Month: May 2021

Estate Planning with Digital Assets

Digital assets have grown massively in popularity in recent years. One need only look at the explosion of cryptocurrency and non-fungible token (NFT) trading to understand how much money is being invested in this area. With this growth has also come a new, and sometimes tricky, set of considerations for those trying to plan their estates.

What Are Digital Assets?

A digital asset is a uniquely identifiable property or material that exists only in digital (i.e., nonphysical) form and includes a legal right to use it. The term can be applied to a wide variety of properties. Here are a few common examples of digital assets:

  • Audio or video files 
  • Internet domain names
  • Photographs and images
  • Business data
  • Software
  • Cryptocurrency
  • NFTs

Questions of ownership or other legal interest can be challenging with digital assets, as they are so easily copied. For instance, downloading a logo from a website does not give you any right to use it for your own purposes, much less sell it to someone. Ownership often may be demonstrated by documentation such as a copyright, bill of sale, etc., but sometimes it is almost entirely a question of who has the password, token, or other means of accessing the asset. In terms of estate planning, it is important to establish what it is you actually own and whether it can be transferred to someone else.

Keeping Track of Passwords

One of the biggest problems with transferring digital assets after someone has passed away is surprisingly mundane: no one has the passwords to access them. The assets may be encrypted on a hard drive or server, or may require an online account login, but the decedent never wrote the passwords down anywhere. Sometimes this issue can be resolved by proving the transfer of ownership to, say, the data storage company or email provider, but that is not always possible. Cryptocurrency has become notorious for this problem. There are several examples of investors losing very large amounts of money after misplacing their password.

Therefore, a key aspect of your estate plan should be to keep track of all passwords and store them in a secure location that can be accessed in the event of your death.

Additional Considerations for Digital Assets

For the most part, digital assets are treated like any other property that makes up your estate, but there are a few specialized concerns to keep in mind. The first is that it’s important to document all of these assets. This may apply to any estate property, but it is especially easy for an executor or administrator to overlook digital assets or simply be unaware of their existence. Cryptocurrency trading, for example, is virtually anonymous, so unless you’ve told someone about your holdings no one will know about them.

In fact, cryptocurrencies present a few challenges for estate planning and administration. Despite the name, the IRS considers cryptocurrency to be property, not currency (analogous to company stocks). The value of cryptocurrencies also tends to be rather volatile, potentially creating unexpected tax consequences. It helps to keep regular records tracking the values of these assets.

Southern California Estate Planning Attorneys

Digital assets have created new and potentially lucrative investment opportunities for many people, but making sure these assets are passed on to your successors takes careful planning and organization. Our experienced estate planning attorneys can help make sure these assets end up in the right hands and minimize the tax burden on your estate. Contact our office today to schedule a consultation.

Accessory Dwelling Units in California

Accessory dwelling units (ADUs) go by a few names: an in-law house, granny flat, carriage house, backyard cottage, and more. They are increasingly popular with homeowners looking to provide a living space for family members or to generate monthly rental income.

With a housing crunch affecting much of California, the state government has a strong policy encouraging the construction of ADUs to provide more affordable housing options. Just this year, a new set of laws went into effect that incentivize building ADUs and remove many of the legal barriers that may have stopped homeowners in the past. Here is a quick rundown on accessory dwelling units in California.

What Is an ADU?

An accessory dwelling unit is an independent living space that is added on to an existing property with a single-family dwelling. An ADU can be a detached building, or an area of the original house that has been repurposed as independent living quarters. The latter type is known in California as a Junior Accessory Dwelling Unit (JADU).

State law allows for a maximum ADU size of 1200 square feet or, in the case of a JADU, no more than 50% of the square footage of the original house. For example, if the original house is 2000 square feet, a JADU may not exceed 1000 square feet. Local laws may relax this restriction, however.

Changes in State Law

 For a variety of reasons, not all counties and municipalities have been friendly to the idea of allowing homeowners to add an ADU to their property. In order to discourage the practice, local governments could enact restrictive zoning laws, make it difficult to acquire a permit, and more. Similarly, homeowners’ associations could prohibit ADUs via their covenants, conditions, and restrictions (CC&Rs).

New state laws have made it much harder to prevent a homeowner from building an ADU. For example, local governments can only restrict the construction of ADUs based on availability of water and sewer service, and the impact on traffic and public safety. If an ADU permit application has not been acted on within 60 days, it is automatically approved. CC&R’s cannot unreasonably restrict or effectively prohibit the building of an ADU. Homeowners considering adding an ADU should find it much easier now.

Accessory Dwelling Units and Property Taxes

For most homeowners, one of the most important questions is how an ADU will affect their property taxes. The short answer is: it will raise your property tax, but not as much as you might be thinking. The value of the new addition will be added to your overall property value, but it will not trigger a reassessment.

For example, if the assessed value of your property is $200,000, but the actual market value is $500,000, building an ADU valued at $100,000 will bring the total assessed value to $300,000, not $600,000.

Additional Considerations

Besides navigating the new laws, building permits, government incentives, tax implications, and rental agreements, homeowners should also consider creating an LLC to protect their assets. If something goes wrong and a renter takes you to court, all of your assets are potentially at risk; an LLC can help reduce this exposure. It may also help you benefit from more tax deductions.

Think of building an accessory dwelling unit on your property? A consultation with Hoffman & Forde can help you do it faster and more cost-effectively, as well as minimize your legal exposure.