President Biden has promised to raise estate taxes (but wouldn’t it make more sense to get money from Melinda Gates, MacKenzie Bezos, et al.? See Would limiting charitable deductions raise more than a wealth tax?).
Crytocurrency has become more mainstream.
Could these two be put together?
Let’s go back to the family in Can billionaires marry their children to avoid Joe Biden’s new estate taxes? Jack and Jill have a lot of money that they want to transfer to children. Why can’t they buy cryptocurrency and give their children, Morgan and Parker, the relevant passphrases? After Jack and Jill die, if the IRS asks what happened to a big chunk of money that was wired to a crypto exchange overseas some years earlier, the survivors can say “Jack and Jill must have bought some crypto and lost the password” or “The password died with them.”
Morgan and Parker can quietly spend cryptocurrency for the rest of their lives, so long as they don’t lose the passphrase or spend so much in a short amount of time that they draw IRS attention.
Readers who are experts on crypto: What am I missing?
Related:
The idea is unlikely to succeed: “if a person refused a subpoena ordering that a bitcoin private key be turned over, the court could hold them in contempt.”
https://ecollections.law.fiu.edu/cgi/viewcontent.cgi?article=1410&context=lawreview
Phi’s point is that they could plausibly deny ever having possessed the password, so a contempt citation would not be upheld even if attempted.
All this is highly illegal of course and the penalties if they were later caught would be severe.
Plausibility is left to the judge’s discretion, really. Some examples:
1.
“Magistrate Judge Bruce E. Reinhart imposed sanctions on Wright in August after he was found in contempt of court for failing to disclose a complete list of his bitcoin addresses, reportedly amounting to 1.1 million bitcoin.
https://www.financemagnates.com/cryptocurrency/news/craig-wright-wants-judge-to-lift-sanctions-imposed-for-contempt-of-court/
2.
“Before the Court is Defendant Diane Dostalik’s (f/k/a Diane Nagby) (“Defendant”) motion to vacate the arrest warrant for failure to purge her civil contempt issued by this Court on July 15, 2019.
The Court held Defendant in contempt for[…]documents and information related to Caye International Bank, Rich Uncles, LLC, and cryptocurrency accounts and investments.
to purge her contempt, Defendant must […] provide Plaintiff with “any documents or substantive information, documented or undocumented, regarding the disposition of and access to any income, accounts, investments, or proceeds relating to Caye International Bank, Rich Uncles, LLC, and cryptocurrency.”
https://casetext.com/case/odyssey-reinsurance-co-v-nagby-7
Whether you want to bet your freedom on your acting/lying skills is yourchoice of course.
Couldn’t the same be said of gold, silver, diamonds, or other precious commodities?
those would be a better choice. They have been valuable for many centuries!
The federal govt keeps getting better and more aggressive at chasing hidden money, offshore accounts, money laundering, etc. Eventually it will figure out how to track cryptocurrency.
Bitcoin is not really as anonymous as most people think. The feds could monitor large money transfers, if they wanted to.
Figured trust funds & non profits were always the strategy, long before there was crypto. The Clinton family would know what to do.
A trust fund doesn’t change the gift or estate tax liability. It is possible to reduce the tax liability to some extent with an LLC structure in which the ownership of the children is devalued by lack of control. See https://philip.greenspun.com/blog/2015/12/03/is-the-new-zuckerberg-fake-charity-an-estate-tax-avoidance-scheme/
Mostly the trust is there to protect children from themselves (gambling or drug addiction) or in hopes of protecting children from family court predators (doesn’t work in states such as Massachusetts, where a plaintiff can break through and get alimony or child support awards based on the value in the trust that parents set up for the benefit of the defendant).
The excuse “I lost my crypto key” is analagous to the excuse “I lost my guns in boating accident” that the 2a crowd plans to use to escape a gun registry. It’s hard to prove otherwise.
One could do the same with gold, except that almost no merchants directly accept gold as a means of exchange, and most dealers require ID to convert your gold back to cash. Crypto could bypass the dealer middleman.
Phil is right that you could transfer your crypto across generations and then spend slowly. The catch is that “spend[ing] so much in a short amount of time that they draw IRS attention” could effectively be spending anything at all. That’s because once all money is digital, the IRS could order businesses to turn over ALL spending records. Naturally, so the IRS can close the “tax gap”.
A little family legacy of bitcoin could still be useful if you expect your children will have to migrate to New Zealand or Portugul to escape the government. There will likely be some foreign jurisdictions that decline to share bitcoin transactions with the IRS. But I wouldn’t bet on it if you plan to remain an American citizen.
Frauds, which is what this is, are typically uncovered when one participant gives evidence against another participant because circumstances change. So for example Jack and Jill have a falling out, Morgan and Parker have a falling out. Parker and Jill have a falling out. Jack is caught doing something criminal unrelated to this crime and offers up Jill to reduce his jail time and so on. Substitute the people who helped put the scheme together, whom one of the beneficiaries bragged to, an unhappy spouse, etc. The argument you could say blah, blah, blah if you are caught is of course possible — you can always say anything if you are caught. The issue is whether the jurors will believe you and the evidence to the contrary, for example a lifestyle that is not financed by reported income. But it almost never comes to trying to fool the jury with some blah, blah, blah, that is fantasy, because the deck is so stacked against you if you are caught & why add perjury to the crimes for which you will be sentenced?
Isn’t the conventional solution to set up some sort of family trust?
Tom: See above. Skipping out on estate tax is not as simple as “I left it in trust to the kids instead of leaving it directly to the kids.” Trusts are mostly neutral in terms of tax effect.
How come scions are ending up with trusts? Is it for the grandparents to put constraints on their grandchildren so the grandchildren do not go through their lives fat, drunk and stupid?
Well, I managed to miss that reply somehow, and perhaps US trusts have been adulterated by now. But still:
https://www.theguardian.com/world/2019/nov/14/the-great-american-tax-haven-why-the-super-rich-love-south-dakota-trust-laws
This plan would unravel as soon as the IRS sets up a formal audit program for digital asset purchases. Because crypto transactions are in the public domain, any audit of let’s say autos purchased with crypto would trace back to the large wallet that was passed on. The IRS would then send a tax bill to the purchaser and could go so far as assume a generational transfer of those assets and request a much larger tax payment.
I suppose using the crypto to only purchase non-traceable assets might be okay but how many Mavericks jerseys can one own?
https://www.bloomberg.com/news/articles/2021-05-13/binance-probed-by-u-s-as-money-laundering-tax-sleuths-bore-in
That’d be risky not just because of volatility but a good chance that eventually IRS will get a list of all the US customers even on the offshore crypto exchanges. As we can see they’re already signaling that with the “money laundering” catch-all for Binance who doesn’t even want US customers.
What could prohibit old frail grand investor selling his/her assets and buy new high value property before checking out and transferring his/her inheritance down the line with little accrued interest (or a loss on paper)? If somehow congress could pass such prohibition then the same could be accomplished with newly sprung financial instrument that are too complex to regulate on the fly. And such financila instruments already exist. I believe that Oracle of Omaha’s Berkshire Hathaway makes business on undervaluing of privately held manufacturing companies for event of transferring inheritance. As usually, what was planned as a Robin Hood action to give to the needy (bureaucrats and those connected politically) resulted in asset mis-pricing, lower revenues to be taxed and lower economic activity overall.
This time it will be different, as in a lot worse then before.
Same line of thoughts here in the FT: https://www.ft.com/content/1b967bdf-815b-4ea7-a1a1-db87ac49ad4f
“Over the past year or so I have overheard my husband telling his friends about how well his bitcoin investments have done. We are now getting divorced and I realise I have no idea how much his cryptocurrency holdings are worth or even how to find that out.
When it comes to disclosing our assets and negotiating a financial settlement I have no evidence at all that it actually exists. Is there anything I can do other than hope that he is honest about it? What will happen if he claims he has nothing in bitcoin?”
Nicolas, it depends entirely on how much work he did to ensure his cryptocurrency holdings remained private. If done correctly, there is no traceable way to prove someone holds a crypto asset, just like there is no way to prove whether or not someone holds cash. However, most people using crypto don’t prioritize this and their transactions can be traced by anyone, including the government.
Whether the privacy a good thing or not is a matter of political opinion. Not going to state mine.