Grandmother and Keyboard

Is Your Grandmother On Facebook?

Young people aren’t the only ones using social media.

People of all ages are using social media to share information, build and maintain relationships, and keep in touch with family and friends, primarily through sharing digital photos and videos.  Many people have also created music or book collections that are entirely digital.  These collections may contain thousands of dollars’ worth of books and music, but they can only be accessed digitally.

The exact means of access may be different depending on the specific type of media, but one thing they have in common is that access usually requires a login or password.

What is also common is that, depending on the media provider, getting access to these items after the death of the account owner can be difficult or impossible.

Family members are often anxious about receiving photos, home videos, journals, music and books of a deceased person, but find that the means for obtaining this information is difficult at best.  The laws affecting the rights to these digital assets are having difficulty keeping up with the advances in technology and the development of social media.

It is clear that digital assets and social media are ever evolving.

As estate planners, we can provide a valuable service to our clients by helping to guide them in arranging for the transfer of these important digital assets.  However, until the laws affecting these assets and the policies of the media providers becomes more stabilized and established, finding good resources to keep updated and informed as these issues develop is especially important to be able to properly advise clients.

The Digital Beyond is one helpful resource in this area. The “Legal” tab is chalk full of helpful articles and information for the “digital afterlife.” A good estate planner should be able to assist their clients with tangible assets, and navigate the waters of digital assets.


Retirement Benefits Feature

Your 401(k) Assets Are Not “Old” – Think Twice Before Rolling Them Over

Almost every bank has some sort of advertisement that refers to your 401(k) benefits as “old” and encourages you to rollover your investments into an IRA. Wells Fargo’s tag line reads: “Consolidate old retirement assets with guidance,” Fidelity publishes articles with the headline “What to do with your old 401(k),” and, Charles Schwab has a TV commercial that opens with “Is your old 401(k) just hanging around?”[1]

These banks are all attempting to send home the message that your “old” 401(k) needs to be rolled over into a “new” IRA in order to have better investment returns. The advertisements in particular are appealing to your sense that you no longer work for your employer, so why leave your assets in your “old” employer’s retirement account? They are also implying that somehow 401(k)s only have “old” investment types available and IRAs have all of the “new” and better investments. This is simply not the case – ERISA retirement plan investments are reviewed each year by fiduciaries and participants with self-directed accounts in ERISA retirement plans actually choose their own investments.

Be Aware of the Downsides of Rolling Over your 401(k)

Furthermore, participants in a 401(k) plan should be aware of the downsides of moving funds from a 401(k) plan to an IRA which can include:

  • Higher maintenance fees charged for an IRA rather than to stay in the ERISA retirement plan. Fees in an ERISA plan are regulated by the Department of Labor.
  • More limits on investment options offered by the bank hosting the IRA compared to the investment options that an ERISA plan can negotiate for on a large scale basis.
  • Less protection of assets from creditors or legal judgments.
  • Higher transaction fees charged in an IRA than in an ERISA retirement plan.
  • More restrictions on withdrawing your benefits. (If you retire from a company at age 55 or older, you may be able to obtain penalty-free access to your 401(k) account whereas IRAs generally have a 59 ½ age requirement before benefits can be obtained penalty-free.)[2]
  • Fees for investment advice may be charged by the bank whereas in an ERISA plan your prior employer’s contract may include providing participants with investment advice for no fee.
  • No ability to obtain a loan from an IRA whereas many ERISA plans permit participants to take loans.

Wells Fargo even has a long disclaimer regarding rollover IRAs, but it is in the fine print:

“When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distribution may be required, protection of assets from creditors, and legal judgments. Investing and maintaining assets in an IRA with us will generally involve higher costs than the other options available.” (emphasis added) [3]

The conclusion is simple:

ERISA plans should take pride in the upsides to participants of staying invested in the plan, and participants should consider their individual needs in order to make the best decision.


Estate Tax Image

There is a Free Lunch – Rethinking Your Relationship With the Estate Tax System

Americans have been trained to fear the US Estate Tax system, sometimes called the death tax system.

However, now that a single person can transfer more than $5 million through the estate tax system without paying a tax, the time has come for us to change our way of thinking.  We need to change our thinking because the estate tax system includes a hidden gift that is now extremely valuable.

The gift is this:  Assets that pass through the estate tax system receive a new basis, which is the value of the asset on the date of death.  Given the number of assets that have increased in value over the course of the past 40-50 years, the new basis at death is frequently an increased “stepped up” basis.

To begin at the beginning, the tax basis of an asset is generally the price that a taxpayer paid for the asset.  The tax basis is important, because it is the measuring point for determining a taxpayer’s gain or loss on disposition of the asset.  So, if a taxpayer paid $1.00 for a share of stock, then sells it for $10.00, the taxpayer’s gain is $9.00, and the taxpayer has to report that gain and pay a tax on it.

The lesson is: The higher an asset’s basis, the better.

The problem is that basis increases generally are not free.  For example, if a person owns a rental property, he or she can increase basis by spending money on the property with the addition of a capital improvement.  The basis adjustment is the direct result of spending money.

Historically, the basis adjustment that is available through the estate tax system – like other basis adjustments – came with a price tag.  The property was subject to estate tax and it emerged from a painful taxation system with a new basis because it had generated a tax payable to the IRS.

Now, though the estate tax exemption is so high that people can use the estate tax system to acquire something that was inconceivable not so long ago: free basis.

The logic to free basis:

  1. The price of the basis adjustment at death has been the need to expose the asset to the estate tax system and the consequent need to pay an estate tax at high rates.
  2. Now, though, the estate tax exemption is so high that many people can expose their entire fortunes to the estate tax system without paying any tax, and many can do this without even filing an estate tax return.
  3. Since Congress did not change the basis adjustment rules when it changed the exemption amounts, the assets that go through the estate tax system painlessly (and perhaps without even filing a return) still receive a basis increase at no cost, which equals free basis.

The key underlying lesson to learn from the current situation is that – even if you cannot look at the US Estate Tax system as a friend – you can look at the system as a neighbor you need to learn to live with.

A few ideas to help you take advantage of free basis:

  1. Historically, parents have given assets that were likely to appreciate to children, so that the appreciation would not be exposed to the estate tax system at the parent’s death. However, when the gift was made, the parent’s basis would transfer to the child, and would not be stepped-up at the parent’s death.  This made sense when the estate tax system imposed a price.  Now that the system does not impose a price for most people, it makes sense for the parent to hold the asset until death so that it can be transferred to the child with a free basis increase.
  1. You probably have a natural aversion to taking money from your IRA, because you pay income tax on your withdrawals. However, if your aversion to taking money from your IRA were to cause you to sell an asset to pay tax at the capital gains rate, you might reconsider.  The assets in the IRA will not get a basis increase when you die.  The capital asset outside the IRA will get a basis increase.  Your situation might be improved by taking money from the IRA and leaving the capital asset on hand so that it can be eligible for free basis.
  1. Think twice before making annual exclusion gifts with anything but cash.
  1. Don’t get involved with family limited partnerships and fractional interest discounting unless you are rich enough to really need them.
  1. Recognize that a traditional A/B Trust may result in the loss of a stepped-up basis at the death of the second spouse. While an A/B Trust can still make good sense for family reasons (especially dealing with a blended family), you should be sure that the trust has been modified to provide a method for obtaining an increased basis. The attorneys in our firm are adept at accomplishing this without disrupting family dynamics.