Written by Neil O. Anderson, Esq., Published on January 6, 2023
Planning for the future of digital assets such as cryptocurrencies is an essential consideration for individuals who have them in their portfolios. Estate planning strategies ensure that the assets pass according to the owner’s wishes upon death.
Although cryptocurrency has made some financial transactions more straightforward, it has muddled estate planning. People who own this asset must incorporate it into their estate planning documents to ensure it remains.
The worth and appeal of digital resources, particularly cryptocurrency, are increasing rapidly. Although these assets may have made transactions more straightforward, they have made the estate planning process more complex. People who have purchased these assets must include them in their estate planning documents or risk their trustees or personal representatives being unable to access them or distribute them to beneficiaries. The classic method of dispersing all resources with a last will’s residuary clause and then having an executor search for digital assets will not be effective with cryptocurrency.
A cryptocurrency is a form of digital money that utilizes encryption techniques to secure and verify transactions. Central banks and governments do not issue it and operate independently of traditional financial institutions.
All types of cryptocurrencies are essentially the same; they are digital money that exists virtually and not in a physical form. Cryptocurrency uses blockchain technology to keep a public ledger, meaning any central government does not regulate it. The currency is encrypted and decentralized, making it almost impossible to counterfeit. To buy cryptocurrency, an individual must have a public and private key. The public key is visible to the whole decentralized network worldwide and records the transaction with a unique ID that is not revisable. The private key is like a password and confirms possession of the cryptocurrency, which is held in a digital wallet and is the only way to access the digital money. Unlike a regular bank account, contacting a central authority will only help if the private key is recovered or stolen. Someone who obtains the private key will have complete access to the owner’s cryptocurrency, so the key needs to be guarded and secured. It is comparable to a safe with only one irreplaceable key. While third-party organizations such as Coinbase have now set up a “vault” to keep the private keys safe, those who hold their private key must be vigilant and prepare accordingly. Since cryptocurrency is just a series of unique computer codes, it is stored differently than traditional currency. If decedents do not plan properly, their digital assets can be permanently lost.
The process of collecting money from taxpayers to fund governmental operations.
The Internal Revenue Service has clarified in their Notice 2014-21 that digital assets are property, not currency, for taxation purposes. Any sale or exchange of these assets can lead to capital gains or losses, reportable in a tax return. Therefore, when someone is making a gift or administering an estate upon death, the tax treatment of cryptocurrency is vital to consider. Since cryptocurrency has value, it is an asset. Cryptocurrency holders must maintain detailed records of the date of acquisition and the fair market value upon purchase. Furthermore, the step-up in the basis of digital assets that pass through an estate is essential when devising an estate plan.
Decisions regarding what will happen to one’s assets and property after passing away are known as estate planning options.
Since anonymity and risk are inherent to cryptocurrency, the usual estate planning documents, such as a Last Will and Testament and Trust Agreement, are inadequate for transferring this asset. An attorney must make not only sure that the beneficiaries can access the cryptocurrency but also make sure that the transfer can take place without delay. The attorney must include legal language in the client’s documents, so the fiduciary can access, store, and manage the cryptocurrency. The fiduciary must receive information about the cryptocurrency’s existence and access. To transfer the asset, the fiduciary must identify the beneficiary and where the decedent held the Crypto.
Suppose an individual invests in cryptocurrency and does not provide the details to their family or include it in their estate planning documents. In that case, the account may stay lost after their death. This makes it essential to have a plan to pass the ownership details. Holders of cryptocurrency should never share their private keys. However, they can provide a roadmap to their information to a fiduciary or a trusted friend/family member. They can provide instructions and access to their digital persona, including passwords, locations, and paths to all assets.
Furthermore, the client must mention their cryptocurrency in their Will and Trust documents to ensure that their executor and beneficiaries know of the existence and can receive the assets. In addition, a memorandum should be executed that includes information about the digital wallet, passwords, and private keys.
When transferring cryptocurrency to a trust where the grantor is not the trustee, the grantor should assign the private key to a secure physical device and give it to the trustee. The grantor should document the transfer. The trust agreement should mention the cryptocurrency, and the trustee should be provided with the necessary powers to retain and manage it.
People entrusted to manage the financial affairs of another are known as fiduciaries.
People with significant cryptocurrency holdings may be beyond the understanding of the average fiduciary. Thus, lawyers should advise clients to select a fiduciary who can manage cryptocurrency. The documents should express that it is permissible for the fiduciary to turn the cryptocurrency into cash and access computers, cell phones, and other devices with cryptocurrency-related information. Furthermore, giving the fiduciary the authority to handle the cryptocurrency both during the owner’s life and after death is crucial. However, practitioners should be aware of the governmental regulations that could prevent the transfer of those assets. For example, according to the Uniform Fiduciary Access to Digital Assets Act (UFADAA), fiduciaries may control digital assets, including electronic records and accounts. Granting access to the private key is paramount to their ability to do their job. Therefore, language that gives expansive and extended powers in the legal documents is vital if they are to access the private key.
Creating a well-thought-out plan is essential for success.
Since cryptocurrency is an intangible possession with high risks, estate plans must provide extra considerations to guarantee that the resources are not gone after the holder’s death. If a holder dies without leaving their secret key, or the key is lost or disposed of, even if beneficiaries are entitled to receive cryptocurrency assets, they will be unable to. Relevant estate planning documents need to reference crypto holdings expressly, provide expansive powers to fiduciaries, and provide relevant information about access to private keys. Additionally, holders of large cryptocurrency investors may wish to implement more advanced strategies, such as utilizing reputable third-party personal key managers or even safe deposit boxes to hold keys and protect information.
