Cryptocurrency has gained significant popularity, becoming a mainstream asset for investors. With this rise, integrating digital assets like Bitcoin and Ethereum into estate plans has become increasingly vital.
If you are an investor, you might be wondering whether you should include cryptocurrency in your estate plan and how to go about it.
Given its unique nature and challenges, it’s essential to have a well-thought-out plan to ensure your digital wealth is properly managed after your passing.
What is Cryptocurrency?
Cryptocurrency is a type of digital or virtual currency that utilizes cryptography to secure transactions. It operates on blockchain technology, a decentralized ledger that records transactions across a network of computers.
This system makes it extremely difficult to alter, ensuring a high level of security for users. Popular cryptocurrencies include Bitcoin, Ethereum, Binance Coin, and Solana, among others.
Unlike traditional currencies, cryptocurrency is not regulated by any central authority, such as a bank or government. This independence is one reason why many investors find cryptocurrencies appealing.
However, this very feature also poses challenges when it comes to estate planning, as there are no centralized institutions to contact for asset recovery after an owner’s death.
Why Include Cryptocurrency in Your Estate Plan?
Cryptocurrency is considered an asset, much like stocks, bonds, or real estate, and should be included in your estate plan. However, digital currencies present unique challenges compared to traditional assets.
For one, cryptocurrencies are stored in digital wallets, which can only be accessed using private keys or passphrases. If these keys are lost or not passed on, your cryptocurrency could be permanently inaccessible.
Additionally, the IRS treats cryptocurrency as personal property, meaning it has to be evaluated for tax purposes, including potential capital gains or losses, based on its market value at the time of your death.
Steps to Comprise Cryptocurrency in Your Estate Plan
- Create an Inventory of Your Cryptocurrency Holdings The first step is to create a detailed inventory of your cryptocurrency assets. This should include a list of all cryptocurrencies you own, their respective values, and the platforms or wallets where they are stored. Keeping this information current is critical, as cryptocurrency values and your holdings may fluctuate over time.
- Appoint a Trusted Contact or Crypto Executor Because accessing cryptocurrency requires specific knowledge, you should designate a trusted person or specialized service to manage your crypto assets. This individual should have access to your digital wallet’s private keys and be familiar with cryptocurrency transactions. Without this, your executor will not be able to recover the assets, and they may be lost forever.
- Securely Store Access Credentials It’s crucial to document and store your access credentials, such as private keys and passphrases, securely. Numerous individuals use services like Digital Vault, where you can safely amalgamate and stock all of your cryptocurrency access information. You can also choose hardware wallets, which act as portable digital storage devices for your private keys.
- Outline Distribution Plans You should clearly outline in your will or trust how you want your cryptocurrency assets to be distributed. This includes naming beneficiaries and any specific instructions or conditions you want to impose on the transfer of these assets. Be mindful that opening cryptocurrency accounts in the name of a trust is not always straightforward, though some wallets may allow this or permit naming a trust as a beneficiary.
- Consider Tax Implications Cryptocurrency is taxed differently than traditional assets. When transferring crypto, it must be reported to the IRS and state tax authorities. The IRS treats cryptocurrency as a capital asset, meaning it could be subject to taxes depending on how it is used or transferred. If you inherit cryptocurrency, it may be subject to estate taxes if the estate exceeds the exemption threshold. Additionally, crypto enjoys a stepped-up cost basis, meaning it is evaluated at its market value on the date of death. If the value of your cryptocurrency appreciates, the executor must also account for capital gains taxes when it is sold.
Risks of Including Cryptocurrency in Your Estate Plan
Cryptocurrency presents unique risks. The volatility of the crypto market means that its value can fluctuate dramatically, impacting the value of your estate.
If the value of your cryptocurrency decreases, this could significantly affect what is passed on to your beneficiaries.
Another significant risk is the potential for fraud and scams. The decentralized and often pseudonymous nature of cryptocurrency makes it an attractive target for fraudsters.
Some common scams contain deceitful initial coin offerings (ICOs), pump-and-dump schemes, and Ponzi schemes. Given the lack of regulatory oversight, scams in the crypto world are prevalent and can result in devastating losses for investors.
It is crucial to educate yourself on these risks and be vigilant when managing and transferring cryptocurrency assets.
How to Ensure Proper Management of Your Crypto Assets
Estate planning for cryptocurrency requires more than just adding digital assets to your will. To ensure that your cryptocurrency is managed and transferred according to your wishes, consider the following:
- Provide Specific Instructions: Your will or durable power of attorney should include specific instructions for your executor or trustee on how to locate and manage your cryptocurrency assets. Ensure that they know where your private keys and wallet information are stored and how to access them.
- Use Secure Custody Solutions: Consider using secure custody services to safeguard your cryptocurrency. This could include software applications or hardware wallets that offer an extra layer of protection for your digital assets.
- Keep Documents Updated: Cryptocurrency is a rapidly evolving field, and your holdings may change over time. Regularly updating your estate planning documents to reflect these changes ensures that your digital wealth is properly accounted for.
Should You Include Cryptocurrency in Your Estate Plan?
Including cryptocurrency in your estate plan is essential if you have invested in this type of asset.
However, given its complexity and the various legal, tax, and logistical challenges involved, it is wise to consult an estate planning attorney who has experience with digital assets.
These professionals can help you create a comprehensive plan that protects your cryptocurrency and ensures its proper distribution to your beneficiaries.
While the process may seem daunting, taking the right steps to secure and manage your cryptocurrency assets will give you peace of mind that your digital wealth is safe and will be passed on according to your wishes.
