How To Estate Plan When You Own Cryptocurrency

Cryptocurrency is becoming a popular investment for those who enjoy risk. Not only that but with bitcoin having a high value, it seems that millions of people see the value of digital assets. However, the true value of crypto has been debated since its inception. Cryptocurrency works much like other investments, so estate planning will be just as easy as it is when you invest in stocks and bonds. Here’s what you need to know about estate planning when you own cryptocurrency.

Why You Need an Estate Plan When You Own Crypto

Everyone needs an estate plan so they know their wishes will be followed after they pass away. It also allows your loved ones to skip the probate process and not have to fight about who gets your assets. Here are the benefits of having an estate plan if you buy Bitcoin or any other type of cryptocurrency.

Avoids Probate

Even if your family members know you have crypto accounts and where you stored your password, they still wouldn’t be able to legally access your accounts. A proper estate plan helps your family avoid going through a lengthy and expensive probate process where a court would determine who will inherit your crypto assets.

Easily Passing on to Heirs Investments

Your heirs an easily access most of your assets. However, crypto can be more difficult to access than a bank account because of blockchain technology. In addition, you need a private key to access your digital currency assets, so if you don’t leave that information in an estate plan, you won’t be able to pass down those assets.

Avoids Confusion about Security

Crypto is decentralized, which means banks aren’t involved in the process. It’s secure because the processing and recording of cryptocurrency are spread across many computers. While that might sound like a benefit of digital currency, it can also be a drawback. With no governing body overseeing cryptocurrency, you’ll need to take the responsibility of asset security into your own hands.

Challenges of Cryptocurrency for Estate Planning

Anonymity

Cryptocurrency is anonymous by design, which can create challenges for estate planning. There is no personal information associated with your account, and bitcoin is a virtual asset that may not be identifiable to your heirs. In addition, all transactions require your private key.

Essentially, your personal information, including your name and social security number, won’t be included because you have a private key. There is also no certificate of ownership or account statement that proves your ownership.

One major issue is with a trust, you can’t transfer an asset to a trustee.

Easily Overlooked

Making estate planning even more complicated is the fact that Bitcoin is a virtual asset that can be stored on anything capable of storing data, including a cell phone, hard drive, or thumb drive. Heirs can easily overlook something that is stored on a device because they won’t know what to look for.

Difficult to Pass to an Heir

Bitcoin transactions occur through the private key that’s saved in your wallet and allows you to spend your assets. The key can present multiple challenges. Firstly, when you’re alive, your key will have to be secure, but you’ll also need a way for your heirs to learn the key after you’ve passed away. Secondly, if you lose your private key or your heirs can’t find it, there is no way to recover it, and your crypto is essentially gone.

This differs from regular assets because there is usually a third-parting holding the asset. With crypto, there can’t be a third party involved. If an asset is left out of a trust, the mistake can be fixed by filing a petition with the court. However, you can’t file a petition when it involves bitcoin because a court can’t recover your private key.

Passing On Bitcoin to Heirs

Passing on bitcoin to your heirs comes with challenges that passing on other assets does not. However, you can make the process simple.

Provide Disclosure Assets

If you want to pass on cryptocurrency per your estate plan, you’ll need to make sure your plan provides the disclosure of your assets and a method of transferring the private key to your heirs. Luckily, the solution can be a simple letter of instruction placed in a safety deposit box.

Document Crypto Investments

Traditional investments have ownership or beneficiary designations. Cryptocurrency does not because it is entirely anonymous. If you pass away without communicating that you own crypto and don’t provide the private key, the asset will be lost forever. Blockchain records establish your ownership, and the only way to access your assets is with your private key.

With the increase in cryptocurrency values, make sure you talk to your advisor about documenting your digital assets, where your passwords are stored, and the purchase price of everything.

Ensure Accessibility

The person with your private key is the owner of your digital assets. Anyone with the key to your account can access your cryptocurrency and move it to another location, which means you won’t be able to access it once it’s moved. When making your estate plan, ensure your advisor does not keep the passwords to your digital assets. Instead, let them know where the digital key is stored so they can document it and your heirs can find it after you pass away.

Address Cryptocurrency Directly in Estate Documents

Your estate plan should directly address your cryptocurrency and how it should be distributed upon your death. Your plan should also authorize fiduciaries to provide the private key to the beneficiaries who will inherit your assets.

Because crypto is complex, consider selecting a trustee who will manage the crypto assets.

Consider Tax Implications

The IRS considers cryptocurrency property, which means the same general tax principles applicable to property transactions will apply. Cryptocurrency transactions have tax implications that can result in tax liability. Gifts of crypto are treated as gifts of property.

To reduce tax liability, you can consider giving cryptocurrency gifts and donating to charities.

Update Your Estate Plan As Necessary

Tracking cryptocurrency is important for estate planning, so consider having an annual review of your assets to ensure your estate planning lawyers and financial advisors can assist you with revising your documents as your net worth increases.

About the writer: Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.