An Estate Plan for Your Digital Assets? Yes, You Need One.

Money Pit

We’re all aware of the importance of having legal documents in place, such as a will or trust and advance directive. While your intentions for personal assets like grandma’s engagement ring or your childhood baseball card collection may be clearly spelled out, most people have given little thought to the legacy of their digital assets. 

The good news is that it doesn’t have to be complicated, and there are some easy steps you can take today to get started.

 

Your digital asset footprint is significantly larger than you think. 

Between email and social media accounts, subscription services such as Netflix, Hulu, and Prime, and cloud storage for photos, files, and digital music, most people have a meaningful digital presence. It’s estimated that the average person has over 100 online accounts and that number will only continue to grow. 

With the increasing popularity of online billpay and paperless statements, our finances leave less of a “paper trail” than ever before, meaning that ensuring family members or executors have the ability to access accounts and pay bills is critically important.

 

Writing down your passwords isn’t enough. 

Perhaps you’ve diligently tracked your online presence with a list of accounts and their associated usernames and passwords.

Aside from the obvious safety concerns and challenges keeping up with sites that require frequent password changes, providing someone with this information doesn’t grant them legal authority to access your digital assets.

In fact, they are likely violating most sites’ Terms of Service Agreements, which typically do not allow a transfer of ownership or use once the original user has died. It’s even possible that heirs could be found guilty of “hacking” a loved one’s account, despite the most honest intentions.  

 

Enter RUFADAA…

Adopted by 46 states, the Revised Uniform Fiduciary Access to Digital Assets Act provides guidance on how a person’s digital assets may be accessed upon their passing.

RUFADAA grants an executor the same access to digital assets as the decedent had during life and is intended to allow an array of privileges, including access to photos, emails, contacts, and the ability to delete or modify social media accounts and pay final expenses. 

RUFADAA establishes a hierarchy of three “tiers” for how a person’s digital assets may be accessed after death.   

 

Tier 1: Online Tools

Some platforms allow users to designate instructions as to how their accounts should be handled in the instance of incapacity or death – essentially a digital “power of attorney” that can be changed or revoked at any time. 

Facebook’s Legacy Contact, Google’s Inactive Account Manager, and Apple’s iOS Legacy Contact take mere minutes to set up.

If you’re an iPhone user, you can set up a Digital Legacy Contact by going to “Settings,” tapping on your Apple ID profile at the top of the page, selecting “Password and Security,” then “Legacy Contact.” From there, select a Legacy Contact who can access your phone in the case of your death.

We’re also big proponents of everyone adopting a secure password manager like LastPass or 1Password. Both enable you to share designated passwords with family members in a secure fashion.  

We encourage you to take these easy steps now and see if similar designations are available on other platforms you use.

 

Tier 2: Legal Documents

If you have not made any designations directly with an online provider, or the option to do so is unavailable, an attorney can help you incorporate digital planning into your will, trust, or power of attorney.

You can provide detailed instructions as to what access should or should not be granted to an executor or surviving family member in the event there are certain accounts, photos, or emails you wish to share or remain private. 

Some people opt to designate a “digital fiduciary,” separate from your executor or personal representative, who will be solely responsible for the management of your digital assets. This person should be provided a copy of the document designating them as such and have the tech savvy necessary to navigate the role. 

It is important to know that designations made through online tools, such as those listed in Tier 1, supersede destinations made in legal documents, so make sure you keep both updated as your desires and life circumstances change. 

 

Tier 3: Terms of Service Agreements

We’ve all become accustomed to scrolling through the “fine print” every online provider inevitably requires and clicking “I agree.”

Unless you’re an attorney or glutton for punishment, most people fail to understand what they are agreeing to in these Terms of Service, especially in the case of death. It’s not uncommon for some providers to stipulate that a user’s account is immediately terminated upon death, meaning it’s especially important to make sure legacy instructions are made directly with the provider (Tier 1) or clearly spelled out in your estate planning documents (Tier 2). 

 

Estate Planning for Modern Times

With so much of our lives spent online these days and important assets moving beyond just the tangible, it’s critical to have a plan in place. The good news is that it doesn’t have to be difficult or expensive to start.

If you have questions about your unique situation or want help getting a plan in place, reach out. We’re here to help.  

 

Biden’s Tax Proposal: What Does It Mean For You?  

On September 13th, Democrats on the House Ways and Means Committee released their highly anticipated, and speculated, proposed tax changes. It’s unclear how they will ultimately shake out, as Democrats need almost every vote they have to advance the changes. Regardless, the proposed measures are quite different from what many anticipated.  

It’s also not out of the question for additional provisions to make their way in, like an expanded deduction for state and local taxes (SALT). While the current version of the bill may not be in final form, many of its features are likely to become law, set to go into effect in the new year. 

While the proposed changes are vast, we’ve narrowed the focus here to four main areas, which are most applicable to Uplevel clients. 

 

Higher Ordinary Income Tax & Capital Gains Rate

The highest tax brackets are changing… again. In 2018, the top federal rate income tax rate was reduced to 37%. Rates are  now potentially reverting back to former top rates of 39.6%, which would be ‘permanently’ reinstated beginning in 2022. 

That’s not all. The highest tax brackets will also be substantially compressed – meaning you hit higher tax rates at much lower incomes. Those earning $400,000 to $450,000, depending on filing status,will see the largest average increase in tax liability of 4.6%, as today’s 35% bracket becomes 2022’s 39.6% bracket.  

Those affected by the new rate will also see fewer deductions in the tax code today than previously, making their effective tax rate higher. It also appears that all ordinary income brackets are indexed for inflation, except the top brackets of $400,000 for single filers and $450,000 for married filing joint. 

The top long term capital gains rate is also set to increase 5%, from today’s 20% to a new 25%, again impacting lower income thresholds of $400,000 for single filers and $450,000 for married filing joint. The cherry on top would still be the 3.8% Medicare surcharge that some filers are already accustomed to. 

The proposed long term capital gains rate changes leaves little room for planning, as Congress isn’t waiting until the start of the new year. Rather, increased rates would be retroactive to September 14, 2021. If you sold appreciated securities prior to this date, the top rate would be 20%. A day later, you’ll pay an additional 5%. It’s also likely that year-end capital gains distributions from mutual funds and ETFs will be taxed under the new rates.

You may be thinking what we’re thinking – thank goodness we’re not tax planning software coders right now. 

What strategies, if any, can you employ if these bumps apply to you? High earners may want to accelerate ordinary income in 2021, prior to the rates increasing. The folks that would most likely benefit the most from this strategy fall into the compressed brackets, where they would move from 35% to 39.6% in 2022, instead of 35% to 37% in 2021. 

Additionally, high earners who are charitably inclined could consider postponing charitable donations to next year, when the associated tax deduction would be more beneficial.

 

Elimination of Backdoor Roths

A previously little-known strategy high income earners have used for years is likely on the chopping block, beginning in the new year. 

Earners who exceed income limitations for contributing directly to a Roth IRA have an alternative route: open a traditional IRA, make a $6,000 contribution (if under age 50), and convert it to a Roth IRA shortly thereafter. In doing so, there is likely little tax on the conversion, and it allows the money to grow tax free in a Roth. 

There’s more. In what’s often referred to as a “mega-backdoor” conversion, participants in 401(k) plans that allow after-tax contributions have been able to sock away as much as $58,000 a year into a 401(k) and then convert a good portion to a tax-free Roth account. 

Not anymore. The legislation would prohibit conversions of after-tax dollars in retirement accounts, including IRAs and 401(k)s. 

The upshot? If it’s been a part of your financial plan to date, then do it while you still can. A word of caution: it can get tricky, so it’s best to work with a planner or tax professional.  

 

Estate Tax Exemption 

Roughly four years ago, the estate and gift tax exemption was doubled and indexed for inflation, bumping this year’s exemption to $11.7 million. The proposed bill reduces the exemption back to about $6 million for 2022, again indexed for inflation. The top estate tax rate remains at 40%. 

What hasn’t found its way into the bill yet is an elimination of the step-up in basis at death, benefiting people well below the 1 percent. Think of grandma or grandpa passing away, leaving you with a home they bought for $100,000 that’s now worth $1,000,000. Without a step-up in basis, you could be looking at hundreds of thousands of dollars subject to capital gains tax.  

Estate planners have been busy helping affected clients use this year’s $11.7 million exemption to give money to heirs without fear it will be clawed back, as well as addressing additional proposals to clamp down on various types of grantor trusts. 

Before rushing to make drastic changes to your estate plan or irrevocable gifts to family members before rules potentially change, it’s important to ask yourself if these moves align with your long term intentions or are worth the increased complexity and cost.

 

Extension of Child Tax Credit 

Under proposed legislation, the current expanded Child Tax Credit is extended through 2025. 

For many families, these prepayments could trigger additional tax owed come next spring. They are based on your most recent tax return, which for many is 2020. If your income has risen this year or you have other applicable changes, you may have to pay back some or all of the prepayments. 

 

Uplevel Can Help

While much still remains unclear, chances are likely lower tax rates, in addition to some popular tax loopholes, are coming to an end. Uplevel can help you navigate the new rules and work with your tax and estate planning professionals to make adjustments to your plans. 

We’ve already gotten to work, proactively contacting clients who are affected. We’re here to help.