Estate Planning & Cryptocurrency
Estate planning has become more complex over the years. With new and different types of assets being created all the time, there are always new questions to be asked and new legal rulings about those assets. One of the more recent trends has been a rise in the investment in cryptocurrencies. Read on to learn more about this recent development in estate planning.
What IS Cryptocurrency?
For the uninitiated, cryptocurrency is simply a form of payment that can be exchanged online for goods and services. The payments are encrypted across several different computers in a chain, a technology referred to as blockchain. The appeal of this technology is the security of the encryption, which is much different than the way your credit and debit cards or bank accounts are encrypted.
Unlike a traditional bank account, an owner (or a fiduciary such as an executor or trustee) cannot contact any central institution and request access to the funds if the private key is lost or stolen. Anyone who obtains a private key would have access to the owner’s cryptocurrency so the key must be safeguarded and protected. Think of it as a safe with only one non-replaceable key.
You have most likely heard of terms such as Bitcoin and Ethereum, which are the most popular and heavily invested cryptocurrencies in the world. Many investors have seen their portfolios increase in value as a result of savvy investing in these newer forms of money.
What Happens To My Cryptocurrency When I Pass Away?
While the rise of cryptocurrency has made financial transactions simpler in many ways, they have made estate planning more complex. Because these assets live in a digital space, and are protected by two separate “keys” (public and private), if the documentation is not laid out explicitly in your estate plan, then this money could be gone forever.
Due to its anonymity and risk, traditional estate planning documents, including a Last Will and Testament and Trust Agreement are not well-suited to effect a transfer of cryptocurrency. Not only must a practitioner examine where digital assets exist online and how the cryptocurrency will be accessed/transferred to the beneficiaries, but they must also ensure that there are limited delays in carrying out the administration. Specific language must also be included in the client’s estate planning documents which permit fiduciaries to access, retain, and manage the cryptocurrency.
With that being said, it is very important to document your cryptocurrency holdings with your estate planning attorney, so that when it is time for your assets to be distributed, it ends up in the right place.
Can Cryptocurrency Be Taxed If I Leave it to My Children?
The IRS has decided that digital assets must be treated as property rather than currency for tax purposes. A sale or exchange can lead to capital gains or losses that must be reported on a tax return. Therefore, you must consider the tax treatment of cryptocurrency when contemplating a gift or administering an estate upon death. Since cryptocurrency has value, it must be reported as an asset of any trust or estate and tax basis must be tracked.
Consequently, cryptocurrency holders must maintain detailed records, including the date of purchase and the fair market value. Also, be aware of the step-up value come tax time.
What Else To Consider With Your Estate Plan & Cryptocurrency
Since cryptocurrency is an intangible asset with no paper trail, special consideration must be made in order to ensure that the assets are not lost following the owner’s death and can ultimately be distributed to intended beneficiaries. If an owner dies without passing on their private key, or if a key is discarded after death, heirs may ultimately discover the owner’s key, but soon realize that they will never gain access to the cryptocurrency.
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