An Estate Strategy for Your Digital Assets and Red Flags for Tax Auditors
by Rita Wilczek on May 24, 2019
Spring greetings!
(I can hope, can’t I?)
This is the time of year we review beneficiaries and estate plan for a select group of clients to make sure their designations and documents support their wishes.
Digital assets have been added to the checklist in the past few years. I found the attached article to be helpful in explaining what happens if you don’t address your Digital Assets. I like the idea of a digital map for your Executor but not to be stored on your computer.
Rita
An Estate Strategy for Your Digital Assets
What should you know? What should your executor know?
Provided by Rita Wilczek
When you think about your estate, you may think about your personal property, real estate, or investments. You also have other, less-tangible assets – and they deserve your attention as well.
Your digital assets should not disappear into a void when you die. Nor should they be stolen by thieves. You can direct that they be transferred, preserved, or destroyed per your instructions. Your digital assets may include information on your phone and computer, content that you uploaded to Facebook, Instagram, or other websites, your intellectual/creative stake in certain digital property, and records stemming from online communications. (That last category includes your emails and text messages.)1
Think of it this way: each password-protected account that you have signifies a digital asset. You may feel that some of these accounts have little value. A cybercriminal might disagree with you. Security software provider McAfee estimates that the average American has $55,000 worth of digital assets.1
Estate strategies for digital assets require an awareness of new laws. Almost all states have now passed some version of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which defines a path for the future of digital assets after their owner(s) pass away.2
RUFADAA sets a hierarchical structure for digital asset transfer. First, if the service provider has the equivalent of a beneficiary form permitting the expedient transfer of the asset to a designated party of the original asset owner’s choice, that takes priority. If no such arrangement exists, then the instructions for asset transfer denoted in traditional estate documents must be followed (assuming those documents are properly written). Is none of that in place? Then the service provider’s terms-of-service agreement (TOSA) takes priority.2
By the way, if your service provider’s TOSA defines your online account in terms of a nontransferable lifetime lease, its ownership cannot be transferred to another person. As a result of RUFDAA, however, you have the capability to appoint a fiduciary to access, manage, or close out an online account defined as a nontransferable lifetime lease. This power may be potentially exercised if you are dead, or alternately, if you are disabled or incapacitated to the point where you cannot manage your account. You must legally name this fiduciary and grant this individual such legal power in a will, power of attorney, or trust agreement, though – if you fail to do that, no such authority can be given.2
What other steps should you take? Leave a digital access map for your executor – your accounts, your passwords. It need not be seen by others until you pass away or are unable to maintain your digital profiles and accounts. It can be a file stored on a flash drive or similar backup media – and it can also exist on paper.
Check with social media and merchant websites today to see what their policies are for transferring or maintaining digital assets when a user passes away. See how reward points and credits are transferred, and ask how any pending financial transactions will be handled.
Lastly, is the executor of your estate something of a technophobe? If so, then think about appointing a second executor just to handle your digital assets. It may be worthwhile.
Rita Wilczek may be reached at (952) 542-8911 or rwilczek@hirep.net
www.ritawilczek.com
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 - kiplinger.com/article/retirement/T021-C032-S014-how-to-protect-your-digital-assets.html [4/25/19]
2 - forbes.com/sites/jamiehopkins/2019/02/01/is-your-estate-plan-out-of-date-probably-and-facebook-is-likely-to-blame [2/1/19]
Red Flags for Tax Auditors
Here are six flags that could make your tax return prime for an I.R.S. audit.
Provided by Rita Wilczek
No one wants to see an Internal Revenue Service (I.R.S.) auditor show up at their door. But in 2018, the I.R.S. budget is roughly $1 billion less than it was 8 years ago, down from $12.1 billion in 2010 to $11.2 billion. And even though the number of audits has dropped 40 percent from 2010 to 2017, an I.R.S. tax audit remains a fear for many individuals.1
The I.R.S. can’t audit every American’s federal tax return, so it relies on guidelines to select the ones most deserving of its attention. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
Here are six flags that could make your tax return ripe for an I.R.S. audit.
The chance of an audit rises with income. According to the I.R.S., less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to over 1.5% for those with incomes between $200,000 and $1 million who attach Schedule C and is over 4% for those making more than $1 million annually.2
If this year’s 1040 deviates greatly from last year’s, that could raise a red flag. The I.R.S. has a scoring system called the Discriminant Information Function (DIF) that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The agency does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return data is within the range of other taxpayers with similar incomes.3
If your business passes for a hobby, you could be scrutinized. Taxpayers who repeatedly report yearly business losses on Schedule C increase their audit risk. In order for the I.R.S. not to consider your business as a hobby, it typically needs to have earned a profit in three of the last five years.2
Not fully reporting your income boosts the chances of an audit. The I.R.S. receives copies of all of your 1099 and W-2 forms. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.2
Alimony discrepancies between exes can raise eyebrows. When divorced spouses prepare individual tax returns, the I.R.S. compares the separate submissions to identify instances where alimony payments are reported on one return, but alimony income goes unreported on the other party's return. Keep in mind that The Tax Cuts and Jobs Act repealed the alimony deduction after December 31, 2018.2
If you claim rental losses, you had better be a real estate professional. Passive loss rules prevent deductions of losses on rental real estate, except in the event when you are actively participating in a property’s management as a developer, broker, or landlord (the deduction is limited to $25,000 and begins to phase out when adjusted gross income exceeds $100,000) – or devoting more than 50% of your working hours to this activity. This is a deduction to which the I.R.S. pays keen attention.2
Rita Wilczek may be reached at (952) 542-8911 or rwilczek@hirep.net
www.ritawilczek.com
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1- washingtonpost.com/business/economy/your-chances-of-an-irs-audit-are-way-down-but-keep-it-on-the-up-and-up/2018/04/06/cb6c5794-3779-11e8-9c0a-85d477d9a226_story.html?utm_term=.77485a954004 [12/27/18]
2 - kiplinger.com/slideshow/taxes/T056-S001-red-flags-for-irs-auditors/index.html [12/5/18]
3 - cpapracticeadvisor.com/news/12418908/how-to-prepare-your-clients-for-an-irs-tax-audit [6/29/18]