Friday, October 25, 2024
Bitcoin is the Best Asset for Irrevocable Trusts and Generational Wealth Transfer
Bitcoin is the superior asset for generational wealth transfer through irrevocable trust structures. Well, let’s be honest, bitcoin is the superior asset for really any purpose. But the more experience I gain in estate planning and bitcoin, the more dots I connect as to why Bitcoin is the top asset to hold in an irrevocable trust with the goal to be charitable and/or pass down generational wealth to your loved ones. Especially considering current federal estate tax rates sit at 40% for the wealthiest families.
To ensure we’re on the same page, let’s briefly outline irrevocable trusts. An irrevocable action or decision is one that can not be undone, changed, or reversed once it’s done. In legal terms, an irrevocable trust is a type of trust that, once established, cannot be modified, amended, or terminated by the grantor (the person who creates the trust), except under specific circumstances or through court approval. This permanence ensures that the assets placed in the trust are effectively transferred according to the original terms, offering protection from creditors, taxes, or legal claims. Because the trust effectively can’t be changed once established and funded, and the assets are no longer controlled by or for the benefit of the grantor, the assets held within the trust are considered to be excluded from the grantor’s estate. One other important point, there are grantor and non-grantor trusts, most popular are grantor trusts. A grantor trust simply means the taxes are paid by the creator of the trust and not by the trust itself. I’ll speak to both with a few of the points I lay out.
Why Bitcoin is the Best Asset for Irrevocable Trusts
Tax Efficiency
Bitcoin has no forced income events like stocks, bonds, real estate, or some other LP investment like oil and gas. Stocks pay dividends. ETFs and Mutual Funds pay out distributions. Bonds pay interest. Real estate produces cash flows from tenants. Oil and gas investments pay royalties. Businesses produce profit or may even have a liquidation event upon exit. The point is Bitcoin does not subject the trust or the grantor to taxable events unless intentionally chosen. In the case of a grantor trust, the creator of the trust pays the trust related taxes. If an asset besides Bitcoin was held, then they would need to plan from a cash flow perspective to pay the related taxes. That may even require them to liquidate assets of their own, creating another taxable event, almost like a chain reaction. Overall, this reduces the total wealth either within the trust or for the individual. It’s an unnecessary tax leak or tax drag on overall wealth accumulation or preservation. In essence, you are forced to pay more to the IRS and live on less or pass less to your grandchildren.
Additionally, unlike real estate, bitcoin requires no property taxes. Again, if you placed an apartment building into a trust or any other real estate investment for that matter, you or the trust would still be required to foot the bill for the annual property taxes. Yet another tax drag on your wealth.
Low Carrying Costs
Real estate has high carrying costs. Property taxes (mentioned above), insurance, legal protection, property management, maintenance, required renovations/upgrades, and potential damage from tenants or natural disasters which may be covered by insurance, but likely still require some out of pocket costs and lead to lost rent. These carrying costs lead again to a wealth accumulation or preservation leak that is unavoidable with real estate.
Stocks, bonds, or other traditional investments may have less carrying costs, but they still exist. To avoid concentration in one company, many people would prefer to own an index for long term generational wealth transfer and index funds have expense ratios attached. Depending on the custodian, you may owe regular fees.
Bitcoin could be held with very little to no carrying costs. I say could, because within an irrevocable trust structure, it’s likely prudent to hold your bitcoin with a qualified custodian. This doesn’t mean you have to go to coinbase, there are other options and more players will continue to enter the space. I know… I know… I know… you hate that word. It’s not required by any means, but likely prudent for long term security of your bitcoin. Because when you pass those assets into a trust like this, you are effectively giving up ownership to the trust and you can no longer control or benefit directly from the assets. So if you continue to hold the private keys, your trust would not be legally recognized.
Divisible & Highly Liquid
Bitcoin is infinitely divisible unlike stocks, bonds, and real estate. Try selling 1/10th of that building to donate to charity. Not going to happen. Try liquidating 25% of that business the trust holds. Not going to happen. That muni bond you own, can’t be split. Now those stock/ETF shares, could be. But Bitcoin is still more easily divisible than them all.
Bitcoin is highly liquid. Traditional assets like stocks and bonds can normally be sold fairly easily, but only within market hours. Not on holidays or weekends. That office building? Good luck selling that within 6 months without taking a significant haircut off market value and getting brokers/lawyers involved. Bitcoin is more liquid than any of the alternatives.
Less Counterparty Risks
Real estate has quite a few counterparty risks. Tenants destroy your building. Property management steals from you or mismanages the property. Local legislation causes you to pay higher taxes or decreases the value of your property due to the location. Real estate is also physically bound to the geographical domain it’s within. If your state is the center for a US civil war, there's nothing you can do. The insurance company can and will fight you to get out of paying any claims. You get my point.
Stocks are reliant on the business continuing to perform. A bad CEO or faulty product could cause things to go awry at any point. After all, based on history, just because a company is at the top of their game or the largest company in the world, it doesn’t mean it will be for the next 10-20 years. Maybe the country the company is located in regulates them to death or moves in a different direction like electric vs gas vehicles for example. The point is, the potential counterparty risks associated with owning a stock is substantially greater than many people realize.
Bitcoin on the other hand allows you to nearly remove all counterparty risks. It’s a decentralized, digital bearer asset that isn’t reliant on any one party to operate. It can be transacted anywhere in the world and has the total addressable market of every human on the planet. There are risks to bitcoin of course, but the number of potential risk vectors is significantly less than real estate or stocks.
Appreciation Potential
Bitcoin cannot be debased. Stocks can issue more shares. People will always build taller, bigger buildings. Bitcoin is the only strictly fixed supply asset in existence where ownership and total supply are verifiable. When you’re putting assets into an irrevocable trust, you want something that will last for possibly multiple generations. Bitcoin has the greatest potential for long term value appreciation and an irrevocable trust structure allows you to pass assets to the next generation completely avoiding the current 40% federal estate taxes. So if you put $1M worth of bitcoin into a trust today and that turns out to be worth $20M in 30 years, you just avoided $8M in taxes and that much less bitcoin passed down to your heirs. That’s powerful.
Global Accessibility, Security, & Censorship Resistant
Bitcoin can be accessed from or moved anywhere in the world by the trustee or beneficiaries when appropriate. Bitcoin is more secure than physical gold or real estate which can be stolen or damaged. You can send bitcoin to any person or organization at any time without the permission of a third party. Imagine you created a trust that gives to charities that support mission work. Your trustee goes to distribute money from the trust to the charity and the transaction gets denied, because it is a christian organization.
Do I Need to Say Any More?
Bitcoin is the best asset for irrevocable trust structures and long term generation wealth transfer. The only way it isn’t is if Bitcoin does not grow to the value that us as bitcoiners expect it to grow to over the long term. If Bitcoin dies, then fine, I’m wrong, but if it thrives… it is the king of assets to hold for generations to come within a trust.
Considering how you can leverage a trust?
If you’d like to learn more about upcoming estate planning changes and how an irrevocable trust could help you avoid a 40% estate tax, read this article. If you think establishing a trust may help your financial situation, but you’re not sure how, schedule a call with us here to learn more about how we can help.
We are financial planners for bitcoiners.