A recent survey found that almost 90% of all crypto owners are concerned about what will happen to their crypto assets when they die. Awareness is a good thing. However, this doesn’t always mean that they have taken steps to include digital assets in their estate plans. A recent article from Forbes, “Your Financial Legacy When You Own Cryptocurrency” provides some answers about estate planning for cryptocurrency.
The IRS treats cryptocurrency like artwork: it’s personal property, and like artwork, there are certain implications requiring proper planning to ensure that assets are passed on to heirs.
Appraisals are required for any taxable transfer of crypto, including NFTs, which do not regularly trade in the market or are illiquid. Obtain one or more appraisals from certified experts and keep records—digital and hard copy—of the appraisals. Estate planning for cryptocurrency can’t start until you know how much value we are talking about.
Special tax and estate laws applicable to digital assets differ from those governing distribution of other asset classes. Don’t ignore these rules! You could leave your children with unusually high capital gains taxes, income or estate tax penalties, or depreciation of the digital asset’s market value.
Distribution of digital assets can get complicated. Estate plans generally articulate a clear plan for dividing and distributing financial assets. The distribution of complex assets, like real estate or business ownership, has been developed over many decades. Therefore, there are well-established planning methods for these assets. Regarding estate planning, digital assets are still a relatively new asset class.
Create an estate plan with both a will and a trust. These are legal documents outlining how assets are to be distributed after death. Explicitly include digital assets in your will or trust, so they are distributed according to your wishes. Refrain from including information like account numbers, passcodes, usernames, etc., in your will, as this becomes a public document during the probate process. Your estate planning attorney will help you create a plan for passing down your digital assets in a private and secure way.
Use a trust for digital assets. It may be best to name the trust as your beneficiary for cryptocurrency assets, so they do not go through probate and pass directly to beneficiaries named in the trust.
Name a digital executor or trustee responsible for managing your digital assets after your death. Select someone who understands all aspects of digital assets to ensure that they are properly managed and distributed.
Create an inventory asset list for digital assets. This will be needed if your family or digital executor needs to locate and manage assets after your death. There are many instances of people losing access to digital assets of significant value because they lost this information. An inventory will be helpful while living and after you have passed.
Estate planning for cryptocurrency can present unique challenges. Digital assets are stored in digital wallets accessed with private keys—a code known only to the owner. If the key is lost or stolen, the asset may be irretrievable.
Cryptocurrency can have major implications for your estate plan because of the differences between how digital assets and traditional assets are handled. Speak with an experienced estate planning attorney to be sure to address both kinds of assets in your estate plan.
Reference: Forbes (July 5, 2023) “Your Financial Legacy When You Own Cryptocurrency”