New Jersey recently enacted the Uniform Fiduciary Access to Digital Assets Act (the “Act”).  See the Act here.  In general, the Act provides executors, trustees, guardians, and power of attorney holders (“fiduciaries”) with the ability to access and control “digital assets” belonging to decedents, beneficiaries and wards.  The term “Digital Asset” is broadly defined under the Act as any electronic record, and includes e-mail accounts, social media accounts, virtual currency accounts (e.g., Bitcoin), domain names, blogs, photos and videos posted to the internet, music sharing services, cloud based storage accounts and more.

Obtaining Access to Digital Assets

Basically, the Act acknowledges that an individual has a property right in his or her digital assets, and permits an individual to designate a fiduciary to manage those assets.  The terms-of-service agreements (“TOSA”) used by many companies that store digital assets (e.g., Facebook or Yahoo), which are called “Custodians” under the Act, provide that an individual’s account is non-transferrable and terminates at death.  The Act essentially overrides the TOSA and allows individuals to authorize fiduciaries to access their accounts by serving a request and proof of authority on a Custodian.

Among other things, the Act seeks to address situations where a family member or loved one is denied access to a decedent’s account because the Custodian refuses to allow it.  For example, in a well-publicized case (In re Estate of Ellsworth, No. 2005-296, 651- DE (Mich. Prob. Ct. May 11, 2005), the family of a U.S. Marine killed in Iraq successfully sued Yahoo in a Michigan probate court for access to the decedent’s e-mail account.  Such a lawsuit now could be avoided under the Act in New Jersey if the decedent had authorized access during life.

The Act contains detailed procedures for obtaining or restricting access to digital assets.  First, a designation in an “Online Tool” (i.e., a tool provided by a custodian allowing an individual to grant or deny access) has priority over any designation contained in an individual’s estate planning documents or the TOSA.  If the individual does not use an Online Tool (or the Custodian does not offer one), then any direction contained in the individual’s estate planning documents controls.  If there is no Online Tool designation or direction contained in estate planning documents, then the Custodian’s TOSA will control.  See Section 4 of the Act.  Thus, an individual can specify which digital assets may be preserved for posterity, and those he or she prefers to take to the grave.

The Act does not apply to any digital asset of an employer used by an employee in the ordinary course of business.

Steps to consider

Individuals may now wish to consider:  (1) creating an inventory of their digital assets, which may include valuable domain names or virtual currency accounts; (2) using Online Tools to grant fiduciary authorizations or ensuring that estate planning documents include a specific grant of authority to access digital assets; and, (3) specifying any digital assets that they do not want fiduciaries to possess or ascertaining that the terms of the TOSA will suffice to achieve the desired restriction.

Obligations of fiduciary

The Act requires fiduciaries to act in a manner that is consistent with the individual’s wishes, and they cannot engage in conduct that violates the scope of authority provided to them.  Moreover, fiduciaries have a duty to marshal and preserve digital assets within their control and could, presumably, be held accountable for waste or mismanagement.

In sum, the Act modernizes New Jersey law by expressly recognizing and clarifying the rights and obligations of fiduciaries and individuals with respect to digital assets.

The New Jersey Tax Court recently released its opinion in Estate of Ruth Oberg, NJ Tax Court, Docket No 000240 (October 24, 2017), upholding the Division of Taxation’s assessment of additional New Jersey estate tax.  The case provides some important reminders about doing proper estate planning.

The estate in this case had a date of death value of $3.1 million and an alternate valuation date value of $2.1 million.  The estate claimed the alternate valuation date on its New Jersey estate tax return.  Unfortunately for the estate, however, the return was filed almost four years after the decedent’s death.  The judge agreed with the Division of Taxation that the return was filed too late to be able to claim the alternate valuation date.

The decedent also had made an undocumented loan to her daughter.  The estate claimed that the loan was a self-cancelling installment note (“SCIN”) and therefore was cancelled at death.  The court, emphasizing the difficulties of proving that an undocumented loan was actually a SCIN, found that the decedent had an interest in the loan at her death, and it was includible in her estate.  The court also found that the Division of Taxation was not bound by the IRS closing letter issued in the estate where the federal estate tax return was accepted as filed.

This is a classic “failure to plan” case.  If the decedent had properly documented the loan, and if the estate tax return had been filed on time, the additional estate tax assessed in the case could have been avoided.

The IRS has withdrawn the controversial proposed regulations under Code §2704 that would have significantly affected the use of discounts in US estate planning.

Code §2704 provides that certain “applicable restrictions” on ownership interests in family entities – that is, entities where the transferor and family members control the entity – should be disregarded for valuation purposes.  The proposed regulations created new rules relating to a lapse of a liquidation right.  They also created a class of restrictions known as “Disregarded Restrictions” that included many common types of restrictions in business entities and would be ignored for gift and estate tax valuation purposes.  See our prior blog post on this topic.

The effect of the proposed regulations appeared to be that they would eliminate or greatly restrict minority interest and lack of marketability discounts that are commonly applied in gift and estate tax valuations (resulting in higher valuations).  The regulations were very controversial from the moment they were issued.  Among other things, commentators said the regulations were unclear and unrealistic.

Treasury and the IRS have stated that they now believe that the approach of the proposed regulations to valuation discounts is unworkable.  The IRS issued a notice (Notice 2017-38) that it was reviewing the proposed regulations as unduly complex or overly burdensome, and has now withdrawn the proposed regulations.

Experts have started to calculate the inflation adjustments to key estate and gift exemption amounts for 2018.  Note that these are not the official figures to be released by the IRS, but should be used as a guide.  The IRS will officially release the numbers later this year.

For an estate of any decedent dying during calendar year 2017, the applicable exclusion was increased from $5.45 million to $5.49 million.  This change increased not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $10.98 million estate, gift and GST tax free to their children and grandchildren in 2017.  The projected 2018 adjustment to the applicable exclusion will increase from $5.49 million to $5.6 million which means that a husband and wife with proper planning could potentially transfer $11.2 million estate, gift and GST tax free to their children and grandchildren in 2018.

For 2017, the estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.  For gifts made in 2018, the projected gift tax annual exclusion will be adjusted to $15,000 (up from $14,000 for gifts made in 2017).

The New Jersey Estate Tax repeal will be effective as of January 1, 2018.  The current $2 million exemption which increased on January 1, 2017 is set to be eliminated as of January 1, 2018.  Keep in mind that the New Jersey Inheritance Tax is still in effect. This is a tax imposed on transfers to beneficiaries who are not spouses, parents, children or grandchildren (i.e., nieces, nephews, siblings, friends, etc.) New Jersey Inheritance Tax rates start at 11% and go as high as 16%.

The New York exclusion amount was changed as of April 1, 2014.  Beginning April 1, 2014, the exclusion has increased as follows:

•           $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;

•           $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;

•           $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;

•           $5.25 million for decedents dying between April 1, 2017 through December 31, 2018.  Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

In 2017, the gift tax annual exclusion to a non-citizen spouse was increased from $148,000 to $149,000.  This is projected to increase to $152,000 in 2018.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

On November 2, 2015, new partnership audit rules, repealing existing TEFRA rules, were enacted in Section 1101 of the Bipartisan Budget Act (“BBA”).  On August 15, 2016, Treasury published temporary regulations (TD 9780, 81 FR 51795).  The BBA will become effective on January 1, 2018, although partnerships can elect into the new rules retroactively to November 2, 2015.

The new rules have created quite the excitement among certain tax professionals because they shift both the audit and the collection of partnership taxes to the partnership.  Since 1982, partnership audits have been governed by the Tax Equity and Fiscal Responsibility Act (“TEFRA”).  Partnerships with 10 or fewer partners (with some exceptions, such as tiered partnerships) were exempt from TEFRA rules, and were governed by the default partner-level audit regime that existed prior to TEFRA.  What that means is, such small partnership audits were of the K-1’s of the partners who owned interest in the partnership in the years under audit, and correspondingly any adjustments were paid by those “review-year” partners.  For all other partnerships, TEFRA now required that the audit be conducted at the partnership level, which means adjustments were to be made to partnership income and deductions, with amended K-1’s then issued to the review-year partners.  The regime was now partnership-level audits with partner-level assessments.  In other words, those partners whose actions caused the additional tax were the ones responsible for paying it.

In addition, under TEFRA, over-100 partner partnerships could elect to have partnership-level assessments, that is, additional tax paid not by review-year partners but by current, “audit-year” partners (under the Electing Large Partnership Audit rules that were also repealed by the BBA).  This would result in a partnership-level audit and partnership-level assessment.

Unfortunately, over the years the IRS found partner-level collection difficult, and Congress has now responded by consolidating not only the audit but also the collection of tax at the partnership level.  In other words, the collection of tax is now made from audit-year partners, or partners having interest in the partnership in the year it is being audited.  This may be fine for small static family partnerships whose partners do not change, but it is not fine for large dynamic partnerships with ever-changing ownership interests.

A partnership representative (PR), rather than TEFRA’s Tax Matters Partner (TMP), now controls the conduct of the audit at the partnership level.  Neither the IRS nor the PR is statutorily obligated to give notice or audit rights to the other partners, a response to the IRS’ desire to streamline the audit without too many administrative hurdles.

An additional change in IRS’ favor is that there is no longer an automatic exemption from the consolidated audit for under-10 partnerships.  Now the burden is on the partnership to make an annual election out of the BBA rules under Section 6221 of the Internal Revenue Code.  The election can only be made by partnerships having fewer than 100 partners and those partners have to be individuals, C corporations, S corporations, tax-exempt entities or estates of partners.  When such an election out of the BBA is made and an audit arises that year, the partnership will essentially have a pre-TEFRA audit at the partner-level (as had been the case for under-10 partnerships under TEFRA).  The catch?  If the partnership has other partnerships or trusts as partners, it cannot elect out of the BBA consolidated rules no matter its size or preference.

If a partnership cannot elect out of the BBA rules because of its size or composition of its partners, it can still elect under Section 6226 to “push-out” payments of the additional tax assessed from the audit-year to the review-year partners.  The push-out election essentially replicates the TEFRA regime of partnership-level audit and partner-level payment.

Note that the rules are not clear on whether multi-tier partnerships can push-out payment to the ultimate partners.  The IRS has indicated the push-out will not automatically reach the ultimate partners unless the partnership can provide sufficient information about the tiers of income and loss allocations.

The new rules upend the status quo, affect countless existing partnership agreements, and create additional liability for purchasers of partnership interests.  At the same time, the new rules potentially create additional leverage for controlling partners.  All these considerations need to be reviewed on a case-by-case basis to amend existing agreements and draft robust new ones for the future under the new regime.