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Three Estate Planning Strategies to Take Advantage of Low Cryptocurrency Valuations

April 23, 2019 by Eric C. Jansen, ChFC®

Bitcoin’s value has ranged from less than a penny to nearly $20,000 since its inception a little over ten years ago now. Within the last year alone, bitcoin’s value has fallen from $11,000 to a low of around $3,500. Many other digital currencies and tokens, which are referred to as “ALT coins” have seen their values drop by 90% or more from there all-time highs.

These steep declines in crypto valuations can be a bit scary for even die-hard crypto fans or HODL’rs, crypto investors who are “Holding” on to their crypto no matter what the price action. However; for those who believe in cryptocurrency’s long-term growth potential, now is a great time to use crypto’s depressed valuations to do some savvy wealth transfer planning designed to reduce or even eliminate wealth transfer taxes.

Basics of the U.S. Estate & Gift Tax System

The current federal estate and gift tax rate stands at 40%, making estate & gift tax avoidance strategies an important component of any wealth preservation plan. While the estate tax exclusion amount was $5.49 million in 2017, the Tax Cuts and Jobs Act of 2017 increased the basic estate tax exclusion amounts for 2018 through 2025. In 2019 estates valued at $11.4 million or more per individual, $22.8 million for couples will be subject to the Federal Estate Tax. The annual Gift Tax Exclusion amount remains the same at $15,000.

Based on these high exclusion amounts many people mistakenly believe estate tax planning is only for the ultra rich. Think again. Not only are the tax cuts and higher estate tax exclusion amounts brought on by the TCJA set to expire after 2025, but there are already talks about drastically reducing the current thresholds in the future to broaden the number of estates subject to taxation.

Further, Seventeen states and Washington, DC, levy their own estate or inheritance taxes (Maryland levies both). State exclusion amounts vary considerably but are often much lower than the federal exclusion amount, making estate tax planning extra important for wealthy residents of those states. As an example, Massachusetts taxes estates valued at $1 million and above.

Gift Taxes

The annual $15,000 gift tax exclusion applies to each person you give a gift. As such, transferring ownership of cryptocurrency valued at more than $15,000 to another person would potentially subject you to gift taxes of 40% of the amount over $15,000 if you have exceeded your lifetime gift tax exemption. The lifetime exemption for federal gift taxes is a dollar amount you can give away without paying a gift tax. 

In short, the federal lifetime gift and estate tax exemptions are tied together by what is referred to as the Unified Tax Credit. You can use the credit to reduce or eliminate estate taxes at your death, or you can use it to defray taxes owed on giving more than the $15,000 annual gift tax exclusion to any individual in a given year. In other words, you can use your unified credit while you are alive, through gifting, or at death.

Gifting Crypto to Reduce Future Estate Taxes

Now that you have a general understanding of how both estate and gift taxes work, we can begin discussing strategies that will allow you to take advantage of low crypto valuations to reduce current or future estate and gift taxes.

The first strategy is by far the simplest. As you are allowed to gift $15,000 to any person each year free of gift taxes, then it may make sense to gift $15,000 of bitcoin or any other cryptocurrency today to your loved ones, before values go up again.

With bitcoin at about $5,000 or so per coin on 4/15/2019, you can give away three bitcoins to as many people as you like without being subject to gift taxes, nor utilizing any of your Unified Credit. When bitcoin was worth nearly $20,000, you could gift less than one bitcoin to have the same result.

Once the coins are gifted, all the potential future appreciation is no longer taxed in your estate at death, thereby reducing your estate’s value and subsequent estate taxes that may be due.

Keep in mind when gifting, your cost basis in the coins gifted is transferred to the recipient. They will be subject to any income taxes due on any gains above that basis upon selling the coins if they so chose at a later date.

If you are worried about gifting your crypto outright, consider establishing an irrevocable trust that can hold your crypto from being distributed until your death, or some other later point in time such as for your grandchildren, or even great-grandchildren in a generation-skipping trust.

Gifting assets, of course, entails giving up control of those assets—another key consideration in any estate planning strategy. Gifting cryptocurrency adds a layer of complexity since the recipient needs to understand how to value it, access it, and protect it. A financial advisor and a tax attorney with a solid understanding of cryptocurrency can be invaluable in formulating your strategy. (For more, see What Estate Planning Attorneys Need to Know About Cryptocurrencies.)

Gifting Large Amounts of Crypto

If you are sitting on a substantial amount of crypto, trying to stick within the gifting limits of $15,000 per person’s annual gift tax exemption amount may do very little in terms of reducing your overall estate value and tax burden. As such, you may decide to utilize some or all of your Unified Credit now, instead of waiting until death, especially if you believe your crypto is likely to rise in value in the future.

As an example, unbeknownst to many people, you could, if you so chose, gift $11.4 million (Exclusion amount) of bitcoin, crypto or other assets to one or any number of people at anytime prior to your death and not have you or the recipient owe any gift, estate, inheritance or income taxes on the amount gifted. In other words, you are not bound to stay within the $15,000 annual exclusion amount.

You read that right; you could gift 11.4 Million dollars worth of crypto today and remove all the future appreciation, if any, out of your estate. Practically speaking, if your estate is under $11.4 Million today, removing some or all of the growth of your crypto portfolio could potentially keep you from paying estate taxes in the future.

Keep in mind if you use some or all of your Unified Credit while alive that will reduce or eliminate its availability at your death. But as you will see, if the assets gifted substantially appreciate in the hands of the receiver, the credit may be far more valuable to use while you are alive through gifting than at death.

Let’s look at an example

If you were to gift $11.4 Million of crypto today (or a smaller amount that is still above the $15,000 annual threshold), there would be no tax due. If that $11.4 Million of crypto triples in value to $34.2 Million after its gifted, the $22.8 Million appreciation would no longer be part of your taxable estate, saving $9.12 Million in Estate Taxes under current tax rules.

A-B Trusts

A second estate planning strategy for taking advantage of low cryptocurrency valuations involves A-B trusts, also called credit shelter trusts or bypass trusts. Married individuals can use an A-B trust funded with undervalued cryptocurrency with the hope of passing a much greater amount of cryptocurrency to heirs in the future, free of estate taxes and with the asset protection that trusts provide.

Most married couples don’t need to use A-B trusts to avoid federal estate taxes because they can combine their individual estate tax exemptions under the portability law that became effective in 2011. However, individuals and married couples who want to avoid state-level estate and inheritance taxes, as well as two other key groups—unmarried partners and remarried individuals with children from a prior marriage—may still find an A-B trust helpful.

In an A-B trust, a couple establishes either a single trust that splits in two when the first partner dies or two separate trusts in each if their names. In either instance, the trusts are revocable until the first spouse passes away.

When the first partner dies, trust A becomes the survivor’s trust, and trust B (the bypass trust) becomes the decedent’s trust. Trust assets totaling up to the value of the estate tax exemption get transferred into the B trust. That trust becomes irrevocable, which restricts the survivor’s ability to use it but still allows them to receive income (and other amounts) from the trust.

Since the value of the assets placed in the first spouse to dies B trust does not exceed the Estate Tax Exemption amount, and the remaining assets, if any, pass to the surviving spouse with an unlimited marital deduction, there generally will be no estate taxes due upon the death of the first spouse.

Also, any future appreciation of the crypto or other assets transferred into the B trust will not be taxed when the second spouse dies, as trust B is not considered part of the taxable estate at the second spouse’s death.

Further, any appreciation in the assets in the trust, including cryptocurrency, may avoid estate taxation for generations to come if set up as a generation-skipping trust, thereby saving potentially millions of dollars in future estate taxes.

In summary, by funding an A-B trust with low-valued cryptocurrency that is expected to appreciate, a much greater amount than was used to fund the trust could one day be passed down estate-tax free while also providing asset protection to heirs.

GRATs

The third strategy involves a type of irrevocable trust called a Grantor Retained Annuity Trust (GRAT). It’s often used for assets expected to appreciate over time, such as real estate, stock, and business interests, and can work particularly well in low-interest rate environments.

The goal for creating a GRAT is to transfer assets and their potential future appreciation out of your estate for federal (and/or state) estate tax purposes while avoiding gift taxes and retaining as much of your Unified Credit as possible.

The crux of this strategy is two-fold:

  1. As a general rule when an individual makes a transfer of an interest in property that is regarded as complete for federal gift tax purposes, only the value of the interest transferred (and not the interest retained) constitutes a gift.
  2. The GRAT will accomplish its goals if the Crypto transferred into it grows faster than the IRC 7520 Rate, currently 3.0 % as of 4/2019.

Here’s how you could implement this strategy with cryptocurrency.

Working with an estate planning attorney and financial advisor who thoroughly understands cryptocurrency, you would create a GRAT and transfer bitcoin, or another crypto that you will not need during your lifetime into the trust. Name your beneficiaries (children or grandchildren, for example).

You would then determine the amount of income (annuity payments), and over what time frame you would want to receive them, from the GRAT that would effectively result in the actuarial value of the remainder interest passing to the trust beneficiaries being as close to or equal to zero as possible, based on the then current IRC §7520 Rate.

Even though transferring assets to a GRAT would be considered a taxable gift, the taxable gift is not the value of the assets transferred to the GRAT. instead, the gift is reduced by the actuarial value of the annuity you retain.

There are a couple of important caveats to note regarding GRATS.

  1. If the grantor dies before the GRAT term expires, the assets in the GRAT will become part of their taxable estate although that leaves the grantor in no worse financial position than if they didn’t do the GRAT at all.
  2. If the value of the assets depreciate or grow less than the 7520 rate, the strategy would not have accomplished its goals.

At the end of the annuity period, the GRAT terminates. Any remaining cryptocurrency and other assets in the trust are distributed to your beneficiaries. The goal again is that your bitcoin or another crypto in the trust has appreciated significantly over the trust’s term so that you can pass a much larger amount to your heir’s tax-free than you would have been able to otherwise.

Conclusion

Gifting low-valued cryptocurrencies under the annual gift tax exclusion or placing them into properly structured A-B trusts or GRATs can be a solid strategy for reducing estate taxes, especially for residents of states that levy their own estate or inheritance taxes.

High net worth individuals and couples who own bitcoin and other cryptocurrencies should use a team-based approach in their estate planning. Working with both a financial advisor and an attorney who both specialize in cryptocurrency planning is key. Cryptocurrencies are like no other asset and in addition to making sure you have an updated estate plan that includes them. Having a well-thought-out access plan for your crypto at death or if you become disabled is equally important so that your crypto is passed on and not lost or stolen.

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Eric C. Jansen, ChFC

Fun Facts About Me

When he is not researching the next great stock to add to client portfolios, you can find him travelling frequently with his family to Jackson Hole Wyoming.

  • Hometown: Chicago, IL
  • Birth Month & Year: November, 1964
  • Favorite Hobby: Goldmining in Nome, AK
  • Favorite Food: Steak at Charley’s Steakhouse in Orlando FL
  • Can't be interrupted when: Watching the Discovery Channel
  • Hidden Talent: Finish Carpenter
  • Something on bucket list: Obtain Helicopter Pilot License
  • Family Pet: Goldfish

Steven C. Johnson, ChFC

Fun Facts About Me

Steve would tell you that one of the best parts of the day is spent talking to clients and relationships that result from it. When away from the office, he loves to travel the back roads of New England enjoying all the great sites that can be found off the beaten path.

  • Hometown: Townsend, MA
  • Birth Month & Year: December, 1967
  • Favorite Hobby: Playing Hockey
  • Favorite Food: Chicken Caesar Salad
  • Can't be interrupted when: Watching the Bruins
  • Hidden Talent: Cooking – Makes a great Thanksgiving turkey
  • Something on bucket list: Travel to Italy and Greece
  • Family Pet: Max – our Pomeranian

Frederick M. Lane, ChFC, CASL

Fun Facts About Me

When not managing client portfolios, Fred can be found relaxing with family and friends.

  • Hometown: Nutley, NJ
  • Birth Month & Year: July, 1954
  • Favorite Hobby: Dog Walking
  • Favorite Food: Italian
  • Can't be interrupted when: Listening to Pink Floyd
  • Hidden Talent: Landscaping
  • Something on bucket list: Space Flight - Tourism
  • Family Pet: None

Catherine M. Gareri

Fun Facts About Me

When not caring for her clients Cathy enjoys relaxing in her yard at home.

  • Hometown: Bellingham, MA
  • Birth Month & Year: July, 1957
  • Favorite Hobby: Cooking and Entertaining
  • Favorite Food: Steak at the Capital Grille
  • Can't be interrupted when: It's family time
  • Hidden Talent: Dog Whisperer
  • Something on bucket list: Spending a couple months on the Almalfi Coast
  • Family Pet: In Between Mastiffs now so a little blue fish “Willy”

Katie E. Moore, CLTC

Fun Facts About Me

When Katie is not busy taking care of her clients, she spends her time being a mom to her two little ones, Owen and Isla.

  • Hometown: Modesto, CA
  • Birth Month & Year: September, 1982
  • Favorite Hobby: Swimming
  • Favorite Food: Mexican Food
  • Can't be interrupted when: I'm cooking
  • Hidden Talent: Climbed Yosemite's Half Dome, twice - no fear :)
  • Something on bucket list: See the Northern Lights and Potty Train my 2 year old
  • Family Pet: Caddy and Sierra – our two cats

Hesper Duval

Fun Facts About Me

Loves spending time with 2 daughters and enjoys participating in 5k obstacle races throughout the year.

  • Hometown: Charlton, MA
  • Birth Month & Year: October, 1981
  • Favorite Hobby: Running
  • Favorite Food: Cheesecake
  • Can't be interrupted when: Reading a good book
  • Hidden Talent: Interior Design and furniture restoration
  • Something on bucket list: To travel cross-country in an RV
  • Family Pet: Charlie and Nora, both black labs from the same litter

Donna Fournier

Fun Facts About Me

When not cheering for the Patriots, Donna spends her free time travelling throughout the United States looking for new haunted places to explore. She loves to wear her cowboy hat and boots when travelling out west.

  • Hometown: Swansea, MA
  • Birth Month & Year: February, 1961
  • Favorite Hobby: Exploring haunted locations
  • Favorite Food: Pizza
  • Can't be interrupted when: Eating my pizza
  • Hidden Talent: Rollerblading
  • Something on bucket list: Travel to Australia
  • Family Pet:  Had a pet skunk

Danielle Drew

When Danielle does not have her head in a book studying to expanding her financial planning knowledge, she enjoys anything active and outdoors, including visits to the beach and hiking.  

  • Hometown: Dennis, MA
  • Birth Month & Year: November, 1985
  • Favorite Hobby: Working out, concerts, and exploring wineries
  • Favorite Food: Lobster pot pie, cheeseburgers, BBQ, the list goes on...
  • Can't be interrupted when: Working out 
  • Hidden Talent: Country line dancing
  • Something on bucket list: To hike the 48, 4000 footers of New Hampshire
  • Family Pet: none, hopefully a big dog someday

Jay Willwerth, ChFC

Fun Facts About Me

Jay’s days are spent helping clients achieve their financial goals, followed by nights and weekends typically watching his daughters play competitive volleyball.

  • Hometown: Melrose, MA
  • Birth Month & Year: September, 1959
  • Favorite Hobby: Golf
  • Favorite Food: Anything at a Patriot’s Tailgate
  • Can't be interrupted when: Watching the Patriot’s Game
  • Hidden Talent: Competitive Volleyball Watcher (Mostly his 2 daughters)
  • Something on bucket list: Play a round of Golf at Pebble Beach
  • Family Pet: Bella, our Shih-poo
 

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