If you’ve invested in a digital currency, you should take the time to protect your cryptocurrency through estate planning. As 1 in 10 people invest in crypto, many attorneys are now striving to ensure their clients include their digital assets in their wills and trusts. Thankfully, the task is entirely doable but may come with considerable tax implications.
Can You Inherit Cryptocurrencies or a Digital Wallet?
In the U.S., anyone can inherit transferable and fully owned digital assets if they are included in a legally binding estate plan.
Without estate planning, your digital and crypto assets may pass in accordance with Florida Statutes (rather than a specified beneficiary). Crucially, unlike a physical asset, crypto can quite easily go under the radar and be forgotten about entirely after the cryptocurrency owner passes away.
Data privacy laws may also restrict an individual’s digital assets, which is why it’s vitally important to include them in your Estate Plan.
What Digital Assets and Cryptocurrencies Can Be Inherited?
Generally, any crypto asset that is owned outright can be devised via a Will. You should check that the asset or currency is transferable, as some have rules against it. If in doubt, consult an estate planning attorney.
The following digital assets can be devised or inherited through a valid estate planning document:
- Bitcoin and most other cryptocurrencies
- NFTs (Non-fungible tokens)
- Funds in digital wallets, such as PayPal or Blockchain Wallets
- Online investment portfolios and wallets
- And much more
How to Include Cryptocurrencies in Your Estate Plan
Learn from the Mistakes of Other Investors
In 2021, German programmer Stefan Thomas lost his Bitcoin password that made over $220 million worth of Bitcoin earnings inaccessible. This mistake was a huge wake-up call to the estate planning industry that the digital world is unforgiving when it comes to gaining access to digital wallets.
By taking steps to protect your digital wallet now, you can avoid your family losing out on access to vast crypto wealth. The first steps you should take are to write a will and consult an estate planning attorney.
Document All Cryptocurrency Investments
Crypto doesn’t provide ownership or beneficiary destinations like traditional investments.
Cryptocurrencies like Bitcoin are completely anonymous. If you die and the password or ‘private key’ wasn’t recorded somewhere, then that account effectively dies with you. Lost forever.
For that reason, it is crucial that your passwords, access codes or private key details for crypto accounts are kept in a secure location that is accessible through estate planning.
Digital assets are also vulnerable to being completely unknown or forgotten about. Even though your partner may know you dabble in crypto, they may be completely lost as to what you really own if you pass away.
- Document what you own.
- Inform your attorney.
- Document which exchanges you use.
- If you use a cold wallet, such as a USB drive or phone, then ensure the location and passwords are documented.
- Securely document where passwords for hot or cold wallets are stored.
- Document the purchase price for each cryptocurrency.
- Contact an estate planning attorney to ensure you do this securely and in your best interests.
Ensure Your Crypto Assets Will Become Accessible
Owning crypto requires that you have a password or key. Should you die, you’ll need your selected beneficiary to know the password.
This can be done by storing the password in a secure location known only by a trusted fiduciary, family member or estate planning attorney.
If you’re the owner of a cryptocurrency, you should ensure a document details how to access your cryptocurrency assets in the event of death or disability.
Some people share their passwords in chunks. They’ll give one person three digits, the other person another three and so on. While this ensures extra security for thieves, it could also be extremely risky. If one person loses their code, the entire password is lost.
Address How You’d Like Crypto to Be Distributed
Just like personal property and traditional assets, your estate plan should state how you want the cryptocurrency to be distributed upon your death.
You should also include a named fiduciary with authority and power to own the cryptocurrency in the best interests of the estate. This fiduciary can then provide passwords to the beneficiaries who you’d like to inherit the crypto.
Crypto is a complex topic so, if using a trust, you should ensure a trustee is selected to manage the crypto assets and that they have a clear understanding of what that means. This must be someone you can depend on and trust. Passwords are extremely sensitive, so never place trust in someone with a tendency to be unreliable or unfaithful. You can also consider appointing a power of attorney.
Consider All Federal Gift and Estate Tax Implications
Currently, the IRS recognizes and treats cryptocurrency as property, not as a currency. That means cryptocurrency transactions have tax consequences.
As of 2022, the U.S.’s lifetime gift and estate tax exemption for an individual is $12.06 million.
That means you can gift and devise up to $12.06 million to your beneficiary or heir and there will be no federal gift or estate taxes applied.
After this figure, the first million will be taxed at graduated rates. After that, you’ll face 40% tax rates. Note that certain deductions, including debt, mortgages and charitable gifts, are excluded when calculating the exemption.
When gifting cryptocurrency, it may also be wise to obtain an appraisal to establish the fair market value of the crypto assets.
In the world of crypto, it’s not entirely uncommon to have a considerably sized digital wallet, so these taxes may apply to you.
Some cryptocurrency owners may consider donating cryptocurrency to qualified charities to reduce tax liability. This can reward the taxpayer with a charitable deduction on their income taxes.
Note: This blog is purely for introductory purposes and should not be used for making tax-related decisions. Tax-related decisions should first go through a consultation with a professional estate planning attorney and/or CPA.
Keep Your Estate Plan Updated
Every successful estate planner keeps their documents updated. Life and financial changes may dramatically alter how you’d like your digital assets to be distributed. For example, a divorce, new grandchild or step-child should never be overlooked. The last thing you want is for someone to miss out on what you’d like them to receive or for a big family fight to occur after your death.
Similarly, your crypto valuations and investments may dramatically change, altering how you’d like the money to be shared. For example, you may start to feel it’s wiser to set up a trust so your kids don’t get too much wealth on their hands at once and instead receive it at milestones in their life.
You should also make an annual review of all your crypto investments to see how it impacts your existing estate plans and to document any new passwords and keys.
Consult an Estate Planning Attorney
As with any complicated area of estate planning for personal property, you should contact an estate planning lawyer for legal advice.
The areas that make cryptocurrencies exciting, such as privacy and decentralization, also come with risks and added complications.
By consulting a legal expert, you can minimize the risks of loss and maximize the benefits of estate planning for the good of your family.
Common Types of Cryptocurrency
CoinMarketCap.com currently lists the following as the most popular cryptocurrency in the world:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- BNB (BNB)
- USD Coin (USDC)
- Solana (SOL)
- Dogecoin (DOGE)
- Binance (BUSD)
- Terra (LUNA)
- XRP (XRP)
Contact a Cryptocurrency Estate Planning Attorney Today
If you’re looking to protect your wealth and digital assets, then our Florida estate planning attorney can guide you through the process.
Battaglia, Ross, Dicus & McQuaid, P.A. is U.S. News and World Reports Tier 1 law firm in Florida, specializing in Estate Planning & Probate since 1958. With award-winning experienced estate planning attorneys, they can help you create a will to avoid complications for your family after your death.
Schedule a free consultation today to get started.