One of the initial tasks of my engagements as a professional fiduciary is to "marshal the assets" of my clients.  That means finding all the bank accounts, insurance policies, investments, real estate, credit cards, etc. that are held by my clients.  Some of those assets may be held in a trust.  Some may be held in a deceased spouse's name.  Some provide statements, some do not.  It can take months, even years, to find everything.  And even then, there's some lingering doubt that we've found everything.  It's a kind of forensic accounting scavenger hunt (the most boring kind of scavenger hunt).

Some of these accounts are so small that the cost of finding them, contacting the financial institution, generating the required documentation and consolidating the funds can outweigh the value of the asset.  But they legally have to be hunted down, consolidated and treated as part of the trust's assets in any case.

One of the process improvements I've implemented in the last few years is to work with my older clients to "tidy up" their financial lives.  This not only makes things easier in the short run, in terms of documentation for taxes and keeping track of of all the accounts, but it makes it much easier when it is time to execute the terms of the trust.  It lowers costs for everyone involved and reduces the chances of errors and omissions.

What does "tidying up" mean in practice?  It might be helpful to go through the list below:

• Create a list of all financial accounts and assets.  
• Add any pertinent information:
• Contact information for the institution
• Account numbers
• Name of any person that you worked with at the institution
• Rough estimate of value
• Username and password (this should be kept separate from the information above)
• Identify assets and accounts that are not providing value as a separate asset.  Some of these may be left over from a previous employment or from an investment that made sense at the time and that you simply haven't had the time to unwind.
• Consolidate these assets into the most appropriate accounts (take into account the tax implications of selling appreciated assets).  The goal is to reduce the overall number of accounts and assets.

If you or your client has been lucky enough to have accumulated some wealth AND are in a situation where you are in a high-income tax bracket at the moment, you may want to investigate Donor-Advised Funds (DAFs).  They offer a way to donate to the charitable causes of your choice while taking advantage of immediate tax deductions.  A DAF is simply a private fund administered by a third party and created to manage charitable donations on behalf of an organization, a family, or an individual.  The graphic below may help.

My clients have a wide range of concerns about their estates but one of the most common is what will happen to family heirlooms (or any items of sentimental value).  They want to pass those precious items down to future generations and they don't want their heirs to fight over them.  

Fairly dividing items of high emotional value is tricky.  It is made even more complex by family dynamics and shifting memories ("Mom said I could have it because I reminded her of Aunt Mary!").  There are a few tricks to getting through the process as painlessly and fairly as possible, as long as everyone agrees to certain ground rules.  

Decide Who Gets What, Then Write it Down

The cleanest approach is to make these decisions with a clear head long before any crisis.  Inventory the most important items, list them and clearly note who is to get what.  You don't need to justify or explain your decisions - that can lead to unintended hurt.  Once you have gone through that process, share the list with your heirs.  Your decisions may cause some awkward conversations but far better to do it when everyone is in a stable place than surprising somebody after your death, when they will be emotionally fragile.

Appoint an Independent Trustee

Even with your best intentions, there will likely be some items that are not listed (perhaps you didn't realize the attachment your heirs have to an item or you simply left it off the list).  In that case, it's best to have somebody as objective as possible to adjudicate the distribution of items.  If you have a professional trustee, it is typically that person.  Or it can be a family member or friend who is not part of the group receiving the heirlooms.

Put a Process in Place (and Stick to It)

There are a couple of classic processes that professional fiduciaries use to fairly divide items that have not been specifically designated by their clients for one of their heirs.  They aren't fancy by design and sometimes look like playground techniques for choosing teams, but they tend to work better than more complex schemes.

Pick Out of Hat

Simply inventory all the items and write them down on slips of paper.  You can put them all in the hat at the same time, or roughly categorize them into groups of equal value and have several drawings.  Each heir pulls from the hat and the trustee keeps track of who drew what in a master list.  In some versions, heirs can "trade" heirlooms to accommodate the different values that they may place on the items.

Round Robin (or Draft)

In this version, heirs draw numbers from a hat to determine their picking order.  Then each heir, choosing in order, selects the heirloom of their choice until all of the items are chosen.  A slight variation is for the draft order to "snake."  That is, the last picker gets to choose twice, then it goes to next-to-last and then backwards through the list.  For example, the first three rounds for a group of four heirs would look like this:

First >> Second >> Third >> Fourth

Fourth >> Third >> Second >> First

First >> Second >> Third >> Fourth

Auction

Assign each heir a set number of points (for example, 1,000 pts).  Then present each item and have each heir provide a sealed bid (that is, not public) for that item.  This is somewhat more complex and prone to problems, but has the advantage of allowing each heir to independently value each item.  For example, perhaps Mom's pearl necklace is worth lot to one daughter, while the other daughter places more value on Mom's handwritten recipe book.  This method removes some of the luck element of the other methods and allows each daughter to bid what each item is worth to her.

No matter which method you choose, the most important thing is to be transparent and clear.  Nobody should feel like they have been left out or didn't know what was going on.  Overcommunication and inclusivity are your friends in this process.

Tax attorneys and accountants love their acronyms.  Some seem deliberately designed to confuse the rest of us.  For example, QTIP trusts.  They have nothing to do with ear cleaning or model airplane construction.  QTIP stands for Qualified Terminable Interest Property and a QTIP trust is simply an instrument designed to pass on property (in a limited way) to a surviving spouse without triggering the Federal Gift Tax.  The recipient spouse has an income interest in the trust and does not have a power of appointment over the principal.  Upon the recipient spouse's death, the principal is included in his or her estate for estate tax purposes.

Why would someone want to set up a QTIP trust?  The most common situation is when the grantor (or creator of the trust) wants to provide a home (and any income deriving from the home) for a surviving spouse during that spouse's lifetime, but wants to direct the final gift of the property upon the death of the spouse.   QTIPs are often employed for second or third marriages, when the owner of the property wants to provide for the current spouse but wants the property to ultimately go to one or more of the children from the earlier marriage(s).  But there are other scenarios, as well, including leaving the remaining principal in the property to a charity or somebody else altogether.

Those of us who help older clients (or who simply have older relatives for whom we care) know that the amount of work and the number of skills needed to do it well can be overwhelming.  No one person, no matter how brilliant or well-intentioned, can do it alone.  It requires a team of specialists and family members, all working together to make sure that the client has the highest possible quality of life and, after death, that their beneficiaries receive all to which they are entitled.

I recently had a conversation with a very experienced fiduciary and she told me that much of her value is her extensive network of other professionals, all of whom she has validated over the years.  Her database of contacts allows her to quickly solve problems with trusted providers.  Most family members, if asked to manage care or the estate at short notice, would waste a tremendous amount of time simply sourcing these services (and relying on Yelp, Google, Nextdoor or word of mouth for a quality assessment).  Think about it - do you know a quality person for each of the roles below?

The list below doesn't cover every possible role - just those that come up the most frequently.  You can easily imagine situations that would require even more narrow specializations.  A good fiduciary can help you navigate this difficult transition with a minimum amount of work, stress and expense, while providing confidence that tasks are being handled professionally and ethically.  

Medical and Personal Care

Family members

Care manager

Homecare provider

Housekeeper

Assisted Living Facility staff

Medical team (including doctors, dentist, ophthalmologist, therapists, audiologist, etc.)

Finance and Legal

Estate attorney

Licensed professional fiduciary (to build and coordinate with all the rest of the team)

Other attorneys (litigation, small business, family law)

Daily Money Manager (to pay bills, move money, etc.)

Tax advisor

Bank

Investment advisor

Court employees

Real Estate

Real Estate Agent

    Title Company

    Staging company

Contractor

Tradespeople (plumber, electrician, etc.)

Moving company

Junk removal

Housecleaner

Landscaper

Estate seller (furniture, art, collectables, etc.)

Property Manager (for rental property)

Other

Auto mechanic

Family mediator or arbiter (to resolve any disputes if the team above cannot)

Cryptocurrencies have been around long enough to begin showing up in unexpected places.  For example, the investment portfolios of people who don't really fit the "crypto bro (or sis)" stereotype.  Amateur investors, tempted by the stories of incredible returns, are starting to include some bets on this volatile asset.  The Super Bowl this year featured multiple ads for cryptocurrency trading platforms.  While it's unclear how many Super Bowl viewers are going to actually download the apps and buy, it's clear that this market is here to stay, at least for the immediate future.

So, some portfolios will include cryptocurrencies.  And some of those portfolios will be included in a trust.  And some of those trusts will end up under the management of a successor Trustee.  What is the right way to handle these assets under these circumstances?

The key thing to remember is that the Settlor (or originator of the revocable Trust) is free to manage her money based on her own risk tolerance.  If she wants to allocate some portion to cryptocurrency, she's completely entitled to do so.  She can invest in gold coins, alpacas, Las Vegas real estate.....anything she likes.  It's her money.

But upon her death or incapacity and the passing of the irrevocable trust to a Successor Trustee, the rules change.  A Successor Trustee is bound by the Uniform Prudent Investor Act, which is an actual thing and not something I just made up (California Probate Code 16045-16054).  The Act specifically requires a Trustee to review the investments within a "reasonable" time after accepting the Trust and then invest and manage Trust assets “as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.”  Moreover, it requires investments that take into account the needs of the entire Trust and beneficiaries, not those of the Settlor.

What does that mean?  A simple rule of thumb is that investments within the Trust should be defensible when standing in front of beneficiaries or a judge.  And judges, in particular, take a dim view of speculative investments.  

Take a look at the two charts below.  The first is for the Standard & Poor's 500 Index, the second is for Bitcoin pricing.  Both are for the past year.

Standard and Poor's 500 Index

                                                                                 Bitcoin Price

The thing is, assets within the Trust will need to be distributed eventually.  And since the Trustee does not know the exact timing of the distribution, volatility (that is, wild swings in daily prices) are risky.  You might get lucky.  Maybe the liquidation date falls on an upswing.  But you might hit a dip in the pricing and then you're stuck explaining why the beneficiaries got less than they expected.

Because of the extreme volatility of cryptocurrency assets, the most reasonable approach when taking over a trust that includes these assets is to convert them into a more balanced blend of equity and debt instruments early in the process and to document your approach in order to answer any future questions.  You might miss out on some upside, but the downsides of holding such a volatile investment outweigh any potential gains.

Sooner or later, professional trustees and probate referees will come across an estate with cryptocurrency assets.  These assets pose some challenges, not least of which is understanding the mechanics of how to buy, sell and value them.  The infrastructure around cryptocurrencies is not as developed as that for other assets (such as bank and investment accounts).  That means that documenting and accounting for cryptocurrencies involves some research.  

In the beginning of the cryptocurrency boom, investors needed some technological sophistication.  For example, with Bitcoin, one of the earliest cryptocurrencies, an investor would hold their private key in a Bitcoin "wallet."  That digital wallet would then need to be stored in a very safe place.  The news was rife at the time with stories about Bitcoin investors who lost their wallets and, consequently, all of their wildly-inflated Bitcoin fortunes.

These days, most investors go onto an exchange to buy and sell cryptocurrencies.  There are a lot of different models for these exchanges but, for the most part, individual investors create an account and the exchange manages the digital security and holds the digital wallet. The account is linkable to an individual and is typically accessed like any other account (username, password, two-factor authentication, etc.).  These exchanges are helpful to trustees and probate referees, since they operate similarly to other types of brokerage accounts (that is, they are a third party managing the funds and can be worked with just as any other financial institution).  They should work with the trustee given the appropriate documentation or court order.  The largest of these centralized exchanges are Binax and Coinbase Exchange.

There are more sophisticated trading models for hedge funds, institutional investors and very sophisticated individual investors.  If you come across one of these, your best approach is to find a financial professional with experience in these types of exchanges.  The same is true if the estate contains cryptocurrency assets that were purchased directly or held since the early days.  There are more than 1,500 cryptocurrencies and many of them are not traded on the exchanges.  These assets require special expertise and careful research to manage properly.

In terms of historical valuation of cryptocurrencies (necessary to establish value at the beginning of the accounting period), there are a lot of data sources.  For this purpose, I find that CoinMarketCap is a useful resource.  For example, here is the daily price information for Bitcoin.  There are other sources of data that are designed for investors, with hourly data and attached metadata.  These are usually accessed through APIs for modeling - for the purposes of trustees, they are confusing and overkill.

Th cryptocurrency market is evolving rapidly and the good news (for trustees and probate referees) is that as it becomes more widely established and accessed by non-technical investors, institutions and infrastructure are developing that will make it simpler to manage within an estate.

Additional Articles

I am beginning to see more and more requests from fellow fiduciaries, estate attorneys and accountants for help with trusts and estates that hold cryptocurrencies as part of their portfolio.  There are very real questions about valuation, liquidity, transaction costs and risk.  Some of those questions are not yet fully worked out in the courts, but a basic understanding of cryptocurrencies and how they work may help.

There is a lot of ground to cover, so I'm going to break this into three posts:

• A basic primer on cryptocurrencies and how they work (this post)
• The mechanics of how to buy, sell and store cryptocurrencies
  
• The role of cryptocurrencies in a trust portfolio
  

Most of us have heard of Bitcoin and Ethereum, but they are just the largest of cryptocurrencies.  There are anywhere between 6,000 and 15,000 different cryptocurrencies (depending on how you count them), which is an indication of both how easy it is to create a cryptocurrency and how little most of them are used.  As of December 2021, all cryptocurrencies combined are worth an estimated $2.3 trillion.  That's a lot of money and it is beginning to show up in trusts and estates where you might not expect.  That presents a challenge for trust administrators who need to professionally manage these assets.

As I write this, Congress and the Biden administration are wrestling over the massive Build Back Better Act.  The bill (H.R. 5376) has gone through multiple revisions as various factions weigh in.  At one point, it contained a number of changes to current law to fund some of the goals of the Biden administration.  These changes included, at one point or another, some mix of the following:

• Reducing the amount that individuals could gift during lifetime or bequeath at death before application of federal transfer taxes
• Eliminating the so-called “step up” in basis that occurs at death and enables those inheriting assets to avoid tax on the capital gains accruing during a decedent’s lifetime
• Taxing capital gains at death or sooner without need for a sale of assets

Understandably, estate planning professionals and clients concerned about passing down wealth with a minimum of taxes have been scrambling to think of ways to adjust plans to account for these changes.  However, as of today (and this could certainly change) the Build Back Better Act (H.R. 5376) contains no modifications to the estate and gift tax exclusion amount or the basis step up rules.  That is good news for all of the carefully planned trusts that currently exist out there.

But there are a number of caveats to this good news.  The first, of course, is that Congress could change its mind and re-insert changes in the final bill.  The second is that the current state of affairs was always meant to be temporary.  The current $11.7M estate and gift tax exclusion was provided under a temporary law under the Trump Administration. Even without any act of Congress, the exclusion will be cut by about half effective January 1, 2026.  Amounts in excess of the exclusion (probably about $6.5M indexed to inflation) will be taxed at the highest federal rate of 40%.  

In addition, trust income will be subject to the "Millionaire's Tax" in the Build Back Better Act.  The proposal is that there will be a 5% tax surcharge on income over $200,000 and an additional 3% on income over $500,000.  These income limits are substantially lower than those for non-trust income.

Because of the chance that both the estate and gift tax exclusion will revert to the lower amounts in 2026 and that the trust income tax surcharges will take effect, estate planners are starting to look at re-structuring estate plans (particularly those for estates of more than $6.5M) to solve for the new tax situation.  Trusts such as an A/B (or C) trust, which splits the original revocable trust into two trusts upon death (thereby lowering the amount of each trust below the new limit) might become popular again.  They have restrictions and can be complex and difficult to manage, but the tax savings can be substantial.  I will outline the specifics of A/B (C) trusts in a later blog post.

The upshot of all the above is that, if you are fortunate enough to have an estate that you project to be more than $6.5M (which is, admittedly, a bit of a champagne problem) you should be actively working with an estate planner who is tracking these changes and has a strategy for adjusting your plan to compensate.  It is also a good idea to think about who you will use as a trustee - most non-professionals are not able to manage the complexities of administering these trusts.

California Proposition 19 was passed in 2020 and went into effect on February 16, 2021.  It was intended to remedy some of the distortions created by Prop 13 by making it easier for older Californians to move from their low-basis and highly-appreciated properties to other areas of the state without taking a large property tax hit in doing so.  The perceived problem was that older Californians were reluctant to move from their low-basis property in or near urban centers because they didn't want their property taxes to skyrocket.  That created a logjam where retired people were staying in high-cost areas such as the San Francisco Bay Area, Los Angeles, and San Diego, making it difficult for younger workers to purchase in areas with a reasonable commute.  The thinking was that by making it easier for older, retired people who might not need to live near work anymore, they would move to less-congested, lower-cost areas, freeing up housing for younger workers.

All great so far.  But Prop 19 giveth and it taketh away.  In addition to loosening the restrictions on moving while taking the low property taxes with you, the proposition also contained language that make it more costly to pass down property to your heirs.  To simplify considerably, parents are only able to pass down their low tax basis to their children in one scenario: when they pass down their principal residence and the child then lives in the home as their principal residence.  Even in that scenario, properties of more than $1M may be partially or completely reassessed, wiping out part of the low basis property tax benefit.  The math and restrictions can become very complicated.  For example, the child needs to fully occupy the home within one year of the death of the parent.  To avoid reassessment, the value of the home must be less than the factored base year value plus $1 million (indexed for inflation). 

There are some strategies for limiting the tax impact of Prop 19, but they are certainly more limited than before the passing of the bill.  What used to be a fairly straightforward analysis now involves complicated contortions (for example, some attorneys will help high net worth individuals create LLCs as a transfer vehicle, etc.).  Things also get complicated when there are multiple siblings - what is the value of the low cost tax basis in dividing up the estate?  That is, if one sibling moves into the property and gets the tax advantage, how does that impact the equity between the beneficiaries?

Given the complexity of the new law and the untested nature of some of the edge cases, anyone who is planning to pass down property in California, particularly if the property is worth more than $1M , should work with an estate attorney who is intimately familiar with the new conditions.  You may want to revise your trust and will to adjust to the new law and avoid a nasty tax surprise for your heirs.