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Amy met with her estate planning attorney to update her last will and testament. Over the last five years, Amy has substantially increased her holdings of digital assets. Amy currently owns a variety of cryptocurrencies including 5 Bitcoin, 10 Bitcoin Cash, 1,000 Ripple and 50 Chia. She also owns three nonfungible tokens (NFTs). One of the NFTs is a digital painting worth $10,000. The second NFT is a limited-edition album by her favorite band, currently valued at $5,000 and the third is a pair of sneakers valued at $250.
The attorney drafts a will that includes instructions to leave the 5 Bitcoin to her local faith-based nonprofit, the 10 Bitcoin Cash to her favorite animal rescue organization and the NFT of the digital painting to the art museum in the state capital. Amy's will states the specific wallet where the Bitcoin and Bitcoin Cash can be found, along with instructions regarding where the passcode to access the wallet is located. The will notes that the NFT is held in a separate wallet and provides additional instructions for accessing it. Depending on the value of these assets when Amy passes away, her estate may be able to claim a substantial estate tax deduction with these bequests of digital assets, which hold an estimated value of $207,000. Thanks to Amy's attorney's attention to detail and Amy keeping her passcode document updated, the charitable recipients of these bequests are able to access and take possession of these unique assets when the time comes.
Jim, age 75, recently had a discussion with the gift planning officer at his alma mater. He told the gift planner that he would love to make a charitable gift to the university, but he also wants to make sure he has enough income during his retirement years. While discussing possible assets to use for a charitable gift, Jim mentions that his tech-savvy son convinced him to buy into cryptocurrency a few years ago. Specifically, in January of 2019, Jim purchased 100 Ether at a price of $115 each. By May of 2021, Ethereum reached an all-time high of $3,500. As Jim reaches his mid-70s, he has three goals. First, he is looking for a way to make a charitable impact. Second, he wants to find a way to supplement his annual income during his retirement years. Third, although Jim has enjoyed watching the explosive growth of his digital assets, his risk tolerance is much lower than it used to be. Looking at his Ethereum balance, Jim decides now is the right time to put these high gains to use benefitting his alma mater while also generating payouts for his lifetime.
Jim transfers 75 Ether to the university in exchange for a gift annuity with a 5.4% payout. Based on his age and the current applicable federal rate, Jim is entitled to claim a charitable income tax deduction of $118,346. He will receive annual payouts of $14,175. Of that amount, $2,552 will be taxed as ordinary income, $11,243 will be taxed as capital gains and $380 will be tax-free. If he had sold the 75 Ether, he would have received proceeds of $262,500, with $253,875 of taxable capital gain. Jim is happy to spread out the taxable gain over life expectancy rather than receiving a huge tax bill in the year of sale. He is also thrilled to be able to make such a large charitable gift based on his original investment of $8,625.
Dana is a software engineer who decided to diversify her investment portfolio at age 35 to include digital assets. In January of 2015, she invested $100,000 into Bitcoin, purchasing 500 coins for $200 each. Six years later, in April 2021, Bitcoin reached a high of $63,000. Dana felt that Bitcoin had hit a plateau for a while and desired to lock in her gains while her investment hovered around $31,500,000 in value.
Dana met with her advisor to explore her options for locking in her substantial gain while limiting the tax consequences. When planned gifts came up, Dana was intrigued. She liked the idea of receiving annual payouts while also using her cryptocurrency to benefit her favorite nonprofit. She asked the advisor whether the annual payment amount would be fixed or subject to market fluctuation.
Dana's advisor explained that there are a few life income gift options, but that it was unlikely that she would qualify for one that would provide fixed annual payments. Dana may qualify for a charitable gift annuity, but many CGA issuers have a minimum age requirement between 60 and 70 years old. A charitable remainder annuity trust also provides fixed payments, but with a currently-low AFR and her relatively young age, Dana would not qualify for a CRAT. Therefore, the only life-income gift option likely to work in Dana's circumstances is a CRUT, which will not provide annuity-type payouts. Instead, the CRUT payouts are a fixed percentage of the trust's annual value. While this means the trust payout is subject to market uncertainty, it also leaves the door open to a higher payout amount if the trust grows in value.
Dana decided to take some time to consider whether she wanted to go forward with the CRUT idea. By early May, with the value of Bitcoin holding near $55,000, she decided it was time to move forward with the CRUT. Dana's attorney put together the trust document, Dana executed the trust and transferred 400 Bitcoin to the trust. The total trust value at the time of the donation was $22,000,000. She retained 100 Bitcoin outside the trust, valued at $5,500,000. Dana was able to take a charitable income tax deduction of $4,014,340. She will receive a payout of 5% of the trust's value, which will begin around $1,100,000 per year, depending on the trust's value each year.
After the trust was funded, the trustee sold the 400 Bitcoin the next day at $52,000 each and invested in a balanced portfolio of stocks and bonds. By that point, the value of the trust corpus had dropped slightly to $20,800,000. Several days later, Bitcoin fell to $38,000 in value. Had the trustee waited another several days to sell and reinvest, the trust corpus would have been $15,200,000, a decrease in value of $6,800,000 in less than a week. Although slightly disappointed that she was not able to capture the value of her Bitcoin at its peak, Dana is thankful that her trustee reinvested quickly, saving her and the charitable beneficiary millions of dollars.
Charitable Gifts of Cryptocurrency, Part I
An IRA rollover allows people age 70½ and older to reduce their taxable income by making a gift directly from their IRA.