How Cryptocurrency Affects Your Estate Plan

Just a short time ago, no one had ever heard of “cryptocurrency.” In the decade since Bitcoin arrived on the scene, most of us know at least a few people who have invested in cryptocurrency. And with Bitcoin values rising dramatically over that time period – from just one cent in 2010 to tens of thousands today – cryptocurrency is no longer considered the fringe investment that only hipsters would consider. Bitcoin and other forms of digital currency have gone mainstream.

Of course, along with success stories come the tales of woe. Any new innovation is bound to be misunderstood by many. Cryptocurrency is no exception. Since digital currency works differently from traditional assets in the bank, those who don’t understand its value or how to access it might overlook it when divvying up property after a death. In the worst-case scenarios, discarded computer drives have resulted in millions of dollars’ worth of lost Bitcoin.

Clearly, anyone investing in cryptocurrency should expect to include that asset within their estate plan. But because cryptocurrency is held and recorded a bit differently than other assets, estate plans should be carefully geared toward helping heirs access a digital wallet. The digital wallet can be “soft” meaning accessed directly through the internet with a private access code or “key” and a special or “seed” phrase. Or, the digital wallet can be “hard” meaning a USB storage device that is used to access the currency along with a private key and seed phrase.

First, while cryptocurrency is considered very secure, there can be a downside to its level of security. Digital wallets can only be accessed by the holder of a private key or seed phrase. Estate plans must record this information but also keep it safe from prying eyes.

Similar to cash, cryptocurrency transactions are not traceable. Therefore, when it’s gone, it’s gone. Keys must only be revealed to the right person or people, at the right time.

Trusts are a popular and effective method of transferring property while avoiding probate court. However, it is often difficult for trusts to properly hold or own cryptocurrency. Estate plans must be carefully worded by an attorney intimately familiar with these issues. In addition, care must be taken to ensure that passwords, private keys and seed phrases are kept in a known and easily accessible, but protected place, along with any hard digital wallets.

And finally, cryptocurrency is taxed by the IRS as property, rather than currency. Its fair market value is determined by a “reasonable exchange rate.” Transactions are subject to capital gains tax regulations, and that means specific provisions must be drafted into trusts used for estate planning purposes.

Perhaps in the future, cryptocurrency will be so well integrated into our way of life that these entanglements will become less confusing. But for now, we strongly urge anyone holding cryptocurrency to consult with an estate planning attorney who is familiar with these issues. Drafting the right documents can help to protect this valuable asset, both now and in the future when it is time to transfer it to heirs.

 

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