Friday, May 31, 2013

A "How To" Estate Plan for Your Digital Assets

The last two posts introduced what digital assets are, the importance of planning for them, as well as some obstacles that exist.  Please take a moment to read them HERE.  In this final post we will explore a few solutions that have been developed to help with planning for digital assets.

“After you pass away, the everyday things in your life will become significant to your friends and family.  No matter how simple, your digital content is no exception; in many respects, it may become even more valuable.”  Evan Carroll, Your Digital Afterlife.  We know that planning for digital assets is important.  Now how do we do it?  While there is no single answer, a combination of options may help.

The very first step is compiling a list of all websites where accounts are held.  For each website, read the terms of use or find out how each website handles the account and the data within it upon death.  Do they let you choose who can access the account?  What documentation is required to grant access to an heir?

Second, research the laws in your state.  Are there any existing laws governing digital assets?  If there are, do they cover access to any digital account AND access to any digital assets held within the account.  If no laws exist, speak to legislators in your state to voice concern. 

Estate planning attorneys can also be an asset.  Visit with your estate planning attorney about including language in your last will and testament to express your desires about management of your digital assets.  Do you want the executor to also handle access to your digital accounts and digital assets?  Do you want to leave a memorandum with instructions for digital assets and their access, handling, distribution and disposition?

Services and technology solutions have been introduced to try to address this growing area of need.  There are programs for the purpose of storing usernames, passwords, and other documents in an encrypted format.  Some of them are strictly for the purpose of making a record of all accounts and access to each that cannot be used during life.  Upon receipt of a death certificate they will release all information to the authorized individual. 

“In its simplest form, a digital legacy is a summation of the digital assets you leave behind for others.  As the shift to digital continues, the digital assets left behind will become a greater part of your overall legacy.”  Evan Carroll, Your Digital Afterlife.  A complete plan uses several of these options in conjunction.  Visit with loved ones, your financial advisor and your estate planning attorney to begin developing a plan to ensure that your digital legacy continues—your way. 

Friday, May 24, 2013

How important are your digital assets to you?

In the last post we explored what digital assets are and how important they are in day to day life.  If you would like a refresher you can view that blog post here.

Now that we know what digital assets are, how is management of digital assets different than the management of the account?  An account is just a shell to house content.  It is not necessarily the account that is valuable—it is the content within the account that may be worth having and planning for. 

In the example where email is the hub of all online account activity, the actual account is a compilation of information needed in order to operate different aspects of our finances, volunteer activities, work, friends, relatives, clubs and organizations, travel, online purchasing, banking etc.  It is the actual emails are digital assets that hold value to us. 

The following are issues in planning for digital assets as identified by Evan Carroll with website The Digital Beyond.
  1. Awareness—Do heirs know about the digital account and how to find it?
  2.  Access—Do heirs have the appropriate credentials or means to access the account?
  3.  Ownership—Who owns the data inside accounts?
  4.  Rights—Do heirs have the right to take control of or access the account?

Different rules surround how accounts and the digital assets within them are treated upon death.  Consideration should be given to the laws in your state, the terms of service that govern each account (and what state they are governed by), what is desired as far as an estate plan and the solutions available to ensure these assets pass in the best most efficient way possible.

Difficulties that come up:
  1.   Legally the basic rights of privacy expire at death.
  2.  Laws on estate planning for digital assets vary from state to state.  There is no uniform treatment of these assets upon death.
  3. As a relatively new planning topic, many states including Texas have NO laws on the treatment of digital assets upon death.  As of April, less than half of the states have laws (or proposed laws) in place for the management of digital assets. –Evan Carroll, The Digital Beyond
  4. The laws in your state may differ from the laws that govern the terms of service for accounts.  Which laws prevail?

Once again I’ve presented several ideas to get the wheels spinning.  Stay tuned for the next blog which will explore options to help address some of the issues introduced today. 

Friday, May 17, 2013

Estate Planning for Digital Assets Poses Some Questions

Over this three post session I’ll venture into a topic that most of us are familiar with but probably not prepared for.  We all use technology in various ways.  Some of us are more active using online resources than others.  Have you stopped to consider what will happen to your digital assets upon your death?

First, what are digital assets?  Evan Carroll, author of Your Digital Afterlife writes:

“Email, photos, videos, Facebook accounts—they’re the elements of your new digital life.  In fact, almost without realizing it, we have shifted toward an all-digital culture.  Future heirlooms like family photos, home movies, and personal letters are now created and stored in digital form.  And increasingly they’re stored online at popular sites that might not be accessible to your loved ones after you pass away.”

In a recent presentation at the National Association of Personal Financial Advisors (NAPFA) conference Mr. Carroll describes four different types of digital assets that should be considered.

  1. Contents of computers and devices such as desktop computers, laptops, tablets, mobile phones and other similar devices.
  2. Email including incoming mail, stored mail and sent mail.
  3. Social networking and websites like Facebook, Twitter, Flickr, Pinterest, LinkedIn and others.
  4. Online business and account management.  This could include sites such as eBay, Etsy, blogs, advertising, PayPal, online banking and bill payment services.
Do digital assets have value?  Think about email in particular.  How much of your day to day routine involves email in one way or another?  All online accounts use email as a hub for management of your account.  I receive bank statements and ebills, reminders from the bank, reminders of service from the exterminator, emails from the kids teachers and principals, password reset requests, order confirmations and travel itineraries to name a few.  Not to mention all of the personal interactions with friends, relatives, volunteer organizations and clubs the kids are involved in.  What would happen to all of these things upon my death?  Is my spouse completely prepared to take over the daily management of our lives in my absence without access to all of these digital assets?  Unfortunately the answer for me is no.  I suspect the answer may be the same for many of you.

The issue is even more imperative if you are one of the many entrepreneurs who operate a small business through sites like Etsy, eBay or others.  Is there someone who knows how to wrap up your business dealings?  How would you access the business records held as part of the history of these online accounts?

Each site has a “terms of use” section with details about how the account is handled should a death occur.  How would a person navigate the requirements of each account when they all differ slightly in what is required upon death and what they will provide?

Basically I have asked a lot of questions and offered few answers.  I will be exploring different options in future posts.  Stay tuned…

Monday, May 6, 2013

Income Taxes—The American Taxpayer Relief Act of 2012

The American Taxpayer Relief Act of 2012 extended the Bush era tax rates for most taxpayers and extended many expiring tax provisions for another year. However, it did make some permanent revisions that provide at least some clarity for future planning. One must always keep the national congressional idea of “permanent” in mind though (everything is subject to change). As with most tax laws, the net effect was an increase in the taxes paid to the government; our planning job is to assist our clients in minimizing the impact in the future.

 First, a broad over view of the changes:
  • Reduces the tax benefit of itemized deductions and personal exemptions for higher income tax payers. This phase-out applies to individual taxpayers with more than $250K in AGI ($300K for couples). Taxpayers will lose $0.03 in deductions for every $1 above those amounts subject to a maximum 80% reduction.
  • Permanently fixes the Alternative Minimum Tax (AMT) by indexing the exemption amount for inflation to prevent a drastic expansion of that tax.
  • Increases the maximum estate and gift tax rate from 35% to 40% but maintains the exemption amount at $5 million (indexed for inflation-$5.25 million in 2013).
  • Extends emergency unemployment benefits for 2013 but the payroll tax holiday is repealed (reverts to 6.2% from 4.2%) which impacts all wage earners.
  • Continues the tax free treatment of municipal bond interest.
  • Ordinary income tax rates will rise for taxpayers with taxable income above $400K ($450K for couples). Such taxpayers will face a marginal tax rate of 39.6%.
  • Taxpayers at the higher ordinary income tax bracket levels will face a higher tax on capital gains and dividends—20%. Taxpayers in the first two tax brackets will have a 0% tax rate and other brackets below the thresholds will have a 15% tax rate.
There were some tax preference items that were extended:
  • For retirement accounts:
  1. Tax free IRA required minimum distributions made to a qualified charity were extended for 2013.
  2. In-plan conversions of traditional 401(k) assets to designated Roth accounts expanded.
  • For college education:
  1. American Opportunity Tax Credit of up to $2500 was extended for 5 years.
  2. Coverdell savings accounts permanently extended ($2000 contribution used for K-12 expenses)
  3. Tuition related expense deduction (up to $4000) extended for 1 year.
  4. Student loan interest ($2500 max) made permanent.
These are only part of the total tax burdens we will be facing. Health care taxes will be increased and the estate/gift tax warrant further discussion—both to be done in another blog. For now, the best planning tool—stay below the income thresholds if possible. As usual, please feel free to call us at Paragon Financial Advisors if you have questions on your particular situation.

We are not accountants and urge you to verify any items we discuss with your tax professional to determine the implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well being. It is in that spirit that we discuss the Congressional resolution (enacted at the last minute) to the fiscal cliff.



Thursday, May 2, 2013

Taxes-Long Term Outlook

We at Paragon Financial Advisors are not accountants and urge you to verify any items we discuss with your tax professional to determine its implications in your particular situation. We also do not believe you should “let the tax tail wag the investment dog.” That is, your investing should not be dependent solely on tax considerations. However, tax consequences certainly should be considered when all other things are equal. Taxes can have a significant impact on your total economic well-being. It is in that spirit that we discuss the Congressional resolution (enacted at the last minute) to the fiscal cliff.

There are many items available for discussion in our current fiscal situation. However, there are two specific facts that cannot be ignored: 1) 2012 marked the fourth consecutive year that our federal budget deficit exceeded $1 trillion, and 2) the majority of our federal spending as currently structured is non-discretionary. In fact, our spending (by type as a percent of total spending) for 2012 is estimated as follows (source: Congressional Budget Office, Monthly Budget Review, September 2012):

Mandatory: 65%
  • Social Security-21%
  • Medicare-13%
  • Medicaid-7%
  • Interest on the national debt-6%
  • Other (veteran’s benefits, retirement benefits for gov’t employees, unemployment compensation, etc.)-18%

Discretionary: 35%
  • Defense-19%
  • Non-Defense-16%

The most widely discussed solutions to our deficit problem seem to be centered around either, or a combination of, tax increases (reform) and/or spending reductions. The spending reductions could involve cuts in discretionary spending or entitlement reform. Since social security is the largest component of spending, potential reform in that area could include (but is not limited to) the following:
  • Increase the taxable wage base (i.e. the amount on which social security taxes are collected—a maximum of $113,700 for 2013).
  • Increase the retirement age eligibility for younger workers.
  • Make changes in the cost of living adjustment (COLA) formula for benefit increases.
  • Means testing—i.e. reduce the benefits for higher income recipients.

Tax reform could include such items as follows:
  • Changing tax brackets (perhaps fewer) with elimination of tax deductible items.
  • Taxing newly issued municipal securities.
  • Capital gains and dividend income being taxed at ordinary income rates.
  • Elimination or reduction in tax preference items or deductible items. Listed below—in order of impact-- are the items that would have the greatest impact on tax revenues in the 2011-2015 time frame (source: Joint Committee on Taxation, January, 2012):
  1. Taxing employer provided health care plans. 
  2. Taxing contributions to defined contribution (DC- i.e. 401(k), 403(b), etc.) plans and IRA’s. 
  3. Eliminating the mortgage interest deductions.
  4. Eliminating the lower tax rates on dividends and capital gains. 
  5. Eliminating the earned income tax credit (EITC).
  6. Taxing contributions to defined benefit (DB) pension plans. 
  7. Eliminating the step up in basis allowed on assets for capital gains taxation. 
  8. Eliminating the deduction for state/local income tax or state sales tax.
  9. Eliminate the deductibility of charitable contributions. 
  10. Tax interest income from municipal bonds.
By examining the above list, you can begin to see where legislators might begin to look in terms of adding additional tax revenue. With that in mind, you, the investor, can begin to take steps that would benefit your economic well-being in the future. As always, we here at Paragon Financial Advisors are here to help you in that planning.