, but future Congressional action could either move that date up, or abolish it entirely.
The actual amount of the exemption is indexed for inflation, producing a final exemption amount of $11,180,000 for 2018. Married couples may combine their exemptions for a total amount of $22,360,000. This is a significant change that should be accounted for by all estate planning attorneys.
For example, many existing estate planning documents include formula clauses, or language specifying that children receive the maximum allowed tax-exempt portion of an estate before the surviving spouse receives the rest. The new law dramatically increases how much the children receive in this scenario, potentially disinheriting a surviving spouse entirely.
That is not the intended end goal of most estate planning arrangements, so all formula clauses should be carefully reviewed with this new legislation in mind.
Likewise, the increase in the maximum tax-exempt estate amount may make it beneficial for some individuals to reword their existing estate planning documentation to focus on income tax savings instead of estate taxes. The particulars involved are complex, so it is best to consult your estate planning professional for advice on your specific circumstances.
Now may also be the time if an estate is considering making a large gift to another person or organization. Most experts agree that estates will not be charged additional gift taxes retroactively if the figure reverts to $5 million in the future, but it is worth noting that neither the IRS or the United States Government have issued official confirmation that this will be the case.
The new law has no impact on estate tax rates paid by estates in excess of the new maximum. The top marginal tax rate will remain 40 percent for estate taxes, gift taxes, and GST taxes.
Similarly, Portability is unaffected by the new law. Portability allows a surviving spouse to use any remaining estate or gift tax exemptions the deceased had not yet used.
The law does not cover the Annual Gift Tax Exclusion, but separate legislation is increasing it from $14,000 in 2017 to $15,000 in 2018. This is the maximum value of a gift before the giver begins to incur gift tax penalties.
The Act has several tax implications outside of the realm of estate planning as well. Business partners, limited liability corporation members, shareholders in S corporations, and sole proprietors may now claim a “Pass-through” deduction of up to 20 percent on their Qualified Business Income (QBI). QBI is defined as the difference between business income and any other business deductions claimed.
QBI does not include compensation received from a business, and it is calculated separately for each applicable entity if an individual is involved with more than one.
The full 20 percent deduction is available to individuals with annual QBI of $157,500 or less ($315,000 or less if a married couple is filing jointly). The deduction is gradually phased out as income exceeds that figure, disappearing entirely at the $207,500 ($415,000 if filing jointly) benchmark. There are additional reductions as well, so it is best to consult a tax professional with any questions.
In addition, 529 Plans originally intended to fund college or university tuition may now be used on private, religious, or public elementary or secondary schooling. The amount is capped at $10,000 per beneficiary per year for non-college uses.
Finally, the Kiddie Tax (or taxes incurred by minors on unearned income) will now match the rates charged trusts and estates on amounts in excess of $2,100. This is typically higher than the rates paid by the child’s parents, which was used previously.
In conclusion, the Tax Cuts And Jobs Act Of 2017 has left our estate planning lawyers with a lot to catch up with.
The fluctuating prices of cryptocurrencies is a frequent topic of discussion, but how they figure into estate planning is often ignored. Digital currencies are anonymous, meaning that they do not have a listed beneficiary like most asset management accounts do. There is also no central “Bitcoin Bank” for executors or trustees to contact for further information, meaning that the information provided to heirs is literally all they will have to work with when attempting to claim their inheritance.
The first thing to remember is that estate planning is absolutely essential when considering cryptocurrency. If the owner of a Bitcoin account dies without sharing their private key with anyone, their holdings become completely inaccessible. This means that the funds within it have effectively died with their original owner. Anybody interested in including crypto assets as part of their estate for their heirs needs to be proactive about making arrangements according to their wishes.
This does not mean sharing a private key with the world. Instead, the holder of cryptocurrencies should write it down and place it somewhere secure, such as a safe or digital archive site. This arrangement makes the private key public only when necessary, giving the cryptocurrency trader privacy in the meantime.
Estate planners should also consider the tax implications of digital holdings. The IRS currently considers Bitcoin and other virtual currencies as property, just like a car or house. As such, the estate may be subject to capital gains taxes if its crypto holdings increase in value. The initial purchase price is irrelevant in these circumstances, as only the current market price and the currency’s value on the original holder’s date of death are included in the calculation.
Some states have a “Prudent Investor Act” requiring trustees and executors to diversify any significant investment, language that may be taken to include cryptocurrency holdings. If the owner of a cryptocurrency legacy wishes to pass it on in its current form, it is necessary to specifically absolve whoever is managing the estate of any liability should the “investment” go sideways.
There are additional steps that may be taken to ensure the successful transfer of digital assets. For example, all cryptocurrency holders should make a complete inventory of where their digital holdings are hosted as part of their estate planning. Some coins are stored on the exchanges or used to purchase them, such as Coinbase or Bitstamp. Any exchanges used should be written out on paper so that relevant heirs know where to look.
Alternatively, tokens may be stored within an online “wallet”. Heirs need to know the name of any wallets that may have coins and where the backups for those wallets are located to have any realistic chance of claiming their inheritance.
Finally, any devices (laptops, smartphones, etc.) used to access cryptocurrencies may have private keys saved on them. Anybody with access to these devices could take the crypto without authorization, so heirs need to protect them until the estate has been settled.
Cryptocurrencies have added a new dimension to estate planning that must be considered in all relevant circumstances.