If you have invested in crypto since your estate plan went into effect, you should include that investment among the potential “triggering events” for an estate plan review or update. Also, your estate plan should include meticulous documentation, including identifying crypto holdings, their location (wallets, exchanges), and access keys, and perhaps designating a “crypto custodian.”
UNDERSTANDING CRYPTO
In contrast to more conventional investments, such as ownership of currency or registered securities, crypto is a purely digital asset with specific storage, access, and tax implications. Significant planning challenges can arise from any number of issues related to crypto, including:
- documentation;
- taxation and valuation;
- ownership transfers;
- probate (if the crypto is held outside of a trust); and
- fiduciary selection and access.
No Paper Trail. Unlike conventional investments, cryptocurrency ownership is documented on the “blockchain,” which can complicate the process by which your beneficiaries establish ownership and gain access.
On a more conventional level, as with your registered securities and other financial accounts, you will need to create a detailed list of all of your crypto holdings, including the types, amounts, and wallet addresses, and the exchanges where they are stored.
Tax Liability.
The IRS considers cryptocurrency as “property” (see the
Digital Assets page on the IRS website), which subjects it to the same tax rules as your more conventional assets. This determination is very important in estate planning.
You might need to bring in a tax professional who understands the specific tax consequences of crypto, including how it is valued for estate or inheritance tax purposes, and, more common, how capital gains taxes might apply to ownership transfers. In either case, crypto’s erratic market fluctuations can make establishing a defensible value much more challenging than with other types of assets.
Will vs. Trust. One of the consequences of crypto’s decentralized nature is that you generally cannot designate beneficiaries with an account custodian, as you can for most other sorts of financial assets.
Thus, absent some special arrangement (see “Crypto Custodian” below), an individual (a) who owns even a modest amount of crypto, and (b) whose estate plan consists solely of a basic Will, will not avoid probate.
While the complexities of probate are, in many instances, exaggerated, such is not the case when crypto is added to the probate estate. If crypto issues are unfamiliar to your personal representative and heirs, you can assume that they will also be unfamiliar to the judge presiding over your probate.
In our opinion, if you have crypto holdings, a trust is a practical necessity. Your trust should own the crypto (i.e., the crypto should be retitled into the trust), and your successor trustee should have some familiarity with digital assets. If your successor trustee is not likely to have or obtain that familiarity, read on.
Crypto Custodian. There are some companies that offer crypto custodial services, which are like a limited trust/conservatorship just for digital assets. Signing up for such a service does allow you to name beneficiaries and perhaps avoid probate; however, you are limited to the contractual terms on offer, and there are always risks in relying on such third-party companies to manage large amounts of wealth for an extended period of time.
Access. You will need to create a detailed list of all of your crypto holdings, including the types, amounts, and wallet addresses, and the exchanges where they are stored.
Protecting your crypto assets requires proper storage and restrictions on access. It is crucial that your successor trustee can obtain the necessary login credentials, keys, passwords, etc.,
when necessary. Ensuring that your trustee knows where those credentials are stored (we recommend storing them separate from your estate plan binder) and can access them in an emergency,
but not before then, is an elusive objective for crypto owners.
SEEK PROFESSIONAL ADVICE
In creating or updating your estate plan in the wake of crypto ownership, you should consult with an estate planning attorney who is familiar enough with cryptocurrency holdings to ensure that your plan is legally sound and addresses the foreseeable tax and asset transfer considerations.
See also:
“Digital Assets: Your Estate in the Cloud,” Hoopes, Adams & Scharber, PLC
“Understanding Cryptocurrency in Estate Planning,” Karin C. Prangley and Suzanne Brown Walsh (co-authors), The American College of Trust and Estate Counsel
“Fitting Cryptocurrency into Your Estate Plan,” Fidelity Wealth Management
