Virginia Enacts New Digital Estate Planning Laws

Over the past few years, I have written about the growing need to estate plan for your digital assets. See here and here as examples. In those articles, I mentioned that states were slowly recognizing the need to have laws on the books to address digital assets. In late 2011, the Uniform Law Commission also cognizant of the need began discussing drafting uniform laws to cover digital assets and digital estates. As a definition, digital estates include your Blog, Facebook, Twitter, PayPal online gaming accounts and the like.

In recent years, digital estate and digital assets issues have become as contentions as issues over traditional estates and assets. Much of this contention is due to the burgeoning popularity of online mediums and the increase in the value of assets under digital control to $35,000. This is especially true when the account either:

  1. has money invested into it (like PayPal),
  2. has a dollar value associated with the account (as with an online gaming account like World of Warcraft; or
  3. has the ability to be monetize, thanks to either a large online following or a handle that is sought after by a company (such as with Twitter).
Due to this extreme rise in value, many states have begun to address the need for laws focused on the passage of digital estates.

Building off of a prior law enacted in 2014 that provided the ability for personal representatives of deceased minors to access the digital account (e.g. Facebook) of deceased minors, Virginia enacted the Privacy Expectation Afterlife and Choices Act (the "Act"). The Act grants similar powers as the 2014 law over digital assets to the personal representative provided there is input from the decedent prior to the decedent's passing. The Act allows users to make choices before death and dictates how the digital information can be disclosed on death, including the following:

  • The Act distinguishes the difference between digital "records" and digital "contents." "Records refers to the identification of the account holder and holder's electronic addresses as well as times and dates of communication. "Contents" refers to the actual substance of the communication.
  • A personal representative can ask the court to order a provider to supply the last 18 months of a decedent's records as long as the request is not in conflict with the decedent's last will and testament. Records farther back than 18 months can be requested if court concludes that the records are necessary to the administration of the decedent's estate.
  • To request "contents" of the digital communications, a personal representative must show that the decedent consented to the disclosure. Disclosure can be shown through account settings or some form of affirmative direction to the provider by the decedent. Provisions in a TOS agreement with the provider won't be enough.
  • A provider can block access to both records and contents if the decedent acted to protect the privacy of the information. The provider can also block access to the request by demonstrating by clear and convincing evidence that compliance with the order would create an undue burden upon the provider.
  • A provider can deny disclosure if it would violate state or Federal law.
When reviewing the legislative history of the Act in combination with drafts issued by the Uniform Law Commission on fiduciary access to digital accounts, the Act appears to be more friendly toward the internet service provider (ISP) than providing the fiduciary the necessary access to the digital assets. In short, it will be very easy for an ISP to deny access to accounts by inserting language into terms of service agreements that state the user denies access to all non-users.

A key component to the law, however, is §64.2-114, which prohibits the personal representative from transmitting electronic communications or making other uses of the account. This is both good, and bad, for several reasons. First, it is good because it stops the personal representative from taking actions on the account that the deceased user may have objected to. Also, it ensures that an overly curious personal representative does not embark on a personal mission to learn more about the other users that the deceased account holder may have interacted with. There are still negatives though. First, it does not allow postings to be brought down which can be problematic in the case where the decedent committed suicide. It also does not allow personal representatives to reach out to possible friends and notify them of the death.

While some may see these positives as negatives, and vice versa, the important take-away from the law is that at least states are starting to address the issue.

Basics of Estate Planning: Charitable Gifting through a CRUT

Charitable remainder trusts, governed under IRC 664, are irrevocable trusts set up to give income to non-charitable beneficiaries, with the remainder interest irrevocably payable to a charity. In other words, it is a trust set up to give income to an individual, with the remainder at the end of the trust's life going to a charity, with no ability for the owner of the trust to revoke that. There are two major types of charitable remainder trusts, CRUTs and CRATs. This article will focus on CRUTs.

When making distributions as a CRUT, the amount paid out each year to the non-charitable beneficiary is a fixed percentage based on the fair market value of the trust’s assets valued annually. This means that every year the trust is given a value, and a percentage of that value is given out as income, with the rest preserved to continue gaining interest. Maybe an example will help. Assume Mr. X creates a CRUT with an initial value of $1.0 million and selects 10% as the fixed percentage out to be distributed. In year 1, X would receive $100,000 back from the CRUT. It the assets in the CRUT appreciate to $1.0 million, in year 2 X would, again receive $100,000. But, if the assets in the CRUT did not appreciate at all, then in year 2 X would only receive $90,000 (10% of the value of the CRUT's assets). On X’s death, the charity would receive the remaining assets in the CRUT.

Some other restrictions on CRUTs, the fixed percentage distributed out must be at least 5% but no more than 50% of the fair market value of the assets in the corpus. The remainder, the amount expected to go to charity, must be at least 10% of the fair market value of the assets contributed to the CRUT. A CRUT can also only lasts the longer of the life of the creator of the CRUT or fixed number of years not to exceed 20 years.

The major advantage of these trusts is the ability to be completely tax exempt, so long as the trust does not have unrelated business taxable income under IRC 512. While many technical requirements exist under this type of trust, including those governing the sale of property by the trust, what makes these types of trusts ideal is the benefit for those with highly appreciated, but low yielding, capital assets, such as real estate or stock. These trusts give those individuals the ability to dispose of these assets free of capital gains tax, with the added bonus of gaining assets that produce a higher amount of income and appreciation, along with the immediate income tax deductions mentioned before.

Thus, setting this trust up while income is still high is ideal, as it will help to lower any tax income tax burden you may have. While a donor normally receives no charitable income tax deduction for the gift of a remainder interest to charity, so long as 664 is followed, this will not be the case. The same holds true for gift and estate taxes. Along with saving you money in future taxes, these trusts are also professionally managed by the organization, or someone whom they hire to complete such tasks. This ensures that the funds are managed in a way that will help your gift to grow, and to help you generate more income for yourself or your family, as mentioned above. It is important to mention, however, the importance of ensuring that all guidelines and regulations are followed, in order to maximize any deductions and minimize the tax burden.

Estate of the Month: Whitney Houston's Estate Has More Problems

A few years ago, Whitney Houston's estate had the dubious honor of being the first estate bestowed with having an estate such a mess that her estate earned estate of the month twice (See here and here). It is unfortunate to report but Houston and her daughter Bobbi Kristina Brown become the first parent-child estate of the months.

As you may remember, popular singer and actress Whitney Houston passed away in 2012. While her talents as an artist are something to be envied, her estate planning is something to be avoided, especially in regards to her daughter, Bobbi Kristina Brown, and particularly in light of her daughter's recent death.

To begin, the estate planning was done through a will, and not a living trust, as is recommended by many estate planning professionals. This is because of the flexibility that these trusts give you, the privacy given, as well as the fact that it avoids the probate process. Instead, Whitney Houston used a will, drafted in 1993, which left her estate in a testamentary trust for all of her children, which in this case meant only Bobbi was able to qualify.

The will had also not been updated since Ms. Houston’s divorce from Bobby Brown in 2007. Luckily or unluckily, depending on how you see it, due to their divorce he is ineligible to receive any inheritance from Ms. Houston’s estate. The will was updated by codicil in 2000, and possibly again in 2004 (no record yet exists of this, and the will does not refer to it). In those codicils, Cissy Houston was named executor, in place of the attorney who had drafted the will (another major red flag). However, despite the notes of the codicil, Cissy did not serve as executor, with Houston’s sister-in-law Pat Houston being appointed by the probate court.

One of the biggest issues with Ms. Houston’s will are the issues it has seemed to cause with her daughter’s estate. First, had Bobbi lived, there are major tax issues in the setup which Ms. Houston had listed in the trust. Having distributions of 10% at age 21 and 30% at age 25 to Bobbi Kristina has some merit because it allows the beneficiary to learn about money. But, in an estate this size there might be better solutions. Further, having the entire remainder distributed at age 30 meant would generate a large burden on Bobbi. Instead, it would have been more advisable to have a trustee manage the funds for Bobbi, to ensure that they are spent in a way that ensures both her needs are met, and the money is maximized from a financial and tax perspective. While there is a provision that allows for the trustees to spend money for things like education, buying a home, starting a business, having a child and more, it is limited. The type of trust used also does not keep money from being taken by creditors or through a divorce, another major issue when such large sums of money are at stake. I’ll again note that Houston’s estate plan was created by her entertainment lawyer and not a true estate planning attorney.

The biggest question, however, is what happens now that Bobbi has died. While, she hasn’t received the future funds yet, Bobbi Kristina can still distribute assets through Bobbi’s estate. Also, the will names Bobby Brown as guardian if Bobbi was still a minor, and as her father, even after Bobbi turned 18 Bobby could have attempted to seek control of the estate as a conservator. However, the will says if Bobbi dies unmarried, without her own children, and with no will or testament of her own, then the estate is divided among the living relatives of Whitney Houston. In this case, those people are Cissy, Michael, and Gary Houston.

There are also issues for Bobbi Kristina with her boyfriend, Nick Gordon, who Bobbi referred to as her husband several times on social media. Bobbi Kristina was a resident of Georgia and Georgia, like many other states, provides for the ability for a spouse to elect against the estate. This is known making a spousal election and usually equates to an intestate share of the deceased spouses estate. The question will be whether Mr. Gordon can show a marriage certificate, as common law marriage does not exist in Georgia.

There is also the possible issue that a current criminal investigation into Mr. Gordon could result in a finding that injuries he inflicted upon Bobbi caused her eventual death, something that would further affect his ability to inherit. It is like Houston's estate is a text book for what not to do in estate planning and estate planning complications.

Much of this could have been avoided had Ms. Houston used an estate planning method that ensured that the estate minimized taxes, maximized flexibility, avoided probate, and worked in a way to avoid conflict at Bobbi's death, by only allowing inheritance to her children.

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