How to Incorporate Cryptocurrency in your Estate Plan
If cryptocurrency recovers its recent downturn in the market and continues to grow in popularity as an investment, it has potential to be a widespread estate planning problem. Nobody wants to accumulate an asset that may disappear, often upon death. Even though the crypto landscape is evolving rapidly, having an estate plan is critical to protecting your crypto assets when you die. Your family or fiduciary must know that the cryptocurrency exists, where to find the assets, and what to do with them.
It is impossible to provide a full primer on cryptocurrencies in a blog post, but the outline below can assist you in understanding the importance of making sure that if you own these types of assets, they are covered in your estate plan.
What is cryptocurrency?
Cryptocurrency (“crypto”) is decentralized, digital currency that runs on a blockchain.
There are currently many different cryptocurrencies. Right now, the top cryptocurrencies are Bitcoin and Ethereum, and they make up a large part of the market value, which has historically been valued as high as three trillion dollars. However, in mid-June 2022, the value of the cryptocurrency market fell below $1 trillion for the first time since January 2021, reaching as low as $926 billion.
Cryptocurrency is accessed through a private key, which is a series of alphanumeric characters known only to the owner and stored in a digital wallet (such as Coinbase Wallet, Exodus, or Valora) or in cold storage (hardware). Having your funds in a wallet means you have full custody and ownership. Whoever has the private key can buy, sell and use the digital currency. Without the private key, your crypto cannot be accessed.
Cryptocurrency exchanges are platforms where you can buy and sell crypto. Some crypto exchanges are centralized, meaning they are run by a company, such as Coinbase or Binance. Other exchanges are decentralized, meaning they are built on a blockchain network and use smart contacts to facilitate transactions.
What is a blockchain?
A blockchain is a decentralized ledger that allows transactions across a peer-to-peer network.
So, what does that mean? Blockchain is a growing list of records. Each block contains information and together, form a chain that cannot be altered or corrupted—like an electronic document with view only permissions. Ownership of crypto is recorded in the blockchain and can be transferred by the owner, allowing crypto to be sold and traded.
Think of the blockchain as train tracks that cryptocurrencies run on. The blockchain provides security and infrastructure that keeps crypto safe, without the need to be governed by a central figure or bank.
Estate Planning with Crypto
Like your real estate property and other possessions you own in your name, crypto is considered a probate asset. In the event that you do not have a trust established and funded with your crypto assets, it has to go through probate (the legal and court-driven process of distributing your estate) before it can be legally transferred to your beneficiaries after you die. Having an estate plan generally makes the probate process quicker and easier for everyone involved.
Because of its decentralized nature, crypto has some unique safety concerns that are not typically an issue with assets managed by a centralized authority (like bank or investment accounts).
Even though crypto is a digital currency, you should treat it like a physical asset with value, akin to cash. Anyone who gains access to your crypto can use it — for better or for worse. Conversely, if you die without giving someone access to your crypto keys — the strings of randomly generated numbers and letters that serve as your crypto “passwords” — your crypto is likely gone forever, locked in a digital wallet that can’t be accessed. Consider that Mathew Mellon, heir to the Mellon Bank fortune, died without leaving access to his estimated $500 million in cryptocurrency.
Suffice to say, it is imperative to make a plan for your crypto assets and leave clear instructions for the people you want to inherit them. Some potential approaches are outlined below, all of which should be discussed with your financial advisor and estate planning attorney beforehand.
1. Consider establishing and funding an irrevocable trust.
If your estate is valued above a certain threshold, it could be subject to estate tax when you die. The current federal estate tax exemption is $12.06 million for individuals and $24.12 million for married couples.
If you own enough crypto that your estate could be subject to estate tax, you may want to consider gifting the crypto to an irrevocable trust for the benefit of your heirs, which, if properly structured, will remove the increase in value of these valuable assets from your taxable estate and may also remove them from your children and grandchildren’s taxable estates, while still providing your children, and grandchildren, access to the crypto for the their own security. However, as a general rule, the crypto you transfer to an irrevocable trust during your lifetime will not receive a step-up in basis at your death, and when you give these assets away, you can’t get them back. The right time to make these gifts is when the value is down, since you will have to reduce your estate tax exemption by the value of the gifts that exceed $16,000 per donor/per donee/per year.
2. Name a beneficiary for crypto assets in your estate plan.
A beneficiary is the person or entity you want to inherit an asset when you die. Make sure to list all your crypto assets in your estate plan, where they are stored, and which beneficiaries should receive them.
It is currently difficult to open cryptocurrency accounts and NFTs in the name of a trust. However, wallets do exist that allow you to do so, or you can try to name a trust as a beneficiary of your account. This option is only available if the company handling your account allows it. It is likely that the ability to name a beneficiary will evolve rapidly and could soon be available.
If there is no trust account and no named beneficiary, then your crypto accounts will pass as part of your probate estate under your will. You should make sure that your will, trust, and durable power of attorney include digital asset powers for the fiduciary handling your estate. California has adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which makes it easier for your loved ones to manage your digital assets both during incapacity and after death. To make the process easier for everyone involved, consider nominating a digital trustee and executor who is familiar with crypto.
3. Document where the crypto is stored.
How your trustee/executor and beneficiaries will retrieve your crypto after you die depends on how you store it. Because of the decentralized nature of crypto, the onus is on you to keep stock of your investments and communicate access instructions – otherwise, the cryptocurrency could be lost forever.
A digital legacy (an organized, updated list of your digital assets and the relevant location, related information, and passwords a fiduciary will need to access them) can be a good place to keep this information, but make sure that the digital legacy is not saved somewhere that will disappear on your death.
Conclusion
The estate planning and tax issues surrounding cryptocurrency are complex and continue to evolve. Contact Gianelli | Nielsen to set up an appointment to discuss customized estate planning techniques.
