Estate Planning with Cryptocurrency
Estate planning with cryptocurrency can quickly devolve into a futile treasure hunt. However, it does not have to be that way. Careful planning can turn a wild goose chase into an orderly process with minimal surprises. Estate planning with cryptocurrency requires a more deliberate process than other types of estate planning due to the decentralized, intangible nature of cryptocurrency. Done incorrectly, an extremely valuable cache of cryptocurrency could be lost forever. That said, if done using the proper methodology, cryptocurrency may be passed safely to future generations and ensure their financial stability.
Where Is My Cryptocurrency?
Cryptocurrency is classified as personal property by the IRS and is primarily owned in one of two fashions. The first is via intermediary. Many investment services that cater to do-it-yourself retail investors allow for the ownership of cryptocurrency via a system of beneficial ownership. This means the platform buys the actual coins and holds them in a central wallet—a storage bank for the code that makes up individual currency—allowing you to trade your cryptocurrency on demand. In this scenario, you must access your cryptocurrency through the holding broker and often cannot transfer the assets to an outside wallet.
The second way cryptocurrency may be held is through private wallet ownership. Individuals may obtain physical or virtual private wallets that allow them to maintain actual ownership over their coins. These wallets should be highly secure and accessed through multifactor identification or other failsafe methods verified through an authentication system, not just a simple password. Private wallets allow for absolute control over the contents stored within; however, they may also become potential landmines for an estate plan, as the simple loss of a thumb drive, acting as a wallet, could have multimillion dollar consequences.
Disclose, Disclose, Disclose
The most essential element of incorporating cryptocurrency into your estate is disclosure. Cryptocurrency may be tied to a specific owner if purchased through an exchange requiring identification. However, anonymity is an integral part of cryptocurrency, and if an asset is purchased through a marketplace that does not require registration, the lack of a breadcrumb trail leading to the cryptocurrency can easily consign it to the forgotten corners of the internet. One method of combatting this is to use a “dead man’s switch”—basically an email or other method of communication programmed to send a notification to one’s friends, family, or other beneficiaries if the wallet has no activity within a set period. However, often the best way to disclose cryptocurrency is to have the wallet listed among one’s personal belongings in a will or placing it in a trust.
Planning a Cryptocurrency Estate Within an Exchange
The first and easiest method of incorporating cryptocurrency into an estate is to hold the asset through an exchange that allows trusts and corporations to own accounts outright. This method of ownership is straightforward and operates similarly to handing down any asset via a trust. Upon your passing, the trust acquires the asset, and the trustees distribute those assets based on the instructions provided within the trust documents.
The second method is to assign a beneficiary to any exchange traded account, either directly with your chosen exchange or via a will. This method works with exchanges that do not allow trusts and corporations to have accounts but may also result in greater tax liabilities. When the cryptocurrency is transferred to your beneficiaries, they may be liable for higher estate taxes and a capital gains tax if the cryptocurrency is converted to dollars.
Planning A Cryptocurrency Estate with a Personal Wallet
Until now, the cryptocurrency in question has been stored within a bank-like entity; however, another method is to store your cryptocurrency using a personal wallet. These wallets allow for the greatest personal autonomy and carry with them the greatest risk. Anyone with the appropriate password can access the wallet, move funds around, or drain it. Conversely, if nobody has the password, no one may have access to the funds. Indeed, some wallets are programmed to automatically delete their contents (value) when too many unsuccessful access entries are attempted.
With a wallet, disclosure is especially important. Listing a wallet on a schedule of your property is the first method to ensure people know of its existence. This should include a method of securing the wallet and allocating control. Placing the ownership of the wallet in a trust may be a good option, especially when the wallet is a physical wallet and needs to be maintained in an accessible location.
Regardless of whether the wallet is physical or virtual, the best practice is to set up a password system that relies on multiple passwords but does not require every potential password to be used for access. This system, known as a “cascading multi-password system,” allows for maximum security, but by its nature creates a chain with many links, any one of which may fail but still ultimately allow access to the wallet. Having a single password presents less risk in terms of losing or forgetting a password, but also creates potential risk based on the unilateral actions of one password holder. This method may also be ripe for a hacker’s attention. Having a majority entry approach to wallet passwords dramatically increases the security of a wallet, minimizes the impact of a missing password, and reduces the risks associated with unilateral wallet access.
Are You Ready to Begin Estate Planning with Cryptocurrency?
Digital asset classes continue to proliferate, and ownership of digital assets is becoming increasingly popular. Knowing how to transfer these assets to your beneficiaries ensures your family will be able to take advantage of your investments for generations to come. You cannot, as they say, take it with you. With proper planning your cryptocurrency legacy can be designed to benefit your or future generations. The Estate Planning attorneys are RJS LAW are ready and able to provide guidance in this area. Please contact us at RJS LAW of call 619-595-1655 for a free consultation.
Published by Zachary K. McDaniel