Cryptocurrency is no longer just for tech enthusiasts. With the growing popularity of Bitcoin, Ethereum and other digital currencies, estate planning now involves accounting for these unique assets. Cryptocurrency brings new challenges, unlike traditional investments, such as real estate or bank accounts. There’s no customer service to help recover your funds, and if you don’t have the proper protection in place, your digital wealth could be lost forever.
Why Is Cryptocurrency Different in Estate Planning?
One of the main differences with cryptocurrency is how it’s stored. Digital wallets protect your crypto holdings, and private keys control access to those wallets. A common phrase in the crypto world is “Not my key, not my coin,” which means that you don’t have access to the funds if you don’t have the private key.
If you don’t create a secure plan to transfer these keys to your beneficiaries, your cryptocurrency could be lost forever after your passing. Imagine losing a loved one and knowing they invested in Bitcoin without knowing where to find it or how to access it. There are no bank statements or account numbers to check, and without a clear estate plan, their digital wealth may disappear for good.
How Can You Safely Pass Down Cryptocurrency?
According to ACTEC, you must establish a secure plan for transferring these digital assets. One option is to use a third-party custodian to manage and store your cryptocurrency’s private keys. This minimizes the risk of losing your digital wealth through theft or mismanagement.
Some people prefer to store their private keys on physical items like a metal plate or a secure USB drive. While this method gives you direct control, keeping these items safe and ensuring that your heirs know where to find them is crucial. If these physical keys are lost, so is your crypto.
Another approach is to transfer your cryptocurrency into a corporate entity. This can simplify managing and passing down your crypto holdings, reducing the burden on your heirs to figure out how to handle the technical aspects of private keys.
Estate Planning and Cryptocurrency: Why It’s Crucial
Cryptocurrency is decentralized, which means there’s no central authority or institution to recover your assets if things go wrong. If you don’t create a clear plan for your crypto, it can easily be lost forever, leaving your family with nothing.
Creating a comprehensive estate plan that includes cryptocurrency is essential. This plan should clearly outline where your private keys are stored, how to access them and who will manage them after you’re gone.
What Challenges Do Fiduciaries Face with Cryptocurrency?
If you’ve named a fiduciary, such as an executor or trustee, to manage your cryptocurrency, they may face unique difficulties. Cryptocurrencies are known for their volatility, with values fluctuating rapidly. Most fiduciaries are tasked with preserving the value of assets, and managing such volatile investments can be particularly challenging.
There’s also the issue of security. Fiduciaries may not be equipped to handle cryptocurrency’s technical requirements. They could accidentally lose access to these assets if unfamiliar with how digital wallets and private keys work. Selecting a fiduciary who understands these complexities or can seek help from those experienced in cryptocurrency management is essential.
Are Taxes Handled for Cryptocurrency in Estate Planning?
Regarding taxes, the IRS treats cryptocurrency like any other property. You’ll owe capital gains tax if you sell your cryptocurrency for more than you paid. If you’ve held the cryptocurrency for over a year, you’ll pay long-term capital gains tax, which generally has a lower rate.
Cryptocurrency also plays a role in estate and gift taxes. Timing is essential here. If you transfer your crypto during a market downturn, you could lower the tax burden on your estate. Once the value goes back up, your heirs will benefit from the appreciation without the estate being taxed on the total amount.
Estate Planning with Cryptocurrency Is Essential
Without a detailed estate plan, your cryptocurrency could be lost, mismanaged, or subject to excessive taxes. As digital assets become more common, it’s essential to account for them in your estate plan, just like any other investment. Estate planning lawyers can help you navigate these digital challenges and ensure that your cryptocurrency is adequately passed down to your heirs.
Secure Your Digital Wealth: Plan for Your Cryptocurrency’s Future Today
Don’t wait until it’s too late to secure your cryptocurrency. Speak with an estate planning lawyer today to create a solid plan for passing down your digital wealth. Contact us now to schedule a consultation and learn how we can help protect your assets for future generations.
Key Takeaways:
- Protect your cryptocurrency: Digital wealth could be lost forever without proper estate planning.
- Secure transfer of assets: Create a clear plan to ensure that your loved ones can access your cryptocurrency after your passing.
- Reduce tax burden: Plan strategically to minimize capital gains and transfer taxes on your cryptocurrency.
- Choose the right fiduciary: Select someone knowledgeable about cryptocurrency to manage your digital assets securely.
To learn more about estate planning in the East Valley, Gilbert, Mesa and Queen Creek, schedule your free consultation with Attorney Jake Carlson by using one of the links above.
Reference: The American College of Trust and Estate Counsel (ACTEC) (Sep. 8, 2022) “Understanding Cryptocurrency in Estate Planning“
