As a relatively new asset class, cryptocurrency is only beginning to be a consideration in estate planning. For its fans, the decentralized nature of cryptocurrency is one of its benefits—no need to go through a bank or other traditional financial institution to invest. However, that also presents a serious and potentially insurmountable challenge when it comes to transferring those assets to your heirs if careful planning is not put into place in advance. Understanding how cryptocurrency works can help ensure that your plans for how to pass those assets on will be effective.
How Cryptocurrency Works
In order to access and manage crypto holdings, the owner has a private key (similar to a password). Keeping such keys secure is of the utmost importance, because anybody in possession of it can move or sell the cryptocurrency—nobody will be checking ID or otherwise verifying that whoever is using that key is authorized to do so. The flip side of this is if that private key is lost or becomes inaccessible, such as if the owner dies or becomes incapacitated, all access to that cryptocurrency may be irrevocably lost. (This is not a hypothetical scenario: in 2018 a crypto CEO died without sharing access information to millions of dollars of cryptocurrency held by the company, leaving investors struggling for years to recoup any of their lost funds.)
Thus, creating a succession plan for cryptocurrency is of the utmost importance. A qualified estate planning attorney can help you ensure that all the necessary information for accessing your crypto assets—the location where it they are held and the private keys necessary to access them—will be available when it is needed. They can also help you determine your best strategy for dealing with crypto as part of your estate, as there are particular considerations that must be taken into account as you plan.
Trusts and Cryptocurrency
Can cryptocurrency be held in a trust? Yes. As with other types of assets, putting crypto into a trust allows you to avoid probate, with its associated delays and expenses. But again, the nature of cryptocurrency means that you have different concerns than with traditional assets like a stock portfolio or bank account. For instance, if the crypto is kept in a “cold” wallet—i.e., a method not connected to the internet such as a USB key or hard drive—then planning will be different than if it is kept in a “hot” (or online) wallet. Because security is paramount, third-party custody of the encryption keys is often advisable to ensure that there isn’t unauthorized access. And you’ll want to be sure that your chosen fiduciary is either technologically savvy enough to know how to deal with cryptocurrency or has the advice of someone who is.
Another issue is the volatility of cryptocurrency. As we’ve seen in recent years, the value of crypto can go up or down precipitously. In general, a trustee is supposed to manage and protect trust assets, which means refraining from speculation. If you expect a trustee to be managing the trust long-term, your trust will need to be written to take the handling of that cryptocurrency into account.
Cryptocurrency and Taxes
In the U.S., the tax treatment of cryptocurrency is (unlike other aspects of this type of asset) relatively straightforward. In 2014, the Internal Revenue Service issued a notice explaining that virtual currency is treated as property for federal income tax purposes. If you sell crypto at a higher price than you bought it for, the profit would be taxed as capital gains (either long- or short-term, depending on how long you held the asset).
This treatment, in combination with crypto’s volatility, opens options for gifting cryptocurrency if you’re ready to start passing on assets to your beneficiaries now. For instance, when the value is low, you can give crypto to a beneficiary in an amount low enough to not trigger transfer taxes—when the asset goes back up in value, transfer taxes are no longer a problem. When the value of crypto is high, you can gift it to a charity for a full fair market tax deduction, and they can sell it tax-free and use the cash proceeds to fund their mission. These options avoid the complexity of including cryptocurrency in a trust but again, avoid the disaster of having digital assets getting lost upon death or incapacity.
Your Estate Planning Experts
If your estate includes nontraditional assets like cryptocurrency, you can’t afford to have a bare-bones estate plan that can overlook the critical steps needed to protect your wealth and ensure that it is passed on as you wish. The Trusts & Estates team at Bridge Law LLP are experts in creating individualized plans tailored to your specific circumstances, no matter how complex your estate. Contact us here to schedule your consultation today.