Who Should I Name as Trustee? – Annapolis and Towson Estate Planning

When a revocable living trust is created, the grantor (person who creates the trust) names a successor trustee, the person who will take charge of the trust when the grantor dies. One of the biggest sticking points in creating a trust is often selecting a successor trustee. A recent article, “Be careful when choosing your successor trustee,” from Los Altos Town Crier explains what can go wrong and how to protect your estate.

When the grantor dies, the successor trustee is in charge of determining the value of the trust and distributing assets to named beneficiaries. If there are unclear provisions in the trust, the trustee is required by law, as a fiduciary, to use good judgment and put the interest of the beneficiaries ahead of the trustee’s own interests.

When considering who to name as a successor trustee, you have many options. Just because your first born adult child wants to be in charge does not mean they are the best candidate. You will want to name a reliable, responsible and organized person, who will be able to manage finances, tax reporting and respects the law.

The decision is not always an easy one. The child who lives closest to you may be excellent at caregiving, but not adept at handling finances. The child who lives furthest away may be skilled at handling money, but will they be able to manage their tasks long distance?

A trustee needs to be able to understand what their role is and know when they need the help of an estate planning attorney. Some trusts are complicated and tax reporting is rarely simple. The trustee may need to create a team of professionals, including an estate planning attorney, a CPA and a financial advisor. Someone who thinks they can manage an estate on their own with zero experience in the law or finance may be headed for trouble.

If there are no family members or trusted friends who can serve in this role, it may be best to consider a professional fiduciary to serve as a successor trustee. An estate planning attorney may also serve as a successor trustee.

The next option is a financial institution or trust company. Some banks have trust departments and take on this role, but they often have steep minimums and will only work with estates with significant value. Fees are also likely to be higher than for a professional fiduciary or other professional. Be sure to inquire how they evaluate your needs and ensure quality of care, if you become incapacitated. What processes are in place to protect grantors?

Another alternative is to identify a nonprofit with a pooled trust that accepts trustee responsibilities for individuals with special needs and for others who would prefer to have a nonprofit in this role.

Your estate planning attorney will be able to help you identify the best candidate for this role, as you work through the creation of the trust. Don’t be shy about asking for help with this important matter.

Reference: Los Altos Town Crier (Nov. 17, 2021) “Be careful when choosing your successor trustee”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Do I Prepare a Digital Estate Plan? – Annapolis and Towson Estate Planning

Today there is a new kind of asset class requiring attention when creating or reviewing your estate plan: digital assets. A recent article, titled “Everything you need to know about digital estate planning” from the Daily Herald, describes what needs to happen to protect your digital life.

Let’s start by defining a digital asset. These include social media, email accounts, online subscription services, personal images (photos and videos) stored online, blogs, online businesses, cryptocurrency, websites, web domains, gaming accounts and gambling websites, to name a few.

Signing up for any of these accounts involves a lengthy terms of service agreement (TOSA), which we all scroll past without reading and click “Agree.” What we do not realize is our agreement is a legally-binding contract with the platform or service provider agreeing to whatever terms they have created. Many of these TOSAs include provisions stating when the original owner passes, the company may terminate their account, regardless of the value of the digital property or the wishes of the owner.

Most states have adopted legislation of some kind to address digital assets after the person has passed. Generally speaking, they grant the traditional executor or representative access to digital information. However, here is the problem: the tech companies stand by their contracts. Protection of the original owner’s privacy is often cited as the reason contents cannot be shared with another person. Even if the executor knows the username and password, they may find the account and its content deleted. The executor may only find a small portion of the online information or be accused of committing fraud for logging on using the decedent’s username and password.

Big tech companies take the position, the data and accounts owned by one person. As a result, they have a responsibility to protect the person’s privacy. Therefore, they are not legally permitted to share data or content. The headlines of heirs trying to get family photos or police departments attempting to get evidence represent a tiny portion of the many people trying to access their loved one’s digital property. There are also millions lost in cryptocurrency from actual owners who forget their keys, or owners who never shared information with their heirs about accessing crypto wallets.

What can you do to protect your digital assets?

Appoint a digital executor in your will and provide them with the necessary materials to access your digital assets.

Create a digital asset inventory. There are online programs for this purpose, or you can use paper and pen. If you create a spreadsheet on a computer, you should encrypt it. Otherwise, you can expect it to be hacked and stolen. The only question is when, not if!

Keep the inventory up to date every time you change a password or username.

Decide what you want to happen to each digital asset after your death. Do you want your Facebook account changed to a “memorialized” account for a period of time? Or would you prefer it to be shut down, immediately?

Certain digital platforms have a process for assigning an executor—not many, but some. Find out what the policies are for all of your accounts.

Do not share any digital asset information in your last will. The last will and testament becomes a public document when it is filed in the court. Anyone can gain access to it. Protect it the same way you would protect any major traditional asset.

Talk with your estate planning attorney about your state’s digital assets laws. This is still a relatively new asset class, but one that deserves the same level of protection as other assets.

Reference: Daily Herald (Nov. 10, 2021) “Everything you need to know about digital estate planning”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How to Protect Assets from Medicaid Spend Down? – Annapolis and Towson Estate Planning

Medicaid is not just for poor and low-income seniors. With the right planning, assets can be protected for the next generation, while helping a person become eligible for help with long-term care costs.

Medicaid was created by Congress in 1965 to help with insurance coverage and protect seniors from the costs of medical care, regardless of their income, health status or past medical history, reports Kiplinger in a recent article “How to Restructure Your Assets to Qualify for Medicaid.” Medicaid was a state-managed, means-based program, with broad federal parameters that is run by the individual states. Eligibility criteria, coverage groups, services covered, administration and operating procedures are all managed by each state.

With the increasing cost and need for long-term care, Medicaid has become a life-saver for people who need long-term nursing home care costs and home health care costs not covered by Medicare.

If the household income exceeds your state’s Medicaid eligibility threshold, two commonly used trusts may be used to divert excess income to maintain program eligibility.

QITs, or Qualified Income Trusts. Also known as a “Miller Trust,” income is deposited into this irrevocable trust, which is controlled by a trustee. Restrictions on what the income in the trust may be used for are strict. Both the primary beneficiary and spouse are permitted a “needs allowance,” and the funds may be used for medical care costs and the cost of private health insurance premiums. However, the funds are owned by the trust, not the individual, so they do not count against Medicaid eligibility.

If you qualify as disabled, you may be able to use a Pooled Income Trust. This is another irrevocable trust where your “surplus income” is deposited. Income is pooled together with the income of others. The trust is managed by a non-profit charitable organization, which acts as a trustee and makes monthly disbursements to pay expenses for the individuals participating in the trust. When you die, any remaining funds in the trust are used to help other disabled persons.

Meeting eligibility requirements are complicated and vary from state to state. An estate planning attorney in your state of residence will help guide you through the process, using his or her extensive knowledge of your state’s laws. Mistakes can be costly—and permanent.

For instance, your home’s value (up to a maximum amount) is exempt, as long as you still live there or will be able to return. Otherwise, most states require you to spend down other assets to $2,000 per person or $4,000 per married couple to qualify.

Transferring assets to other people, typically family members, is a risky strategy. There is a five-year look back period and if you have transferred assets, you may not be eligible for five years. If the person you transfer assets to has any personal financial issues, like creditors or divorce, they could lose your property.

Asset Protection Trusts, also known as Medicaid Trusts. You may transfer most or all of your assets into this trust, including your home, and maintain the right to live in your home. Upon your death, assets are transferred to beneficiaries, according to the trust documents.

Right of Spousal Transfers and Refusals. Assets transferred between spouses are not subject to the five-year look back period or any penalties. New York and Florida allow Spousal Refusal, where one spouse can legally refuse to provide support for a spouse, making them immediately eligible for Medicaid. The only hitch? Medicaid has the right to request the healthy spouse to contribute to a spouse who is receiving care but does not always take legal action to recover payment.

Talk with your estate planning attorney if you believe you or your spouse may require long-term care. Consider the requirements and rules of your state. Keep in mind that Medicaid gives you little or no choice about where you receive care. Planning in advance is the best means of protecting yourself and your spouse from the excessive costs of long term care.

Reference: Kiplinger (Nov. 7, 2021) “How to Restructure Your Assets to Qualify for Medicaid”

 

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Do Gifts Count Toward Estate Taxes? – Annapolis and Towson Estate Planning

With all of the talk about changes to estate taxes, estate planning attorneys have been watching and waiting as changes were added, then removed, then changed again, in pending legislation. The passage of the infrastructure bill in early November may mark the start of a calmer period, but there are still estate planning moves to consider, says a recent article “Gift money now, before estate tax laws sunset in 2025” from The Press-Enterprise.

Gifts are used to decrease the taxes due on an estate but require thoughtful planning with an eye to avoiding any unintended consequences.

The first gift tax exemption is the annual exemption. Basically, anyone can give anyone else a gift of up to $15,000 every year. If giving together, spouses may gift $30,000 a year. After these amounts, the gift is subject to gift tax. However, there is another exemption: the lifetime exemption.

For now, the estate and gift tax exemption is $11.7 million per person. Anyone can gift up to that amount during life or at death, or some combination, tax-free. The exemption amount is adjusted every year. If no changes to the law are made, this will increase to roughly $12,060,000 in 2022.

However, the current estate and gift tax exemption law sunsets in 2025. This will bring the exemption down from historically high levels to the prior level of $5 million. Even with an adjustment for inflation, this would make the exemption about $6.2 million. This will dramatically increase the number of estates required to pay federal estate taxes.

For households with net worth below $6 million for an individual and $12 million for a married couple, federal estate taxes may be less of a worry. However, there are state estate taxes, and some are tied to federal estate tax rates. Planning is necessary, especially as some in Congress would like to see those levels set even lower.

Let us look at a fictional couple with a combined net worth of $30 million. Without any estate planning or gifting, if they live past 2025, they may have a taxable estate of $18 million: $30 million minus $12 million. At a taxable rate of 40%, their tax bill will be $7.2 million.

If the couple had gifted the maximum $23.4 million now under the current exemption, their taxable estate would be reduced to $6.6 million, with a tax bill of $2,520,000. Even if they were to die in a year when the exemption is lower than it was at the time of their gift, they would save nearly $5 million in taxes.

There are a number of estate planning gifting techniques used to leverage giving, including some which provide income streams to the donor, while allowing the donor to maintain control of assets. These include:

Discounted Giving. When assets are transferred into an entity (commonly a limited partnership or limited liability company), a gift of a minority interest in the entity is generally given a discounted value, due to the lack of control and marketability.

Grantor Retained Annuity Trusts. The donor transfers assets to the trust and retains right to a payment over a period of time. At the end of that period, beneficiaries receive the assets and all of the appreciation. The donor pays income tax on the earnings of the assets in the trust, permitting another tax-free transfer of assets.

Intentionally Defective Grantor Trusts. A donor sets up a trust, makes a gift of assets and then sells other assets to the trust in exchange for a promissory note. If this is done correctly, there is a minimal gift, no gain on the sale for tax purposes, the donor pays the income tax and appreciation is moved to the next generation.

These strategies may continue to be scrutinized as Congress searches for funding sources, but in the meantime, they are still available and may be appropriate for your estate. Speak with an experienced estate planning attorney to see if these or other strategies should be put into place.

Reference: The Press-Enterprise (Nov. 7, 2021) “Gift money now, before estate tax laws sunset in 2025”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Can Cryptocurrency Be Inherited? – Annapolis and Towson Estate Planning

Cryptocurrency accounts are not like any traditional investment accounts. However, their growing prevalence and value means they need to be considered for more and more estate plans, especially when they take an enormous leap in value. These accounts are more vulnerable, according to the recent article “Millennial Money: What happens to your crypto if you die?” from The Indiana Gazette, and in most cases, there is no way to name a beneficiary for your crypto accounts.

If you store your cryptocurrency on a physical device at home and a few friends know your key—the crypto password that grants access to a crypto wallet—one of those friends could very easily wander into your home and steal your crypto without you even noticing.

On the flip side, if you do not share your key with anyone and become incapacitated or die, your crypto assets could be lost forever. Knowing how to store these assets safely and communicate your wishes for loved ones is extremely important, more so than for traditional assets.

How is crypto stored? Crypto “wallets” are digital wallets, managed on an app or a website, or kept on a thumb drive (also known as a memory stick). How you store crypto depends in part on how you intend to use it.

A “Hot Wallet” is used to buy and sell crypto. They are usually free and convenient but may not be as secure as other methods because they are always connected to the internet.

“Cold Wallets” are used to store crypto for a longer period of time, like a deep freezer.

The Hot Wallet is more like a checking account, with money moving in and out. The Cold Wallet is like a savings account, where money is kept for a longer period of time. You can have both, just as you probably have both a checking and savings account.

Whoever holds the “keys” to the wallets—whoever has custody of the password, which is a series of randomly generated numbers and letters—has access to your cryptocurrency. It might be just you, a third-party crypto exchange, or a hybrid of the two. Consider the third-party exchange a temporary and risky solution, as you do not have control of the keys and exchanges do get hacked.

Naming a beneficiary in your will and adding a document to your estate plan containing an inventory of cryptocurrency and any passwords, PINs, keys and instructions to find your cold wallet is part of an estate plan addressing this new digital asset class.

Do not under any circumstances include any of the crypto information in your will. This document becomes part of the public record when filed in court and giving this information is the same as sharing your checking, saving and investment account information with the general public.

Some platforms, like Coinbase, have a process in place for next of kin, when an owner dies. Others do not, so it is up to the crypto owner to make plans, if they want assets to be preserved and passed to another family member.

Preparing for cryptocurrency is much the same as preparing for the rest of your estate plan. Keep the plan updated, especially after big life events, like marriage, divorce, birth, or death. Keep instructions up to date, so the executor and beneficiaries know what to do. Bear in mind that crypto wallets need occasional updates, like every other kind of digital platform.

Reference: The Indiana Gazette (Nov. 7, 2021) “Millennial Money: What happens to your crypto if you die?”

 

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What Is the First Thing an Executor of a Will Should do? – Annapolis and Towson Estate Planning

Serving as an executor can be like having a second job. The size of the estate and your relationship to the deceased can make it a bit overwhelming, especially for adult children handling the estate of their last surviving parent. Those executors typically distribute not only financial assets, but decades of personal property, says the article “What to Do When You’re the Executor” from Yahoo! Finance. If the family is prone to arguments, or the estate is large, or both, the job of the executor can be even more challenging.

The first thing to do is obtain the death certificate. Depending on your state, the funeral home or state’s records department in the location where the death occurred will have them. Get five to ten originals, with the raised seal. You will need them to gain control of assets.

Next, file the will and the death certificate with the county probate court. The deadline for filing the will varies by state. However, it can range from ten to ninety days to six months to one year after the date of death. If probate is necessary, you will also need to obtain a “Letter of Testamentary.” This court-created document says you are the legally authorized person to manage the estate. Until you have this letter, you cannot move forward with any of the assets.

Build your team of professional advisors. An experienced estate planning attorney will help navigate probate court. You may also need a CPA and a financial planner. If possible, contact the estate planning attorney who drew up the will, because they are probably familiar with the will, the estate and possibly with the deceased.

Inventory assets. After death is when we learn a lot about those we loved. Were they hyper-organized, keeping records in an easily understood system? Did they file insurance policies under the name of the insurance company, or leave papers in a stack in no order whatsoever? Go through every box and file cabinet to make sure you do not miss anything.

Protect personal property. If the estate included a home, you must make sure that mortgage and tax payments are made. If you do not know who had keys to the house, investing in the services of a locksmith and a new set of locks and keys could save you from unscrupulous family members who believe certain items belong to them. If a car is sitting in the garage, it will need to be cared for and the title of ownership will need to be dealt with.

Obtain a federal EIN number from the IRS and use it to open an estate bank account. Until the estate is settled, the executor needs to pay bills and make deposits. A separate bank account prevents co-mingling funds, makes it easier to track transactions and is useful, if there are any challenges to your decisions as executor.

Pay any outstanding debts. The executor may be personally liable if debts from the estate are not paid before the estate assets are distributed. You are also responsible for filing state and federal tax returns for the last year the person was alive, as well as a federal tax return for the estate.

To head off potential animosity, stay in touch with beneficiaries. Let them know what you are doing, especially if the process is taking a while. Keep excellent records to reflect your activities.

Distributing assets may require court approval, depending on where the decedent lived. If the will contains specific directions for personal items, you will be in better shape than if there are no directions. If not, review the inventory of assets to see how things can be equitably distributed. Do not underestimate the emotional response to this part of the process. Families have battled over items of little monetary value.

It is a good idea to get a release from beneficiaries acknowledging they have received their inheritance. An estate planning attorney can help with preparing the language to help minimize any challenges in the future.

Reference: Yahoo! Finance (Oct. 29, 2021) “What to Do When You’re the Executor”

 

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What a Will Won’t Accomplish – Annapolis and Towson Estate Planning

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You will want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you do not keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Do not expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

 

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What Is the Best Thing to Do with an Inherited IRA? – Annapolis and Towson Estate Planning

When a parent dies and their adult child inherits a traditional IRA, knowing what to do can be the difference between an inheritance and a tax disaster. Many people take the money from the IRA account and place it into their own IRA. However, that is a mistake, says the article “How to manage an inherited IRA from a parent” from Sentinel Source.com.

Any inherited IRA, whether it is from a parent, sibling, or friend, cannot be simply rolled into your own account or treated as if it is your own IRA. Instead, the assets must be transferred in a timely manner to a new IRA that must be titled as an “Inherited IRA” that includes the name of the deceased owner and the phrase “For the benefit of…” and your name. Different financial institutions may have small variations in how they title the account. However, this seemingly small detail is critical.

If a traditional IRA has more than one beneficiary, it must be split into separate accounts for each beneficiary. Each heir will treat their own inherited portion in the same way, as if they were the sole beneficiary.

It is the heir’s choice to either set up a new Inherited IRA Beneficiary account with a financial institution or advisor of their own, or to create a new account using the prior institution. Sometimes using the same firm that held the account is easier, as long as the correct title is used.

The new owner of a Beneficiary IRA needs to know the rules to avoid costly penalties. After the SECURE Act became law in December 2019, most beneficiaries are now required to deplete an inherited IRA within ten (10) years of the original account owner’s death. This applies to any inherited IRAs where the owner has died after December 31, 2019.

The prior rules allowed Inherited IRAs to be depleted over the lifetime of the beneficiary, which allowed the accounts to grow tax-deferred and in many cases, be passed to a third generation, often referred to as “Stretch IRAs.” This option is gone.

There are no limits as to how much or how often withdrawals can be taken from the account, as long as it is depleted in ten years. However, the withdrawals are taxable as regular income, so if you wait until the ten year mark and take out the entire amount, you will end up with a hefty tax bill.

There are exceptions to the withdrawal rule. A surviving spouse, a minor child, a disabled or chronically ill beneficiary, or a beneficiary within ten years of age of the original IRA owner may have a little more time to withdraw funds (and pay taxes on the withdrawals).

If inheriting an IRA from a spouse, you may transfer the IRA balance into your own account and delay distributions until age 72.

Consider your IRAs carefully when working with an estate planning attorney on the distribution of your assets. Will your heirs be able to pay the taxes on their inherited IRAs, or should they be converted to Roth IRAs to relieve heirs of a future tax burden? These are questions that your estate planning attorney will be able to address.

Reference: Sentinel Source.com (Sep. 18, 2021) “How to manage an inherited IRA from a parent”

 

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When Should You Fund a Trust? – Annapolis and Towson Estate Planning

If your estate plan includes a revocable trust, sometimes called a “living trust,” you need to be certain the trust is funded. When created by an experienced estate planning attorney, revocable trusts provide many benefits, from avoiding having assets owned by the trust pass through probate to facilitating asset management in case of incapacity. However, it does not happen automatically, according to a recent article from mondaq.com, “Is Your Revocable Trust Fully Funded?”

For the trust to work, it must be funded. Assets must be transferred to the trust, or beneficiary accounts must have the trust named as the designated beneficiary. The SECURE Act changed many rules concerning distribution of retirement account to trusts and not all beneficiary accounts permit a trust to be the owner, so you will need to verify this.

The revocable trust works well to avoid probate, and as the “grantor,” or creator of the trust, you may instruct trustees how and when to distribute trust assets. You may also revoke the trust at any time. However, to effectively avoid probate, you must transfer title to virtually all your assets. It includes those you own now and in the future. Any assets owned by you and not the trust will be subject to probate. This may include life insurance, annuities and retirement plans, if you have not designated a beneficiary or secondary beneficiary for each account.

What happens when the trust is not funded? The assets are subject to probate, and they will not be subject to any of the controls in the trust, if you become incapacitated. One way to avoid this is to take inventory of your assets and ensure they are properly titled on a regular basis.

Another reason to fund a trust: maximizing protection from the Federal Deposit Insurance Corporation (FDIC) insurance coverage. Most of us enjoy this protection in our bank accounts on deposits up to $250,000. However, a properly structured revocable trust account can increase protection up to $250,000 per beneficiary, up to five beneficiaries, regardless of the dollar amount or percentage.

If your revocable trust names five beneficiaries, a bank account in the name of the trust is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million (or $2.5 million for jointly owned accounts). For informal revocable trust accounts, the bank’s records (although not the account name) must include all beneficiaries who are to be covered. FDIC insurance is on a per-institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks.

One last note: FDIC rules regarding revocable trust accounts are complex, especially if a revocable trust has multiple beneficiaries. Speak with your estate planning attorney to maximize insurance coverage.

Reference: mondaq.com (Sep. 10, 2021) “Is Your Revocable Trust Fully Funded?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Can You Have Bitcoin in IRA? – Annapolis and Towson Estate Planning

Experts on both sides of the cryptocurrency world agree on one thing: it is still early to put these kinds of investments into retirement accounts, especially IRAs. A recent article from CNBC, “Want to put bitcoin in your IRA? Why experts say you may want to rethink that, explains why this temptation should be put on pause for a while.

Investors who have remained on the sidelines on cryptocurrency are taking a second look as this new asset class surpassed the $2 trillion mark in late August. Looking at retirement accounts flush with positive growth from stocks, it seems like a good time to take some gains and test the crypto waters.

However, the pros warn against using cryptocurrency in retirement accounts. “Not just yet” is the message from both bulls and bears. One expert says using cryptocurrency in a retirement account is like taking a delicate and exotic animal out of its natural element and putting it in a concrete zoo. Cryptocurrency is not like “regular” money.

The accounts are structured differently.  The average investor also will not be able to hold the keys to their own cryptocurrency investment.  It’s a buy and hold, with no individual ability to move the assets around. While there are some investment platforms working to change that, an inability to move assets, especially such volatile assets, is not for everyone.

Cryptocurrency is a much riskier investment. A quarterly look at account updates would be like only checking your retirement accounts every five years. Cryptocurrency values are volatile, and an account balance can change dramatically from one week, one day or even one hour to the next one. Crypto is a 24/7/365-day market.

Self-directed IRAs are allowed to have crypto assets, but just because you can does not mean you should. Another reason: stocks, bonds and real estate have a stated market value, which means they are taxed when withdrawals are taken. However, the expected value of cryptocurrencies is not clear. They are not regulated, while IRAs are among the most highly regulated accounts. This is a big reason as to why most IRA account administrators do not permit cryptocurrencies in their accounts.

Investment decisions are based on the eventual use of the funds. For IRAs, the intention is not to lose money, and ideally for it to grow, so there is more money for your retirement, not less. Separate margin or trading accounts are typically used for riskier investments.

One expert advised limiting cryptocurrency investments to 5% of your total retirement accounts. If money is lost, it will not destroy your retirement, and any wins are extra money. Another expert says investing such a small amount will not be worth the time or effort, so don’t even bother.

For those who are determined to get in the game, a Roth IRA may be preferable if you have an extended time horizon and can stand the ups and downs of cryptocurrency investments. The appreciation in a Roth IRA will be tax-free.

Reference: CNBC (Aug. 17, 2021) “Want to put bitcoin in your IRA? Why experts say you may want to rethink that

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys