A recent survey¹ found that 89% of Crypto owners are worried if they pass away, their families will not be able to identify and access their Cryptocurrencies. So, what does financial legacy planning look like for Cryptocurrency? How should you include digital assets in your estate plans? What do your heirs need to know about inheriting these assets? Here are some answers and tips on estate planning for your financial legacy when owning Cryptocurrencies.
What is Different When Crypto is Included in your Estate?
The IRS treats Cryptocurrency, or Crypto, like artwork, that is as personal property; and, like artwork, including Cryptocurrency in your estate has financial implications that require proper planning to ensure that your assets are passed on to your heirs according to your wishes. Here are some important details to consider when including Cryptocurrency in your estate plan:
APPRAISALS. Appraisals are required for any taxable transfer of Crypto (especially NTFs) that do not regularly trade in the market or are illiquid as part of the estate administrative process. It is important to obtain one or more appraisals from certified experts and keep records of them.
TAX & ESTATE LAWS: Special tax and estate laws apply to Crypto, much as they do to artwork and collectibles, that differ from those governing the distribution of other types of assets in an estate. Ignoring these laws can result in unnecessarily high capital gains taxes to your heirs, income or estate tax penalties, or depreciation of the asset’s market value.
COMPLICATED DISTRIBUTION: Many estate plans clearly articulate a plan for division of financial assets but fail to address the distribution of more complicated assets that often have both financial and sentimental value, such as Crypto and especially NFTs.
Some Tips on Handling Crypto in an Estate Plan
Create an estate plan which has both a Will and Trust: Wills and Trusts are legal documents that outlines how your assets will be distributed after your death. It is important to explicitly include your digital assets, including your Cryptocurrency, in your Will or Trust, to ensure that they are distributed according to your wishes.
NAME A BENEFICIARY FOR YOUR CRYPTO ASSESTS: Naming your trust as your beneficiary for your Cryptocurrency assets can help ensure that they are passed on to the intended recipient without going through probate.
NAME A DIGITAL EXECUTOR OR TRUSTEE: A digital executor or trustee is responsible for managing your digital assets, including Cryptocurrency, after your death. This can help ensure that your assets are properly managed and distributed according to your wishes.
MAKE A LIST OF YOUR CRYPTOCURRENCY ASSETS: It is important to keep a record of your Cryptocurrency assets, including the type of Cryptocurrency, the amount, and where they are stored. This can help your family or fiduciary locate and manage your assets after your death.
CONSIDER USING A CRYPTOCURRENCY CUSTODIAN: A Cryptocurrency custodian is a third-party service that can help manage your Cryptocurrency assets. This can be especially useful if you have a large amount of Cryptocurrency, or if you are concerned about the security of your assets
Administering Crypto in an Estate.
Administering Cryptocurrency in an Estate or Trust can present unique challenges that require specialized expertise. Here are some potential challenges to consider:
PRIVATE KEY SECURITY: Cryptocurrency is stored in digital wallets that are accessed using private keys. If the private keys are lost or stolen, Cryptocurrency may be irretrievable.
BENEFICIARY IDENTIFICATION: It is important to ensure that the intended beneficiaries of your Cryptocurrency assets can be identified and located after your death. This can be challenging if the assets are stored in a digital wallet that only you have access to.
LACK OF LEGAL & REGULATORY REGULATION: Cryptocurrency is a relatively new asset class, and there is a lack of legal and regulatory clarity surrounding its use in estate planning. This can make it difficult to navigate the legal landscape, especially where your executor and your trustee owe a fiduciary duty to your beneficiaries. This is sufficiently uncertain that some banks refuse to act as a fiduciary for estate that contain Crypto.
CUSTODY & ADMINISTRATION: Cryptocurrency assets held in an estate or trust can have major implications for an estate plan, such as how the assets will be held for custody and how they will be administered.
So, the financial legacy of owning cryptocurrencies is significant due to the differences between how Crypto is handlined and other investment assets are handled in your estate. There are some actions you can take now to help ease the challenge, but the administration of your estate will still require overcoming some significant challenges.
¹(https://www.prnewswire.com/news-releases/89-of-Crypto-owners-might-lose-their-money-if-they-pass-away-reports-survey-by-dglegacy-301843482.html)
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