The question of whether or not to raise taxes in order to bring the federal dept under control has been raging for the past few months. On one side, Republicans refuse to consider any tax hikes, believing this will slow down the still ailing economy. On the other side, Democrats counter that without raising taxes there is no way to equilibrate the books without destroying programs that people need. Unless you are living under a rock you have not doubt heard the heated rhetoric.
It can be hard to understand how two parties, both of whom claim to be working towards the same goal, can have such fundamentally different views on how to get there. The reason is that there is a foundational difference in each party’s view of what enables an individual to be successful. This conflict of visions is epitomized in the debate over estate tax.
The reverberations of this argument could also very well have far reaching consequences in an area of inheritance that has hitherto been completely tax-free: digital assets.
To start with lets get some facts about federal estate tax down. Firstly, the estate tax is currently at 35% of any inheritance over $5 million, which is not willed to a federally recognized spouse or charity, this is the lowest it has been since 1931 (not including 2010 when there was no federal estate tax). Second, these current rates mean that the estate tax only applies to 0.14% of inheritances in the US, but would still generate around $11.2 billion in revenue. With such a small percentage of Americans subject to this tax you may ask, ‘why such a big fuss?’ Again, the principle reason is ideological. Who has the right to the money that you made?
Democrats believe that true capitalism is only possible through equality, and that unregulated free markets cannot provide this equality. The estate tax, they believe, is a good way of making sure that wealth does not become distributed to just a few families and that each generation proves itself, rather than simply living off inheritance. They claim that, as the inheritor did nothing to earn the money, she does not deserve it. In the words of Winston Churchill the estate tax, “provides a certain corrective against the development of a rich and idle class.” Liberals also argue that no man is an island. That it is the government and society that created the environment within which the entrepreneur could succeed, and as such an inheritance tax is completely justified.
The death tax, as Republicans call it, is seen as an affront to capitalism for several reasons. For one, it disincentivizes hard work and entrepreneurism. A study done by the conservative lobby group the US Tax Foundation, in 1994, found that the 55% estate tax level, which existed at that time, had the same effect as doubling an entrepreneur’s top effective marginal income tax rate.Many conservatives would agree with liberals that an inheritor did nothing to earn that money. However, they would say, neither did the government. The money belongs to the person who earned it and as such they can do whatever they damn well please with it, including leaving it to an heir. A tax of this nature is seen as punishing wealth gained by legal means and implicitly declaring that socialism/collectivism is superior to capitalism. Finally, Republicans cite that estate taxes are so difficult to regulate that most of the money gained from them just goes toward the cost of policing, so there is not much benefit for the government to begin with.
So will there still be an estate tax in the future and will it be expanded to include digital assets? Yes and yes. Though the estate tax has significantly fluctuated in recent years, it brings in far too much money to be abolished, especially in times like these. Not only that, but taxing 0.14% of a population who just got a multi-million dollar inheritance isn’t likely anger the majority of Americans, many of whom are struggling to pay the bills.
As far as digital assets there is simply too much value in them the government to ignore them forever. However, as with many technologies, laws are struggling to keep pace with the amorphous evolution of the Internet. Though the definition and implementation of such a tax will be quite difficult, and the first attempts will almost certainly be inadequate, efforts towards it are no doubt already underway.
What gives money value? The answer to this question is simple and paradoxical; our belief in its value gives money its worth. Economics calls this the subjective value theory and if we hold this to be true, then as long as we can convince a group of people something has value then we can, in effect, make our own currency, can’t we?
Well that’s the idea behind Bitcoins, a “decentralized internet commodity” that can be purchased with ‘real’ money and used to buy physical products. They are the brainchild of Satoshi Nakamoto (probably a pseudonym) who in 2009, in an effort to circumvent central banks and the dangers he saw in them, created a peer-to-peer network, much like bittorrent, through which his digital currency could be traded. Rather then having someone like Ben Bernanke inject hundreds of billions of dollars into an economy through policies like quantitative easing, a set and predicable number of Bitcoins (currently 300 an hour) are created. These coins are then distributed to community members who sacrifice some of their computer’s processing power to host the system. Once the Bitcoins are deposited in your ‘wallet’, either on your personal computer or a third party’s servers, you can transfer them to buy things or exchange them for cash based on market rates.
Other than the ‘cool’ factor that Bitcoins certainly do possess, there are several other reasons that their advocates believe they are superior to tradition currency. Probably the single biggest reason, and the one that gets economists all hot and bothered, is that Bitcoins are based around the same principles as natural resources, such as gold. There is a finite amount and, over time, the new amount of that resource entering the market will go down. Remember those 300 coins produced every hour today? Well that will drop by half every four years until, in around 2030, no more new Bitcoins will be produced. It even one-ups gold in that there is no chance of some prospector stumbling on a huge deposit of Bitcoins and driving down prices. This, at least in theory, should make it more stable.
Unlike paper money there is no unique serial number or marking for each Bitcoin. Instead, the system relies on a transaction record that records the amount of each transaction per block and references that against the other blocks to ensure that no counterfeit coins were created. In doing this Nakamoto effectively circumvents the need for a central database, like the Federal Reserve, to keep track of the serial numbers of all the coins. The cool part about this is that it also means that the bigger the system gets, and the more blocks that are added, the harder it is for someone to counterfeit the coins. This is because in order to fool the system you would have to control over half the computers on it; not an easy or inexpensive thing in a peer-to-peer network of 10,000+ computer savvy people. The other nice aspect of the transaction record is that it means you don’t have to be connected to the system to receive payment.
So with such great attributes are we all going to be using Bitcoins instead of dollars in a few years? No, and here why.
For one governments don’t like them. Senators note that it could easily be used to launder money and that, because this is no central authority, there is no insurance. FDIC is not terribly likely expand to cover Bitcoins anytime soon.
This criticism, however, can be overblown. Bitcoins are an experiment that came into existence barely two years ago and are being used by relatively few people. Though their short history has been a bit of a roller coaster, comparing Bitcoins to world currencies backed by governments that control real territories and economies, at this point, isn’t quite fair either.
Though these shortcomings are understandable they are also the reason that hordes of people aren’t rushing to switch their hard earned savings into these electronic coins. When it comes to keeping your money safe its understandable to stick with the tried and true method. Though our current financial system is certainly not without its faults, people like the idea that there is a government looking after their cash more than they like to hope that some computer wiz is double-checking each line of open-source code in the next Bitcoin update. That’s why, at least for the time being, the average Joe is going to keep with the old saying; its better to stick with the devil you know than the one you don’t.
From our side of the court, we have yet see people protecting their Bitcoins through Entrustet. However, with their growing popularity and value it’s only a matter of time before people start thinking of how to pass them on.
Wayne C. Buckwalter, Partner, Cohen, Seglias, Pallas, Greenhall & Furman
How Do I Make Sure My Online Business Is Preserved?
As a wealth preservation attorney, I find it particularly important to review digital assets with all clients, especially those with online businesses. The question I routinely get is “what happens to online businesses if the owner passes away? Do they just disappear?” To prevent the businesses from “disappearing”, I recommend that my clients gather in one place all of the information regarding the domain name registration for the business, making sure to include:
· Vendor contacts
· Logins for websites
· Domain name providers
· Access to means to transfer funds for the online business
Almost routinely, when I suggest compiling the above information, the next question I am asked is “Gee, how would I do that?” One way to do this is via an electronic repository, such as Entrustet.com’s Account Guardian service. Another way is through your attorney. Your estate plan documents will instruct your fiduciary where to find an up to date inventory of your online information. An example of which could be a memory stick or removable hard drive, kept in a secure location.
I have also suggested to several online business savvy clients that they establish a side business to assist other online business owners in preserving and transferring a valuable asset.
Don’t let this become a daunting task and prevent you from performing this asset preserving strategy. Carefully preserving your electronic assets will make the transition much easier for your family.
There are a couple of avenues to turn to for help in getting started with the preservation process. A good place to start is with your estate planning attorney. He or she can help to build a succession plan and strategy for your online assets, and make sure everything is in order. Rather than only having your attorney shoulder the expense and potential liability exposure for providing and maintaining your asset preservation, it might also be wise to consider using a digital asset service for added protection.
If you own any online assets, don’t wait to get a plan in order. The more time you give the better, so you can make sure that everything is in order and accounted for properly.
Wayne C. Buckwalter is Chair of the Wealth Preservation Group at Cohen Seglias Pallas Greenhall & Furman, PC. He can be reached at wbuckwalter@cohenseglias.com or 215.564.1700.
I had the privilege of discussing Entrustet and the issues surrounding digital assets and death on KQED San Francisco’s radio show Forum alongside New York Times columnist Rob Walker and host Scott Schaefer. You can listen to the hour long discussion below:
It was a great experience and I thoroughly enjoyed talking about the issues, especially those raised by the callers. I also had the chance to write up some answers to a few of the questions we got yesterday. Check it out and feel free to ask any more questions you might have.
“I think it’s great that Oklahoma law makers recognize that access to social networking profiles of the deceased is a valid estate administration issue. Just like everything else a person leaves behind, photos, mementos, tangible personal property, a person’s social networking profile is something that should be administered according to the wishes of the deceased person.
The law encourages people to think about what they would want, whether for the profile to continue, be edited or deleted. A law allowing access would only serve to streamline the administration process of each account.”
–Lisa Nguyen, Attorney At Law
Proviso Law Group
1600 Rosecrans Ave., Suite 400
Manhattan Beach, CA 90266
Phone 310.248.3966
Fax 310.469.0125 www.provisolaw.com
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“I believe that the new social networking law is forward-thinking, and coordinates with the main estate planning goal of closing out the estate in the decedent’s best interests. Social networking firms insisting on full ownership of user-account amounts to them freely taking clients’ intellectual property rights without negotiation when the account is established. That feels like a”contract of adhesion”, or a standard form contract presented on a take it or leave it basis, which is probably unenforceable because those who signed up really had no idea what they were giving up.”
–Scott R. Zucker, Esq.
The Zucker Law Firm, PLLC
3809 Whitman Road
Annandale, VA 22003
Phone: (703) 280-9280 estateplanninginfoblog.com
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“Technically, all of a person’s personal authority is turned over to the executor of their estate when they die. In most cases (governed by law in each jurisdiction and case law), that authorizes them to execute the terms of the decedent’s will, as well as act on behalf of the estate in matters not directly covered within the will. While many subscriber agreements for web sites keep the site as “owner,” the subscriber maintains authority for what is on the site as long as it conforms with the terms of service. That would mean that unless there is a “death clause” in the subscriber agreement, the executor would have the authority, on behalf of the decedent’s estate, to access the web site and either delete it or make suitable changes. Of course, this is an issue of first impression for me, so this is just my opinion without having done any research.”
–Eric E. Shore, DO, JD, MBA
KANE, SHORE & WITCHER, LLC
Attorneys at Law
1616 Walnut Street, Fifth Floor
Philadelphia, PA 19103
Telephone: (215) 259-3786
Fax: (215) 402-1030
Email: EShore@KaneShore.com
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The goal of the law is noble – to allow the heirs of the decedent to obtain the decedent’s photos and other info on Facebook once the decedent passes away. Often times a decedent can have photos on Facebook (many that they did not upload) and those can be valuable to their loved ones when they die.
However, this law may have much broader results. Generally, the user agreement with facebook (or other sites) defines the relationship between the site and the user. So, if the agreement provides that the info is the property of facebook (or whatever site), this law directly contradicts that agreement. Generally, statutes take precedence over private contracts. Thus, to comply with the statute, Facebook would have to give up its contract rights.
Therefore, this law opens the door to greater regulation of facebook photos and other information. Now that one legislature has encroached on Facebook’s’ ownership of use info, other states (or OK itself) can encroach in other ways, including while a user is still alive. This law is therefore a step toward saying that the user owns the info on their facebook page, regardless of what the user agreement says. This demonstrates the status that Facebook has now achieved – it has basically become part of the public domain. Much like the credit reporting companies who are required to provide free copies of credit reports, Facebook is being required to provide info to users, albeit in a different setting. What will be interesting to see is whether other states follow suit or go further – to hold that users have rights to their profile information while still alive.”
