Estate Planning for Special Assets
A discussion of the unique issues to be considered when a client’s estate planning goes beyond conventional assets such as a home, bank accounts and business interests, but also includes things like works of art, private planes and cryptocurrencies.
What happens when a client’s estate planning goes beyond conventional assets such as a home, financial accounts and business interests, but also includes prized works of art, gold bars or a private plane? How about, especially in recent years, crypto assets that exist digitally but not physically? How do we treat assets that may be or have been illegal to own, like ivory or ancient artifacts?
To a great extent, “special” assets undergo the same legal analysis as conventional assets, whereby we ask the clients: who should inherit these assets (their children, institutions or charities, etc.); whether any conditions should apply (e.g., specific ages of inheritance; life estates retained by the grantor), and what are the values of the assets for estate tax considerations?
Special assets, however, also have their own special considerations, such as: How does the heir physically take possession of a wall-size, exceedingly expensive Rothko? What if the beneficiary of millions of dollars worth of bitcoin lacks an understanding of crypto currencies? Is it better for the executor or trustee to sell the yacht for cash and distribute the cash, rather than giving the yacht to a beneficiary who lives far from the water?
Art requires specific considerations, such as provenance, proper storage, transportation and insurance. Legal assistance is often advisable when the art is displayed at a gallery or sold at auction or private sale, all of which should be subject to the appropriate contractual terms. It is essential to consider the tax implications; for example, whether regular income tax, special taxes on collectibles or capital gains taxes are due, as well as the party responsible for paying those taxes.
Decedents often leave behind valuable wine collections, and beneficiaries may not have any interest in wine or maintaining the cellar. One way to deal with this is for the client’s estate documents to name an advisor to the trustee or executor, someone who knows about wine and can assist the executor or trustee with obtaining valuations of the collection and liaise with auction houses and other potential buyers for the collection. The trust document or will should, of course, give the trustee or executor authority to work with the advisor. This applies to not only wine, but art and other collections.
In recent years, digital assets such as cryptocurrencies and digital tokens often constitute a sizeable component of people’s estates. Estate planning for crypto assets has an entirely new set of issues: Where is the crypto located, on an exchange or private wallet or in “cold storage”? How will the trustee or executor know where the crypto is located, since many crypto custodians do not provide 1099s or the equivalent? How will the trustee or executor get the private keys to access the crypto? Should the client consider a specialized, professional trustee or custodian who has experience with digital assets and can provide the heightened security to prevent hacking and digital theft?
Further, the client’s estate documents should specifically authorize the executor or trustee to access and manage digital assets and comply with digital privacy laws and the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA).
Will or Trust?
Special assets usually are better suited to trusts. Wills have to go through the probate process which involves lawyers, courts, delays and public scrutiny of the estate documents and the assets of the estate. Probate also provides a venue for a challenge to the will and its terms. Trusts avoid probate because assets are transferred to the trust during the client’s life. After the client has passed away, the trust has a continuing duration of its own.
By settling trusts, people with significant assets usually avoid public disclosure and potential estate challenges. Trusts also allow a trustee immediate access to trust assets (including for faster distributions) without having to wait for a probate court to certify a trustee and allow access. Trusts can also provide better asset protection for trust assets and claims against trust beneficiaries.
Estate Tax Considerations
Both conventional and special assets require an assessment of potential estate tax liabilities. The current exemption from the estate tax ($12 million per person, federally, through 2025) applies to a decedent’s overall estate at death, comprised of both conventional and non-conventional assets. If a client’s potential estate exceeds this value, then estate planning counsel should consider estate tax minimization strategies.
Art, for example, which often has sizeable unrealized appreciation, may be contributed to a Charitable Remainder Trust or to a foundation, which would remove the value of the art from the client’s estate (as well as avoid capital gains tax if the client were to sell the art). The client may name the charitable beneficiary/ies and receive a current tax deduction for the present value of the future charitable gift.
Another strategy is for the client to contribute a special asset to a Family Limited Partnership (FLP) and then transfer limited partnership (LP) interests to the client’s beneficiaries by gift during the client’s life, or by testamentary instrument at the client’s death. The IRS recognizes a discounted value for LP interests, because limited interests offer no control and are not freely marketable.
Thus, a transfer of discounted LP interests essentially leverages the transfer so that more value escapes estate tax. In addition, the client can remain the general partner during his or her life and thus enjoy control over the asset, as well as keep it within the family at death. Finally, there are some states where FLPs provide excellent asset protection from creditors of the partners.
We utilized FLPs for a client whose special assets included a fleet of dozens of luxury cars including a Lamborghini, a few Ferraris and, his special interest, several old Porsches. If there was ever a traffic accident, the FLP would provide asset protection by segregating the high-liability cars from the client’s other valuable assets. The client transferred LP interests to his children using leveraged discounts and moved more value out of the reach of the estate tax. FLPs are particularly effective for family businesses and succession planning, as well as for private planes.
The grantees of the special assets will need to know the tax basis of their new property. Recipients of lifetime gifts get the assets with a “carryover” basis, i.e., the grantor’s tax basis carries over and becomes the same basis of the grantee. Recipients of testamentary transfers get a “step up” in basis to the value of the asset at the date of death of the grantor.
Thus, testamentary gifts often avoid tax on the built-in appreciation, since the tax basis is re-set to the current value at the date of death. Essentially, the inherited Rothko can be sold immediately, with no income tax due.
Special Questions for Special Assets
What if a beneficiary does not want a special asset? Often, the interests of the parent do not reach the next generation. A client with a valuable collection of chess sets, for example, may not have children who share the same affinity for chess, not to mention the storage space needed to maintain the collection. This client might consider whether a museum or other institution may provide a better home for the collection, along with a tax deduction for the gift.
As in the case where a parent leaves behind a valuable business, but not children who wish to continue the business, a trustee could be empowered to hire professionals to continue to manage the business (or the special asset). If the asset is income-producing, the trust could provide a stream of distributions to beneficiaries who need not play an active role. The trustee could also be instructed to sell the asset and distribute the proceeds to the client’s beneficiaries.
An additional consideration: If a client has multiple beneficiaries, can the asset be divided, or must it be sold? If the asset can’t be divided, do the estate documents discuss equalization, so that the client’s son, for example, gets the plane (or the FLP that owns the plane) and the client’s daughter gets the cash value of the plane?
What if the assets are or may have been illegal? For example, it is not uncommon for US clients to be named as successor beneficiaries of foreign bank accounts that have not been declared to the IRS and state tax authorities. This requires specialized legal advice and consideration of issues such as source of funds and whether taxes were paid on these assets.
If taxes were not paid, there may be transferee liability for the unpaid taxes. This may require consultation with criminal tax counsel and consideration of whether a voluntary disclosure to the IRS would be appropriate. Items like ivory, which are illegal or heavily regulated in trade, may be inherited, but the transportation and later sale of the ivory must comply with many laws and regulations.
Special assets require special consideration by estate planning attorneys. Special assets also allow us to have some fun amidst traditional and more ordinary estate planning.
Asher Rubinstein is a partner in the New York offices of Gallet Dreyer & Berkey.