Cryptocurrencies have taken the financial world by storm over the past couple of years, which means we in the estate planning world better hurry up and figure out how to deal with them.
The problem is, we have never dealt with an asset even remotely similar to this before.
Cryptocurrency is intentionally unique. It is 100% intangible. Its various types — Bitcoin, Litecoin, Ethereum, Zcash, Dash, Ripple, and Monero being the most popular — are transferred completely electronically via a self-regulating process. Those who are buying and selling cryptocurrency on an exchange often do not have to reveal their true identity. It is intentionally cut off from the traditional legal and regulatory worlds.
And yet governments are starting to engage with it. The Securities and Exchange Commission has indicated it views digital currency as a security. The Commodity Futures Trading Commission says bitcoin is a commodity. The IRS has declared it will treat cryptocurrency like property rather than traditional currency and has started to assess capital gains taxes when trades are made or when a currency-holder dies.
Our firm is working with crypto owners who want to ensure the taxes on their currency don’t destroy their current careful planning, and those who want to be able to pass currency on to someone else if they die instead of leaving it stranded in a digital wallet.
The first thing we do is make sure that any and all accounts will be accessible after their original owner’s death. We suggest account holders keep a list of all digital accounts and instructions for accessing accounts like crypto accounts which are not widely used by the general public. This information should be kept with other estate planning documents in a secure location. The future estate administrator should know where these documents are and how to access them.
Many crypto owners are hesitant to put this sort of information in writing, but the alternative is having the account just sit there after the owner dies. This would not be a big deal if the account was not a taxable asset, but it is.
Because the IRS is treating cryptocurrency like property rather than regular currency, capital gains or losses are incurred each time assets are transferred out of the account, or when ownership of the entire account passes, as it does at death according to traditional legal rules. Crypto owners need to think about how to deal with these taxes now, and estate plans need to address how these taxes should be paid at the owner’s death.
Our firm is working diligently to address the estate planning needs of cryptocurrency owners and their families. This is not the first unusual asset to pop up out of nowhere, nor will it be the last. The law must stretch to meet the needs of the time, and we must work to help it and our clients move along. An experienced estate planning attorney will know how to properly address your cryptocurrency in an estate plan.
Posted in: Estate Planning