Transferring assets, cash or property, without receiving anything of equal value is subject to gift…
Cryptocurrency is a digital asset and as such needs to be addressed differently than traditional estate planning assets. Crypto-assets may comprise significant individual wealth in the forms of cryptocurrencies like Bitcoin and noncurrency blockchain tokens. If you own any of these asset classes, addressing complex challenges to secure, transfer, protect and ultimately gift crypto-asset wealth is crucial to your estate plan.
Estate planning may seem incompatible with decentralized cryptocurrency systems. Joel Revill, CEO of Two Ocean Trust, says, “The idea of handing over your crypto-assets or your private keys to someone else goes against that original ethos of the self-sovereign asset.” Continuing about the asset class, he admits, “A self-sovereign asset is a wonderful concept, but when you put it into the context of succession planning or multigenerational planning, you begin to appreciate the fragility of that custody.”
Whether you bought Bitcoin early and are managing millions or have more modest sums, understand when formalizing a plan for your crypto-assets, they are vulnerable to being lost forever without preparing to convey the access information to a beneficiary. A private key (public/private key encryption), typically alphanumeric characters, is known to the crypto-asset owner and permits access to the currency’s value through a distributed digital system called a blockchain. If your spouse or other heir is not crypto or technically savvy, they may have no clue how to access your crypto-assets without explicit instructions.
Suppose you have a small number of crypto-assets on an exchange such as Kraken, Binance, Coinbase, or others. In that case, the focus of your estate plan is to leave a comprehensive trail of information to your fiduciary so that they may locate and access the account. This trail can be as direct as a list of the crypto-asset on your schedule of trust assets with certainty that the successor trustee has login protocols to the client’s account on the exchange.
Does My Cryptocurrency Need to Go into a Trust?
For those with more extensive cryptocurrency assets, seeking professional help to establish a custodian and trustee may be necessary. You can use one or a combination of these solutions that help you both protect and make your estate plan for digital assets:
- Share your seed phrase (master password) and private keys with a very trusted family member or friend.
- Divide your seed phrase and private keys among multiple highly trustable individuals so that no one person has complete control of your digital assets.
- Create a trust and transfer into the trust crypto-asset ownership with a designated loved one or corporation to serve as trustee.
- Put your crypto-assets in custody, such as a software application or hardware wallet.
- If you have the technical expertise, you may prefer to use a dead man’s switch app.
- Implement a cascading multi-signature wallet, thus dividing responsibility instead of a self-sovereign wallet.
Digital asset custodian services like BlockFi, Unchained Capital, Anchorage, Casa, Genesis, and more also provide secure protection for crypto-assets alongside trustee services. Many of the trusts created for cryptocurrency are lifetime discretionary trusts; however, there is no widely accepted digital asset estate plan template. Some owners prefer a simple approach while others tend to the very complex; still, others favor flexibility.
Beyond the safe storage and ultimate successful transfer of digital cryptocurrency, ownership is the question of what your beneficiary will do with the asset. There are tax implications when transferring or possibly selling digital assets. In this instance, some of the more traditional capital gain tax strategies are applicable. The inheritor can hold until their short-term gain becomes a long-term gain, thus reducing the tax consequence. They might also offset capital gains with capital losses or sell in a low-income year. Each beneficiary will have to weigh their financial situation to identify the best approach for themselves.
Cryptocurrencies are ushering in a new age where primary estate planning documents like a will are not enough to meet the digital needs of this asset class. The nature of cryptocurrency is somewhat volatile as improper passing of digital requirements may mean the loss of the asset in total. An elder law estate planning attorney can provide you with options and recommend how best to pass your cryptocurrency assets to your heirs. If you’d like to discuss your particular situation, please don’t hesitate to reach out. Please contact our New York office or New Jersey office at 732-972-1600.