The Illinois Digital Asset Transaction Tax: Why Multi-State Tax Exposure Must Now Be Part of Every Financial Projection

In July 2026, Illinois became the first state to enact a dedicated tax on cryptocurrency and other digital-asset transactions. The Illinois Digital Asset Tax Act (IDATA) imposes a 0.2% levy on the value of digital assets involved in each covered transaction. The tax is scheduled to take effect in 2027.This development is more than a narrow cryptocurrency industry story. It is a concrete reminder that state tax systems are becoming more aggressive and creative, and that citizens and their advisors can no longer assume that only their state of residence will tax their financial activity.

The Nature of the Tax

IDATA is a transaction tax, not a traditional income tax or capital-gains tax. It is calculated on the value of the digital assets involved in the transaction itself, not upon gain or appreciation.  Because it is imposed on the transaction rather than on realized gain or ordinary income, conventional tax-planning techniques that focus on character of income, holding period, or realization events offer only limited protection. That distinction matters. A pure income or capital-gains tax can often be managed through timing, entity structure, or realization planning. A transaction tax is harder to avoid once the taxable event (the transfer or trade) occurs and is deemed to have a sufficient connection to the taxing state.

Why This Matters for Broader Financial and Estate Planning

IDATA illustrates a growing reality: states are increasingly willing to tax economic activity that has only a partial or temporary connection to their borders.  The risk of unexpected state-level taxation is no longer theoretical for clients who:

• Maintain accounts or wallets with platforms that have Illinois operations or customers;
• Spend significant time in multiple states;
• Engage in frequent trading or transfers; 
• Expect to make large transactions such as lifetime gifts or estate transfers at death; and/or
• Hold digital assets inside trusts or business entities.

Citizens and planners must now routinely include the possibility of taxation by other states in financial projections. Relying solely on the tax rules of the client’s home state is incomplete. Multi-state exposure, whether from income tax, capital-gains tax, transaction taxes, or new forms of digital-asset levies, should be treated as a standard planning variable.

Here are a few estate planning scenarios in which the IDATA could produce an unexpected levy:

• Lifetime Gifts: A retired Ohio executive makes a lifetime gift of $2 million in Bitcoin to his daughter, who lives in Chicago. When he instructs his exchange to transfer the coins from his account to hers, the platform, having nexus with Illinois and treating the daughter as an Illinois customer, collects the 0.2% tax on the full value, instantly reducing the gift.

• Trust Estate Distributions: A Missouri successor trustee distributes $1.5 million in Ethereum from a decedent’s exchange account to a beneficiary who resides in Illinois; the broker’s transfer again triggers the tax, quietly siphoning the tax from the inheritance before the assets ever reach the beneficiary. 

• Probate Estate Distributions:  Probate Administrations are where this tax can be particularly pernicious.  The tax can unexpectedly affect estates in other states and jurisdictions.  It also can result in unequal or inequitable distributions.   

Unequal Distributions: A Hidden Trap in Probate

Assume an Ohio decedent dies owning $900,000 of cryptocurrency held in a custodial account at a major exchange. The probate executor opens an estate account at the same exchange and transfers the entire $900,000 from the decedent’s wallet into the newly created estate wallet. Because the transfer occurs on the platform, the exchange processes it as a broker-mediated movement.

The will directs the executor to distribute the cryptocurrency in equal one-third shares ($300,000 each) to three adult children: Beneficiary A who lives in Illinois; Beneficiary B who lives in Ohio; and Beneficiary C who lives in Florida.  When the executor instructs the exchange to send $300,000 to each beneficiary’s personal wallet:

• The transfer to Beneficiary A (Illinois resident) is treated as a covered digital-asset transfer involving an Illinois customer. The exchange collects the Illinois Digital Asset Tax before completing the movement. Beneficiary A therefore receives less than the full distribution amount;
• The transfers to Beneficiaries B and C have no Illinois customer connection, so no Illinois transaction tax is withheld. Each receives the full distribution; and
• Even if it is not readily apparent to Beneficiary A at the time of the transaction that s/he received less, it will be obvious when the Final Account reports an amount for the distribution to Beneficiary A that differs from the amount the Beneficiary actually received.  

As a result, the three beneficiaries do not receive equal net amounts even though the will called for equal distributions. The Illinois resident bears a reduction solely because of IDATA, while the non-Illinois beneficiaries receive their full shares. The executor must then decide whether to equalize the difference from other estate assets or leave the disparity in place. 

Families focused on traditional income, gift, or estate taxes may discover only after the fact that a simple electronic movement of digital assets through a broker has generated an unanticipated transaction tax.  Differing and unexpected or unanticipated outcomes often mean controversy, conflict and contests.

Digital Assets Covered by the Digital Asset Tax:  Beyond Typical Cryptocurrencies

The IDATA defines a “digital asset” as: "a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not fiat currency."  This definition is intentionally broader than just Bitcoin, Ethereum, and similar cryptocurrencies. Based on the statutory language and analyses of the Act, the tax can reach the following categories (when they meet the medium-of-exchange/unit-of-account/store-of-value test and are handled by a covered broker):

Covered (or potentially covered) Beyond Standard Cryptocurrencies

Category	Status	Notes
Stablecoins (USDC, USDT, etc.)	Covered	Explicitly treated as digital assets; the statute pulls in instruments designed to maintain a stable nominal value.
Governance tokens	Generally covered	Function as store of value / medium of exchange within protocols.
Altcoins and other crypto tokens	Covered	Any token used as medium of exchange, unit of account, or store of value.
Meme coins	Covered	Specifically brought back into the definition even if they lack intrinsic utility.
Tokenized traditional assets (tokenized stocks, bonds, commodities, deposits, etc.)	Potentially covered	When the token itself is used as a medium of exchange, unit of account, or store of value.
Other blockchain-based representations of value used for investment or speculation	Covered	Broad residual category.

The following are the only digital assets explicitly excluded from (IDATA):

• Loyalty, affinity, or rewards program points;
• In-game currencies or items used primarily inside games;
• Digital art, music, literary works, collectibles, and similar items that have substantial value/utility beyond being a digital asset;
• Event tickets, licenses, and similar rights;
• Prepaid card balances; and
• Pure NFTs that function mainly as digital collectibles or art (rather than as a medium of exchange or store of value).

While the tax is commonly described as a “cryptocurrency tax,” it obviously reaches a wider set of digital representations of value, especially stablecoins, governance tokens, meme coins, and many other tokens, whenever they are exchanged, transferred, or stored by a digital asset broker on behalf of an Illinois customer. Pure digital collectibles and in-game items are generally outside its scope.

Although IDATA contains exclusions for certain digital items that are not marketed for investment or speculation, it expressly carves stablecoins back in. IDATA covers any digital representation of value that is “marketed, used, promoted, offered, or sold in a manner that intends to establish a reasonable expectation or belief among the general public that the instrument will retain a nominal value that is so stable as to render the nominal value effectively fixed.” This language was written intending to capture stablecoins (USDC, USDT, DAI, and similar instruments pegged to the dollar or another reference asset).

Moreover, because stablecoins are designed to maintain a stable value, the tax is especially noticeable: the levy is imposed on the full face value even though the holder has little or no price appreciation. Stablecoins are treated the same as other covered digital assets: any exchange, transfer, or custodial storage of stablecoins by a digital asset broker on behalf of an Illinois customer can generate the transaction tax.

Planning Strategies

Although IDATA is structured as a transaction tax, several approaches may still limit its impact or the impact of similar future taxes:

• Entity and Ownership Structure:
  Holding digital assets through carefully designed entities or trusts may affect how (or whether) a state asserts taxing jurisdiction. The analysis is fact-specific and must consider both the state’s nexus rules and the client’s overall estate plan.

• Residency and Domicile Planning:
  Clear documentation of domicile and the limitation of days spent in high-tax or aggressive-tax states remains foundational. While a transaction tax can reach non-residents, strong residency evidence still helps in disputes over sourcing and nexus.

• Platform and Counterparty Selection:
  The identity and location of the exchange, broker, or counterparty can influence whether a state claims the transaction has a taxable connection. Clients and advisors should evaluate where platforms are based and how they report activity.

• Timing and Frequency of Transactions:
  Because the tax is imposed on each covered transaction, reducing unnecessary transfers or consolidating activity may lower the cumulative burden. High-frequency trading is particularly exposed.

• Monitoring Legislative and Constitutional Challenges:
  IDATA is already facing criticism and a proposed repeal bill. Similar future taxes may be challenged under the Commerce Clause, Due Process Clause, or other constitutional theories. Clients should stay informed and be prepared to adjust.

• Integration with Overall Tax Projections:   
  Financial models, retirement projections, and estate-tax estimates should now include sensitivity analyses for potential multi-state taxation of investment activity—not only for digital assets, but for other mobile forms of wealth as states continue to innovate.

Beginning of a Trend?

IDATA is the first of its kind, but it is unlikely to be the last. It signals that states are looking for new ways to tax financial activity that crosses borders. For individuals and families engaged in serious planning, the practical lesson is straightforward: possible taxation by other states must be included in financial projections. A transaction-based tax is more difficult to plan around than a conventional income or capital-gains tax, which makes early awareness and structural planning all the more important. Clients who treat multi-state tax risk as an afterthought may discover that the cost of a single state’s policy choice is far higher than expected.

If you or your clients hold cryptocurrency, stablecoins, or other digital assets, do not wait for the first unexpected levy to appear. Review where those assets are held, how they will move at death or during lifetime gifting, and whether any beneficiary or platform connection could create Illinois tax exposure. A short conversation with your estate planning attorney now can prevent unequal distributions, family conflict, and avoidable costs later. The Illinois Digital Asset Tax is already law; planning around it should begin before it takes effect.

Expanded HSA Eligibility: New Opportunities Under the Latest Tax Law

In December, 2025, the IRS issued Notice 2026-5, clarifying significant expansions to Health Savings Accounts (HSAs) under the One Big Beautiful Bill Act. These changes broaden who can contribute to an HSA and how the accounts can be used. For clients, financial advisors, and elder-law professionals, the new rules create practical planning opportunities, while requiring careful attention to timing and coordination.

Three Main Expansions

There are three major changes:

• Permanent Telehealth Safe Harbor: High-deductible health plans (HDHPs) may now permanently cover telehealth and other remote care services before the deductible is satisfied without causing the participant to lose HSA eligibility. This change applies to plan years beginning after December 31, 2024.

• Bronze and Catastrophic Plans Now HSA-Compatible: Beginning January 1, 2026, bronze-level and catastrophic plans are treated as HDHPs for HSA purposes, even if their deductibles or out-of-pocket maximums exceed the traditional statutory limits. The IRS confirmed that these plans do not have to be purchased through an Affordable Care Act Exchange to qualify. This opens HSA eligibility to many individuals who previously could not contribute.

• Direct Primary Care (DPC) Arrangements: Starting in 2026, enrollment in certain direct primary care service arrangements no longer disqualifies an individual from making HSA contributions. In addition, HSA funds may be used tax-free to pay the periodic DPC fees (subject to monthly limits of $150 for self-only coverage or $300 for family coverage).

These changes benefit our clients and their families:

• Expanded eligibility means more people can take advantage of the HSA’s triple tax benefit: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• Clients on bronze or catastrophic coverage can now pair that lower-premium insurance with an HSA.
• Individuals who prefer a membership-style primary-care model can maintain HSA eligibility and pay DPC fees directly from the account.
• The permanent telehealth rule removes a long-standing source of uncertainty for people who rely on virtual care.
• Catch-up contributions ($1,000 for those age 55+) remain available, making the accounts especially useful for pre-retirees and older adults building medical reserves.

Advisors should review clients’ current health coverage to identify those who were previously ineligible but may now qualify. Modeling the tax savings from new or increased HSA contributions can be a concrete value-add in planning meetings and can support aging-in-place and long-term care funding strategies.

Important Limitations and Cautions

• Effective Dates Matter: The bronze/catastrophic and DPC expansions apply only for months beginning after December 31, 2025. Clients should not assume the new rules apply to 2025 contributions.
• Disqualifying Coverage:  Disqualifying coverage such as certain Flexible Spending Accounts (FSAs), Health Reimbursement Arrangements (HRAs), or non-HDHP plans can still prevent HSA eligibility. Benefit coordination remains essential.
• DPC Arrangements:  These must stay within the statutory fee limits and must be structured as fixed periodic payments.
• Contribution Limits:  Limits themselves were not increased by these particular changes.
• Record-keeping:  Record-keeping continues to be critical for all HSA distributions, including DPC fees.
• Watch for Developments: Further IRS guidance or refinements are possible; plans should be monitored.

Practical Guidance

Clients and insurance or financial professional advisors should:

• Inventory current health coverage and flag anyone on bronze, catastrophic, or DPC arrangements;

• Confirm whether existing HDHPs already incorporate the permanent telehealth safe harbor;

• Coordinate with benefits brokers, payroll providers, and tax advisors before making mid-year or open-enrollment changes; and

• Update financial and long-term-care projections to reflect potential new HSA contribution capacity.

These expansions make HSAs available to a wider group of people and remove several historical barriers. Used carefully, they can strengthen both current-year tax planning and longer-term medical and aging-in-place reserves. As always, individual circumstances vary. Clients should confirm eligibility with their tax and benefits advisors before changing contributions or coverage. 

Aging in Place Planning: Groundbreaking Study- Take Charge of Your Cognitive Health with Simple Lifestyle Changes

As we age, the risk of stroke, dementia, and late-life depression threaten our independence, decision-making, and financial health. The consequences of these conditions threaten our families with burden, cost, and concern. These conditions change how we live, make decisions, and plan for the future. But here’s the good news: a groundbreaking new study from Mass General Brigham, widely covered by CNN, The New York Times, and Fox News, suggests that simple everyday steps can lower our risks.

By making small changes now, we can protect our brains, stay independent longer, and make life easier for ourselves and our loved ones. From the perspectives of estate planning, elder law, and aging in place planning, the findings offer critical insights into preventive health strategies that can enhance quality of life, reduce care giving burdens, and inform legal and financial preparations for aging. This article dives into what the study found, why it matters for planning your future, and how you can start today.

What the Study Says

The Mass General Brigham study, looked at tons of research to identify 17  modifiable risk factors shared by stroke, dementia, and late-life depression (LLD), things we can change to lower our chances of suffering from these conditions. These aren’t complicated medical fixes—they’re things like eating better, staying active, or even spending more time with friends. 

High blood pressure and kidney problems have the most profound impact, but staying active and keeping your brain engaged can make a significant difference in cutting your risk. The study found that improving just one of these areas—like going for regular walks—can help protect against all three conditions. They even created a tool called the Brain Care Score to help you track your progress. For example, boosting your score by 5 points could cut your risk by 27% over 13 years. That’s something to get excited about!

The reason that the study is groundbreaking is that these conditions, which contribute significantly to stroke, dementia and depression, share vascular and small vessel pathologies, making their overlapping risk factors critical. The 17 modifiable risk factors common to at least two of the three diseases are: blood pressure, kidney disease, fasting plasma glucose, total cholesterol, alcohol use, diet, hearing loss, pain, physical activity, purpose in life, sleep, smoking, social engagement, stress, body mass index (BMI), leisure time cognitive activity, and depressive symptoms. Among these, high blood pressure (hypertension ≥ 140/90 mm Hg) and severe kidney disease (estimated glomerular filtration rate < 30 mL/min/1.73 m²) had the greatest impact on disease incidence and burden, while physical activity and cognitive leisure activities were associated with the most significant risk reduction. The interconnected nature of these risk factors means that improving one—such as increasing physical activity—can positively impact others, like blood pressure, sleep, and social engagement.

Why This Matters for You and Your Family- Aging in Place, Estate Planning and Elderlaw Implications

As we get older, we want to stay in control of our lives—living in our own homes, making our own choices, and not leaning too heavily on our kids or loved ones. Stroke, dementia, and depression can make that harder, affecting everything from your health to your finances. This study gives us a roadmap to fight back, and it’s especially important if you’re thinking about aging in place, planning your estate, or  protecting your future.

Staying in Your Home (Aging in Place): Most of us want to stay in our own homes as we age,  surrounded by our friends, family, memories, and comfort. This study says you can make that more likely by moving your body, sleeping well, and managing stress. Here’s how to make your home work for you:

• Make It Health-Friendly: Add a place for stretching, a blood pressure cuff, or even smart lights to help you sleep better. These little changes support the habits the study recommends.  

• Fix Hearing Loss Early: Your home should not be a prison. Untreated hearing loss can make you feel isolated and raise your dementia risk. It makes you less likely to leave your home, and more likely to isolate. Get a check-up—it’s a small step with big payoffs.

• Get Family/Friends Involved: Ask your kids or grandkids to join you for walks or game nights. Invite friends over for a sports event or movie. It's fun, keeps you social, and lowers your risk of depression.  

• Use Tech: Set up reminders on your phone for meds or try a sleep-tracking or exercise app to stick with healthy habits.  Schedule Zoom or Facetime calls with families and friends to talk. Consider my article regarding the use of technology to reduce dementia risk and age in place.

Planning for Your Future (Estate Planning): Nobody wants to think about losing the ability to make decisions, but stroke or dementia can make that a reality. By taking steps like managing your blood pressure or quitting smoking, you can keep your mind sharp longer, which means you’re more likely to stay in charge of your money, your home, and your care. Here’s how you can plan smarter:

• Set Up a Routine Healthcare Plan: Work with a doctor, physicians assistant, personal trainer, deploy an online health app, and/or work with family and friends to improve your health, increase activity, and spend more active and engaging time with family and friends.  Design these around things you already enjoy or like.  Set goals, and work towards them to create a routine. 

• Advance Directives: Engage a lawyer to create a healthcare proxy and living will that says what you want if you become sick. Avoid simple minimalist forms, and actually state your intentions regarding long-term care (e.g., "if I need care I want it to be in my home," or "I do not want to burden my children financially, but hope they will provide time and support when needed").  Mention your current routines and plans (e.g., "monitor my blood pressure a few time a day," or "continue my selected supplements as they have demonstrated success" or I might qualify for Aid and Attendance because your father was a wartime vet, talk to the VA if I need help at home"). 

• Pick Someone You Trust: Choose a family member or friend to handle your finances and/or health decisions if you can’t. Make sure they know your goals, like staying healthy to avoid nursing homes and direct them to take advantage of your existing plan (e.g., if my Medicare benefit runs out, use my MA plan's "hospital at home" benefit, or pay for home care using my long-term insurance policy/short- term disability policy).   

• Deploy Trusts: Consider establishing trusts to fund healthcare needs, including home modifications or caregiver support, to facilitate aging in place, and/or to protect assets from long-term care spend down in the worst case.

• Save for Care: Set up a trust or savings to cover things like home modifications (think grab bars, ramps, a hospital bed at home, or a simple blood pressure monitor) so you can live independently longer.

• Financial and Insurance Planning: Consider aging in place planning when making other financial, insurance, or investment decisions. Consider, for example a Medicare Advantage Plan with home health care benefits, or a life insurance policy that is convertible to lifetime long-term care benefits.

Protecting Your Rights (Elder Law):  Elder law is fundamentally about making sure you’re taken care of as you age, whether that’s qualifying for Medicaid or finding community support. This study shows that simple changes—like joining a book club or getting your hearing checked—can keep you healthier, which means less stress on your wallet and your family. Here’s what you can do:  

• Stay Social: Loneliness can lead to depression, so find a local senior center or volunteer opportunity to stay connected. It’s good for your brain and your mood.  More, it protects your decision-making by providing interactions with people who know you and can alert you or your family if there are changes and/or help you if a predator or scammer attempts to take advantage of you.

• Plan for Medicaid: If you’re worried about long-term care costs, talk to an elder law attorney about protecting your savings while staying healthy to delay those costs.  

• Guardianship Protection: Implement a plan to protect you and your assets from guardianship.  Even a simple revocable trust can, in many states, be crafted to remove or frustrate guardianship control of the trust assets.

Easy Steps to Start Today

The study calls these 17 factors a “menu of options,” meaning you don’t have to do everything—just pick what works for you. Here are some ideas to get going: 

1. Check Your Blood Pressure: Get a home monitor and aim for under 120/80. Cut back on salty snacks, eat more fruits, and talk to your doctor if you think you need meds.  
2. Move More: Walk around the block, try chair exercises, or join a local tai chi class. It helps your heart, brain, and even your mood.  
3. Quit Smoking: If you smoke, call a quitline or ask your doctor for help. It’s one of the best things you can do for your brain.  
4. Stay Connected: Call a friend, join a hobby group, or volunteer. Feeling connected keeps depression at bay, and keeps you active.  
5. Challenge Your Brain: Do crosswords, read a new book, or learn a skill like painting or a new technology or device. It’s fun and keeps your mind sharp. 
6. Sleep and De-Stress: Try a bedtime routine or a quick meditation app to relax. Good sleep and less stress are brain boosters.

The Brain Care Score is a great way to see how you’re doing—just answer questions about your habits, and it’ll show you where to focus. The study says they’re working on more ways to use this tool, so keep an eye out!

How They Did the Study (And Why It’s Solid)

The researchers looked at 182 big studies from 2000 to 2023, narrowing it down to 59 that really dug into what causes these conditions. They focused on things you can actually change, like how much you exercise or how you manage stress, and figured out which ones matter most. They then employed a statistical analysis to compare how much each factor affects your risk, so you know where to put your energy.

This approach is strong because it pulls together lots of research, not just one small study. But it’s not perfect—they might’ve missed some things specific to depression, for example, and they can’t say for sure that changing these habits causes less disease (it’s more like a strong hint). Still, it’s a reliable guide for making smart choices.

What Else We Learned (And Why People Are Talking)

This study’s a big deal because it shows you don’t need a magic pill to protect your brain—just small, doable changes. People are excited about it—CNN called it a “hopeful message,” and experts say it’s empowering to know we can take control. It’s also a wake-up call: with dementia cases expected to skyrocket and strokes hitting even younger folks, starting now is key. Plus, things like finding purpose or staying social remind us that aging well isn’t just about your body—it’s about your heart and soul too.

One cool takeaway? The study’s Brain Care Score is like a personal coach for your brain. It’s already helping people, and researchers want to test it more to make it even better. For now, it’s a simple way to see what you’re doing right and where you can improve.

Wrapping It Up

Growing older doesn’t have to mean losing your independence or worrying your family. The Mass General Brigham study shows that by making small changes you can lower your chances of stroke, dementia, and depression. That means more years in your own home, more control over your future, and less stress for everyone. Whether you’re planning your estate, talking to a lawyer, or just want to age on your terms, these steps are a powerful way to take charge and implement a plan. So grab a friend, take a walk, and start building a healthier, happier future today.

Violence as a Consequence of an Estate Plan- Can Planning/Drafting Help? A Simple Provision in a Deceased Mother's Will Sparks a Son's Shotgun Rampage Causing the Death of Four

You can press play on the video, but if you would rather watch the video in a separate tab/window (recommended) click the link below:

https://youtu.be/2N0uuRFPngw

In this video I discuss violence, threats of violence, and retaliation as a consequence of estate planning choices, and whether planning and drafting can avoid or protect a family from such a tragic consequence.

Trigger warning: the subject matter considers heartbreaking examples of violence including death. This video reports a recent tragedy in which a simple provision in a deceased mother's will sparked a son's shotgun rampage, causing the death of four, and discusses estate planning and administration considerations to prevent similar violence and harm.

The case example discussed is from a report in the Daily Mail, "Simple request in Long Island woman's will sparked her son's devastating shotgun rampage on siblings." (last retrieved 10/10/2024). The Daily Mail article was brought to my attention by Professor Gerry W. Beyer's article, similarly titled.

The video discusses, among others, the following considerations and strategies in an effort to reduce or eliminate the threat of tragic outcomes:

• Drafting Considerations;

• Considerations Regarding Communications with Family;

• Securing Documents;

• Physical Security;

• Identifying/Reporting Threats/Troubling Behaviors, Mental Illness & Grief;

• Logistics of the After-death Family Meeting including Timing and Location.

The video highlights the importance of worst-case scenario planning, and keeping a continuing relationship with a trusted advisor with whom such topics can be discussed and considered openly and thoroughly.

Additional Resources:

• Estate Planning for the “Troubled” Adult Child, Walecka Law, P.C (last accessed 10/3/2024).
• Estate Planning for families of individuals with mental illness (neurobiological disorders), DJ Jaffe (last accessed 10/3/2024.
• Planning for Beneficiaries With Mental Illness or Addiction, Amanda Koplin, Amy Effman, Martin M. Shenkman (9/15/2020, last accessed 10/3/2024).
• How to Avoid Family Conflict with the Right Estate Planning, Hermance Law (last accessed 10/3/2024).
• Top Estate Planning Tips for the Dysfunctional Family; Doug Luftman (last accessed 10/3/2024).

Looking Ahead to 2026- Estate Tax Exemption Sunset and Current Planning Opportunities

The estate and gift tax exemption amounts will decrease at the end of 2025. Decreasing the exemption amounts is tantamount to an increase in the tax because more people are impacted by the existing tax. Currently, an individual can make transfers by gift during life, and bequests at death, up to an aggregate of $12.92 million, with that amount increasing to $13.44 million in 2024, without incurring gift or federal estate tax. Similarly, the federal Generation Skipping Tax (GST) exemption is currently $12.92 million, increasing to $13.44 million in 2024. 

On January 1, 2026, these amounts are scheduled to “sunset” and revert back to the 2017 amount of $5 million, adjusted for inflation. Although the time frame for sunsetting may be extended depending on political and economic factors, it would be prudent for people with larger estates to take advantage of the opportunities available now by utilizing the exemption amounts in excess of the projected 2026 exemption amounts, in case the exemptions are reduced as scheduled in 2026 (or possibly changed before then).

In light of the looming reduction of estate and gift tax exemption amounts, consider some of the following opportunities:

• Complete gifts now to use available exemptions, particularly GST tax exemption for gifts into a long-term dynasty trust. In light of the pending decrease of the estate, gift and GST tax exemption amounts and taking into consideration the proposed effective dates, it may make sense for those individuals who have exemptions available to make gifts prior to year-end 2023, and before the uncertainties inherent in election year 2024.
• In connection with making gifts in 2023, giving a fractional interest in the property (such as an interest in an LLC or real estate) may prove beneficial as the value for gift tax purposes may be reduced by certain discounts, such as a discount for lack of control and/or lack of marketability.
• Consider a spousal lifetime access trust (SLAT) to take advantage of the current high gift and GST exemptions, while retaining some access to the trust assets at the spousal level.
• Consider giving to an irrevocable “grantor trust” that includes a power to reimburse the grantor for income taxes paid. A “grantor trust” means the grantor, not the trust, is treated as the owner for income tax purposes. The grantor pays all income taxes attributable to the trust income, which allows the trust assets to grow without reduction for income taxes. Grantor trusts can be drafted to permit a trustee to reimburse the grantor for income taxes paid; however, until recently it was an open question whether such a power in a California grantor trust would cause negative estate tax consequences to the grantor. This is because prior announcements from the IRS stated that a power to reimburse a grantor for income taxes paid does not cause inclusion of the trust in the grantor’s estate if certain requirements are met, including that applicable state law must not subject the trust assets to the claims of a settlor’s creditors. Effective January 1, 2023, the California Probate Code clarifies that a trustee’s power to reimburse the grantor for income taxes paid does not create a beneficial interest that would allow the settlor’s creditors to reach trust assets.
• For those who are charitably inclined, consider charitable planning such as charitable remainder unitrusts (CRUTs) and charitable lead annuity trusts (CLATs).
• For individuals and families who do not have a significant amount of estate and gift tax exemption available but wish to reduce their overall estate, consider a sale to a trust in exchange for a promissory note. If structured properly, since the transaction is a sale, it will not be treated as a taxable gift, and the assets sold to the trust will be excluded from the estate of the grantor/contributor. The note becomes the replacement asset of grantor/contributor, effectively transferring the appreciation on the asset to the trust.
• If you own Qualified Small Business Stock (QSBS), consider gifts to one or more irrevocable trusts to take advantage of substantial exclusions from federal income tax on capital gains. Gifts of QSBS continue to be eligible for the exclusion on gain, and the transferor’s five-year holding period “tacks” to the transferee. The gifted shares to irrevocable trusts that are appropriately structured will be eligible for a separate exclusion (up to the limitation amount) in addition to the exclusion that continues to be available for eligible shares retained by the transferor.
• For individuals who have used their lifetime gift exemption but still have unused GST exemption, consider a late allocation of your remaining GST exemption amount to an existing GST non-exempt trust you have previously created. Alternatively, consider setting up a new two-year grantor retained annuity trust (GRAT) before the end of 2023 so you can apply your unused GST exemption to the GRAT remainder interest prior to January 1, 2026.

The foregoing is solely for illustration purposes. You should reach out to your legal advisor before undertaking any tax or estate planning to determine if it is appropriate for your situation.

New Tax Credit Planning Opportunities for Individuals and Families

Beyond the general planning opportunities previously discussed, individuals and families should be aware of certain new tax planning opportunities. In June, the Department of the Treasury and IRS released guidance on Internal Revenue Code (IRC) Section 6418, which provides taxpayers a new way to monetize certain energy tax credits. The guidance included proposed regulations relating to the transferability of tax credits under IRC Section 6418. Specifically, Section 6418 allows for the sale of tax credits solely for cash to unrelated taxpayers, and such payment does not constitute taxable income to the transferor (and is not deductible by the transferee). Prior to the enactment of Section 6418, investors typically accessed renewable energy tax credits by investing in so-called “tax equity” partnerships—which were only workable for more sophisticated investors due to the costs and qualifications under such partnership arrangements. Now, with the new rules, monetization of renewable energy tax credits has been made more accessible to a broader range of investors, including partners of a partnership and individuals. Unfortunately, limitations exist. For one, the “passive activity” limitations, applying to individuals, trusts and estates (but not corporations), make such transferees subject to IRC Section 469, only allowing them to utilize purchased tax credits against tax liabilities associated with passive income generated from other sources.  Additional information can be found here.

IRS Targets on Wealthy Taxpayers

In September, the IRS announced it is focusing on high-income earners to “identify sophisticated schemes to avoid taxes.” Bolstered by its funding from the Inflation Reduction Act (IRA) of 2022 (P.L. 117-169) and equipped with artificial intelligence and machine-learning technologies, the IRS employed three key initiatives. The first “High Wealth, High Balance Due Taxpayer Field Initiative,” committed dozens of revenue officers to focus on taxpayers with total positive income above $1 million and more than $250,000 in recognized tax debt. The second bolstered IRS compliance efforts related to ongoing discrepancies on the balance sheets of partnerships with over $10 million in assets. The third program focuses on monitoring returns for partnerships with greater than $10 billion in assets.

Summary

The IRS is committed to increasing collection of tax revenue, and federal and state governments are more likely to to increase rather than decrease taxes. Advanced planning to avoid taxation makes sense.  It is best to plan now than discover that you have lost planning opportunities, and incurred unnecessary and avoidable tax liability.  

Liberal Magazine Fires Shot Across the Bow of Cruise Ship Roth IRA

A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Established in 1997, it was named after William Roth, a former Delaware Senator.  Roth IRA's are popular investment choices for Americans.

Roth IRAs are similar to traditional IRAs, the biggest distinction between the two being how they are taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. Once you start withdrawing funds, the money is tax-free. Conversely, traditional IRA deposits are generally made with pretax dollars; you usually get a tax deduction on your contribution and pay income tax when you withdraw the money from the account during retirement.

Many people use Roths because account holders don't have to start taking distributions at age 70½ as they do with traditional IRAs. The money can sit untouched and grow tax-free throughout the owner's lifetime—a big plus for those who don't need the assets to live on. And while those who inherit any type of IRA must start taking distributions immediately, they are permitted to stretch out those payments, allowing the bulk of a Roth account to continue growing tax-free.

This and other key differences make Roth IRAs a better choice than traditional IRAs for some retirement savers. They are, at the same time, increasingly unpopular among those who champion government intervention to alleviate wealth disparity.  I have warned investors to consider seriously possible future changes to the laws governing Roth IRA's before investing, and particularly before implementing IRA conversions, i.e., liquidating a traditional IRA, and paying the taxes on the investment, in order to convert the investment to a Roth IRA that permits future tax-free withdrawals of both principal and income. See, "Roth IRAs Dim as Inheritance Vehicles- Beware the Rush to Covert."

Mother Jones Magazine (MJ) recently published an article critical of the government continuing to "support" wealthy individuals in an effort to avoid taxation using Roth IRA's. The article may be the first in a coming onslaught of attacks against the investment option, and may be a bell weather indicating reform. 

Although the article often reads more like a partisan platform or political screed (the article is openly published under the MJ "Politics" section), language choice, narrative, and hyperbole aside, the article explores the uses and misuses of the Roth IRA, particularly as a tool of the ultra-wealthy: 

"For many working Americans, a Roth IRA is a useful, if not particularly interesting, way to save money for retirement. For tech billionaire Peter Thiel, it was a way to accumulate more than $5 billion. The nonprofit journalism shop ProPublica ran an exposé in June revealing how a small number of extremely wealthy folks had ended up with Roths—federally subsidized retirement accounts meant for middle-class savers—worth tens to hundreds of millions of dollars and up. Thiel did so, the article noted, by “stuffing” his Roth IRA with wildly undervalued “founders shares” of pre-IPO startups—potentially an illegal tactic—and then watching as their values rose exponentially, and completely tax-free.

The story prompted congressional leaders to request data from the nonpartisan Joint Committee on Taxation, which reported that, as of 2019, more than 28,000 Americans held combined (Roth and traditional) IRA balances of $5 million or more, and 497 taxpayers had balances of at least $25 million. The latter group had socked away a combined $77 billion in their IRAs—on average, more than $150 million each. 'IRAs were designed to provide retirement security to middle-class families, not allow the super wealthy to avoid paying taxes,' Sen. Ron Wyden (D-Ore.) lamented in a press release.  

But it turns out IRAs are only the tip of the iceberg. The bigger problem, according to Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center, is that, thanks to a series of bipartisan bills Congress has passed over the past quarter-century, the government spends a fortune subsidizing a whole range of retirement plans whose benefits flow overwhelmingly to America’s most affluent. 'It’s unbelievable the amounts of dollars at stake, and how tilted they are to the high end,' Rosenthal told me. 'It’s just staggering.'"

The author acknowledges that reform of the Roth IRA is not likely or particularly popular, right now:

“'The wealth defense industry—the lawyers, accountants, and wealth managers to the super-rich—are paid millions to sequester trillions, stretching the limits of the law and sometimes writing the law themselves,' says Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies and author, most recently, of a book titled The Wealth Hoarders. 'They have fracked every corner of the tax code, especially tax-advantaged retirement programs, to extract benefits for their wealthy clients.'"

The article concludes with a contributing source explaining possible reforms and illustrating the lack of receptiveness there is for reform in Congress: 

"'To prevent stuffing and other kinds of self-dealing, [Steve Rosenthal, a tax attorney and senior fellow at Urban-Brookings Tax Policy Center] continues, Congress should just forbid people from holding non–publicly traded assets—like shares of a pre-IPO startup—in an IRA. Lawmakers also could enact a combined asset limit that covers all types of tax-advantaged retirement plans—as first proposed by the Obama administration. They also could strengthen nondiscrimination rules or consider shoring up Social Security—which appears to be in trouble—instead of further enriching the families who need the least help in their old age. “Congress will struggle to solve the problem they created,' Rosenthal told me in an email. 'But the longer they wait, the harder it will be.'

He’s not holding his breath. In July, when the Senate Finance Committee held a hearing titled 'Building on Bipartisan Retirement Legislation: How Can Congress Help?,' Rosenthal and University of Chicago professor Daniel Hemel submitted a statement for the record, but most of the professionals present at the hearing were part of what he calls the retirement-industrial complex: 'The benefits community, the practitioners, the retirement service industry—they testified. Nobody was invited to testify who says the emperor has no clothes.'"

MJ, despite is controversies, and mis-fires, has often been at or near the forefront of a once controversial position moving mainstream.  MJ was, for example, among the first to overtly connect Former President Trump to the alt-Right, although it's effort was roundly criticized, from the Left because its article portrayed a neo-nazi in a "positive" light.   

More importantly, the past few years have demonstrated just how quickly change is possible.  Roth IRA's, like all investment options, should be considered carefully.