The New Jersey Appellate Division recently issued its opinion in Estate of Van Riper v. Dir., Div. of Taxation, No. A-3024-16T4 (N.J. Super. Ct. App. Div. Oct. 3, 2018), upholding the Tax Court’s finding that the full fair market value of a marital home transferred to a trust was subject to New Jersey Inheritance Tax.  The case highlights the importance of understanding the effect of transferring property into trusts for estate planning and tax purposes.

A husband and wife transferred their home into an irrevocable trust and retained the right to live in the home until the death of the survivor.  Any assets remaining after their deaths were to be distributed to their niece.  It appears that this trust was created in connection with Medicaid planning.  The NJ Tax Court held that, due to the fact that the couple retained a life interest in the property and delayed their niece’s enjoyment of it until both their deaths, the value of the home in the trust was subject to Inheritance Tax.  Estate of Van Riper v. Dir., Div. of Taxation, 30 N.J. Tax 1 (2017).  

On appeal, the Estate argued that each spouse held only one-half ownership interest in the property at the time they transferred it to the trust, so the Inheritance Tax should only apply to one-half of the value of the home.  The appellate court upheld the assessment of the full value of the home because the couple owned the property as “tenants by the entirety,” meaning they each “held an interest in the entire estate, not fifty-percent interests.”  Van Riper, slip op. at 8-9.  This reasoning was further supported by the fact that at the first spouse’s death no Inheritance Tax was paid on the property as it qualified as an exempt transfer from husband to wife under New Jersey law.  See N.J.S.A. 54:34-2(a)(1).

This cautionary tale warns New Jersey taxpayers of the complications that may arise from retaining interest in property during one’s lifetime, even if such property has been placed in an irrevocable trust.  It is strongly advised that taxpayers seek the assistance of an estate planning attorney to better understand the tax and other consequences of certain planning techniques.

While success in crypto-currency investing is far from assured, death, sadly, is.  Accordingly, it is vital that investors in Bitcoin and other crypto-currencies are prepared for the unique estate planning factors that apply to digital assets.  The following are five estate planning factors that should be addressed immediately by crypto-currency investors to ensure that their digital assets are effectively passed on to their heirs or beneficiaries.

  1. Custody of Private Keys and Other Information to Access Digital Assets

Unlike bank accounts which can be accessed post-mortem, digital assets typically require a variety of private information to be accessed.  This information (and an investor’s digital assets) may be lost forever if an investor fails to record it or share it with a trusted third party before they die.  To avoid this, it is crucial that investors physically record the following private access information and provide for custody of this information in their will:

  • Private Key: Most crypto-currencies use a public-private key system to ensure that transactions are valid.  While the public key is made public every time the investor buys or sells crypto-currency, only the investor knows the private key.  Private keys are essential to verify ownership and access digital assets, and should be recorded.  Gaining access to a private key is similar to gaining ownership of a bank account, so it is vital that private keys are kept safe.  Creating a physical copy of your private key and securing it in a bank safety deposit box insulates your private key from hacking and may provide the safest means to protect it.
  • Passwords: Crypto-currencies are traded on online platforms commonly known as exchanges.  Investors that fail to secure their digital assets in hardware wallets (see below) typically have their crypto-currencies stored on default digital wallets provided by an exchange.  It is important that the username, password, and security question information for exchanges be recorded to retrieve digital assets from exchange wallets.
  • Two-Factor Authentication: Many crypto-currency exchanges also require that investors use two-factor authentication to authenticate their identity when accessing their account and transferring digital assets.  Two-factor authentication is typically accomplished via a mobile application that provides a unique code to be entered into the exchange.  Investors who use two-factor authentication should record their username, password, and security question information.
  1. Custody of Hardware Wallets

Once Bitcoin and other crypto-currencies are purchased on an exchange, they are automatically stored on that exchange’s default wallet where they can be accessed electronically by the investor.  Digital wallets, especially those used by exchanges, are susceptible to hacking. Investors should transfer their digital assets to a hardware wallet.  Hardware wallets can be purchased online and are, generally, encrypted flash drives that require a password to be accessed.  Investors and their heirs may lose their digital assets if their hardware wallet is lost or damaged.  Investors should record the password and other access information for their hardware wallets, and provide for custody of the information and the wallet itself in their will.

  1. New Jersey Uniform Fiduciary Access to Digital Assets Act

In 2017, New Jersey enacted the Uniform Fiduciary Access to Digital Assets Act (the “Act”).  The Act generally enables individuals to appoint a fiduciary to manage their “digital assets”, broadly defined as electronic records.  Under the Act, electronic records include account information for online exchanges.  Unfortunately, while the Act authorizes a fiduciary to access a deceased investor’s exchange account, it fails to consider that the private key – the essential information to remove digital assets from a digital wallet – is not available to exchanges.  Moreover, the Act’s limited applicability to electronic records may exclude its applicability to hardware wallets.

  1. Fiduciaries under Power of Attorney and Will

Under a well drafted Power of Attorney, an agent, appointed by the principal, is given the power to manage the principal’s assets and make investment decisions on behalf of the principal.  Depending on how the document is drafted, the powers granted under the Power of Attorney can either be effective immediately upon execution or only effective upon the disability or incapacity of the principal.  Having such a document avoids the necessity of asking the court to appoint someone as the principal’s guardian if he or she cannot manage his or her own affairs.

Among other things, the executor of an estate is tasked with distributing the property of the decedent in accordance with the decedent’s will.

In the context of Bitcoin and other crypto-currencies, it may be necessary for the agent under a Power of Attorney or the executor of an estate to have control over these assets.  As such, it is critical that an owner of crypto-currency have a well drafted Power of Attorney and Will, specifically providing the agent with authority over the crypto-currency assets and the necessary information to access such assets.

  1. Estate Planning with Crypto-Currencies

The federal estate tax is based on the value of one’s assets less liabilities at one’s date of death and is imposed at a rate of 40%.  One important exception that is critical to understanding how the federal estate tax works involves the estate and gift tax exemption.  This exemption is the amount that one can transfer to anyone during one’s lifetime or at death without incurring a gift or estate tax.  In 2018, the exemption is $11.18 and this amount will be indexed annually for inflation until 2026, when the exemption amount is scheduled to revert to $5.49 million, with an adjustment for inflation.

For wealthier owners of crypto-currency assets, implementing certain estate planning techniques in order to remove the value of these assets from his or her estate could be highly beneficial.  One such technique would be the creation of a limited liability company (“LLC”), funding the LLC with crypto-currency assets, and then gifting most of the economic value of the LLC to a family trust.

The gift would use a portion of the owner’s federal gift tax exemptions and thus no federal gift tax would be due.  Additionally, if the LLC is created with voting and non-voting membership interests and only the non-voting interests are transferred to the family trust, the value of the gift could be discounted for gift and estate tax purposes.  Moreover, all future appreciation on the value of the LLC interests gifted would accrue outside of the transferor’s taxable estate.

Investors in crypto-currencies are at risk of losing their assets at death unless they plan ahead.  Following these five factors and speaking to an estate planning attorney versed in crypto-currencies will help ensure that digital assets are effectively passed to heirs or beneficiaries.

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.

We all want to provide the best for our children, but most of us do not want to face the task of putting an estate plan in place for when we are not here.  The everyday demands of life put this planning on the back-burner, and when your family has special needs, those everyday demands are even larger.

Those special needs, however, are what make your family’s planning all the more time-critical.  Your family’s estate plan not only needs to lay out how your assets will be distributed to your children once both parents are gone, but it must also create a balance between providing the best for your special needs child and not putting him or her at risk of losing crucial government benefits.  Oftentimes, it is not knowing how to achieve this balance that makes us put off what can be a rather intimidating project.

Giving our children the best we can when we are not here means partnering with the right attorney to achieve that balance.  Your estate planning documents (whether it be via a Will or a Trust) can provide for each child’s individual needs and factor in the government benefits which can be crucial in the life of a special needs child.  Setting up a trust for a special needs child that will provide him and her with the comforts you provide to him or her yourself, and not eliminate his or her eligibility for government benefits, is possible.  You can provide the best of both worlds for your special needs child and you will have better peace of mind once you know these plans are in place.

Governor Andrew Cuomo recently signed legislation which amends New York law to allow mentally-competent disabled individuals under age 65 to establish a first-party Special Needs Trust without court petition.

In the past, when an individual with special needs had assets in his or her name which precluded his or her eligibility for government benefits, a special needs trust could only be created to achieve eligibility for benefits while preserving the assets for a disabled individual’s care by a parent, a grandparent or a legal guardian, or by the disabled individual by way of a lengthy and costly court proceeding.  Now, a disabled individual with mental capacity can establish his or her own special needs trust for assets in his or her own name without the involvement of these other individuals, or the courts, while preserving his or her eligibility for government benefits (for example, Medicaid and SSI).

New York Social Services Law 366(2)(b)(2)(iii) now conforms to the Federal Special Needs Trust Fairness Act signed into law by President Barack Obama on December 13, 2016, and applies to all first-party Special Needs Trusts established in New York on or after August 21, 2017.