Cryptocurrency brings unique challenges to estate planning.
Although civilizations have used monetary currency for thousands of years, digital currency is a new development.
While Bitcoin, Ethereum, and other cryptocurrencies are becoming more popular, they pose unique challenges regarding estate planning.
Unlike bank accounts, traditional investments, or life insurance policies, cryptocurrencies do not have customer service representatives or other agents to help you recover access to funds.
Without the appropriate protections, your cryptocurrency could be irretrievable by your heirs.
Cryptocurrency can be easily lost without proper estate planning.
Storage is a crucial difference between cryptocurrency and regular bank accounts and investments.
Digital wallets are used to protect your digital currencies.
Access to these wallets is controlled through private keys.
If you do not have the private key for the funds, you will not be able to access them.
Cryptocurrency estate planning involves developing a secure plan for transferring the keys to beneficiaries.
Failing to do so means your digital funds could be rendered useless.
Unlike traditional assets, cryptocurrency has no bank statements or paper trail for your loved ones to follow.
Unless you tell them, they may not even know this asset exists.
According to ACTEC, cryptocurrency owners should have a plan for securely transferring these assets to heirs.
What options are currently available?
One option involves using third-party custodians to store and manage the private keys for your cryptocurrency.
Doing so can significantly reduce the risk of your digital wealth being lost through mismanagement or theft.
Another option is to store your private keys on a secure USB drive or metal plate.
Although you retain control of these keys and their transfer, you will also have the responsibility of keeping them safe and ensuring your heirs have access to them.
If the physical keys are ever lost, your cryptocurrency will also be gone.
A third option is to transfer your digital assets to a corporate entity.
The benefits of using a corporate entity are simplifying management and transferring crypto holdings while minimizing the burden on heirs for trying to learn how to use private keys.
Because cryptocurrency is decentralized, no institution or authority exists to help you recover assets if you lose access.
Not creating a plan for your crypto means it can be forever lost, and your family will never recover your investment.
Estate planning for crypto involves outlining where you have stored your private keys, how to access them, and who will manage them after you have died.
When you name an executor or trustee to manage your cryptocurrency, this individual may have to navigate unique challenges.
Because the value of cryptocurrency tends to fluctuate rapidly, your fiduciary may struggle to fulfill the role of preserving the asset value with this particularly volatile investment.
Security may also be an issue for fiduciaries who are not equipped to handle the technical aspects of digital currency.
Your executor or trustee could lose access to the crypto if they are unaware of your private keys and digital wallets.
When selecting a fiduciary for your estate, you should choose someone who understands and is capable of handling this complex asset.
The IRS taxes cryptocurrency like any other asset.
What does this mean?
Selling the crypto for more than your purchase price will require you to pay capital gain taxes.
If you hold the cryptocurrency for more than a year, you will owe long-term capital gains taxes.
The long-term capital gains taxes are usually taxed at a lower rate.
Estate and gift taxes are also impacted by cryptocurrency.
If you transfer to heirs when the market is lower, you can decrease your burden on your estate.
Additionally, your heirs will benefit from appreciation on the asset value without being taxed on the full amount.
Like any asset, cryptocurrency demands comprehensive estate planning to transfer wealth to heirs effectively.
If you neglect to create an appropriate plan, your digital assets could be lost, managed poorly, or excessively taxed.
With cryptocurrency becoming increasingly common, you should take action to preserve this asset like any traditional asset.
Waiting to create a plan for your assets will leave your loved ones sorting through a mess.
With crytocurrency, they may even lose the asset forever.
Yikes!
Working with an experienced estate planning attorney allows you to create a comprehensive plan to protect everyone you love and everything you have.
Without proper planning, your digital wealth could essentially disappear.
Estate planning allows you to develop a clear plan for transferring assets to heirs while strategically reducing taxes.
Because of the unique nature of cryptocurrency, those who have digital assets should select a knowledgeable fiduciary capable of managing the asset.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: The American College of Trust and Estate Counsel (ACTEC) (Sep. 8, 2022) "Understanding Cryptocurrency in Estate Planning"
REMEMBER: “The choice of a lawyer is an important decision and should not be based solely upon advertisements.”
This statement is required by rule of the Supreme Court of Missouri.
