Cryptocurrency has existed in various forms since the 1980s, but it only became widely popular about a decade ago. Now, there is a good chance that you own some digital assets. Common forms of digital assets include cryptocurrencies, such as Bitcoin or Ethereum, and non-fungible tokens (NFTs). Managing digital assets can be a complex process. The laws surrounding cryptocurrency and estate planning are still in their infancy. The estate planning and probate systems are accustomed to dealing with traditional assets like real estate and IRAs. Crypto assets present distinct issues. As the crypto market grows, new laws will develop to address at least some of those issues. Your estate planning documents must address how you store your digital assets and to whom you allow access. You can secure your assets by seeking guidance from an estate planning attorney at Midgett Preti Olansen PC.
Cryptocurrency can present several complicated issues for estate planners. Crypto assets can be challenging to locate or identify without guidance from the owner. Even if an estate planner, executor, or beneficiary has a complete list of someone’s crypto assets, they might be unable to access them because of advanced encryption. Cryptocurrency is a complicated technology, and many people who are otherwise qualified to execute a will might not know how to manage it.
Finally, crypto assets tend to be highly volatile, which can conflict with an executor’s fiduciary duty to manage an estate’s assets. You may need someone experienced with crypto to handle that part of your estate while someone else handles the rest of your property.
Many traditional assets have a clear connection to their owners. Brokerage and bank accounts, for example, include information about account holders, such as names, addresses, and tax identification numbers. Financial institutions will not open an account without sufficient personally identifiable information. An authorized individual, such as an executor, can often find these assets based on information like a decedent’s name or date of birth. Many types of financial accounts allow account holders to designate beneficiaries to receive the account assets after the account holder’s death.
Crypto assets, on the other hand, are usually anonymous. A cryptocurrency account might not include the owner’s name, let alone any beneficiary designations. If you intend to leave your crypto assets to your loved ones, your estate plan needs to identify your assets with enough detail to allow the executor of your estate to find them. This includes a description of each asset and its location. You could have your crypto assets in an online digital wallet like Coinbase, in a cryptocurrency exchange, or on a storage device like a USB drive. If you have assets stored on a physical drive, you must let your executor know where it is, such as in a safe or safe deposit box.
Cryptocurrency uses blockchain technology to maintain the security of each “coin.” In order to use cryptocurrency in a transaction, you need the owner’s private key.
Without the private key, your executor cannot use your crypto assets. They cannot transfer them to your heirs, sell them on a cryptocurrency exchange, or use them in any other way. Your crypto assets would be essentially worthless. Your estate planning documents must provide access to private keys, passwords, and any other information that an executor would need to access your crypto.
Since you want to keep that information confidential, you probably want to avoid including actual private keys in your will. You can use estate planning documents to make sensitive information available to your executor. For example, you can write down your private keys in a document and keep that record in a safe deposit box. Your will can then allow your executor to access the box.
Cryptocurrency began growing in notoriety around 2009. Even in the fast-moving tech industry, that is not very long ago. The person you choose to execute most of your will might not be the best person to manage your crypto assets. In this circumstance, you could appoint two or more executors. One would deal with personal property, real estate, bank accounts, and other traditional assets. The other would be your “crypto executor.” They would handle accessing your crypto assets and distributing them to your heirs.
An executor has a fiduciary duty to a decedent and their beneficiaries. They must manage estate assets responsibly and make every reasonable effort to preserve the value of an estate’s assets. Fiduciaries are not generally in charge of volatile assets. Cryptocurrency, however, tends to be highly volatile.
Different types of digital currencies have experienced significant volatility in recent years. Some cryptocurrencies have skyrocketed in value, while others have become effectively worthless. This uncertainty presents a considerable challenge for a fiduciary.
Losing value is not the only concern for an executor dealing with cryptocurrency. They must also consider how an increase in value could affect an estate’s tax liabilities. The IRS views cryptocurrency as an investment asset for income tax purposes. An increase in value could lead to liability for capital gains tax. A sufficiently massive increase could even create estate tax concerns.
As discussed above, choosing a crypto executor who understands how digital assets work is important. You need someone who will also consider potential tax consequences when administering this part of your estate.
Blockchain technology has allowed digital assets like cryptocurrency and NFTs to become widespread. It creates and maintains a distributed ledger of transactions that is not subject to editing or other alterations. A blockchain ledger can therefore provide a complete record of transactions on a crypto network. This has already begun to affect the estate planning and probate processes.
Centuries of estate planning law have sought to ensure that a person can leave instructions for the distribution of their assets after their deaths with no unauthorized alterations or forgeries. Virginia law requires a will to be in writing, signed by the individual making the will (the “testator”), and signed by two witnesses. This process has long involved a printed will signed in ink. While Virginia is not among them, several states have enacted versions of the Uniform Electronic Wills Act, which allows testators to sign wills electronically with the same legal effect as a signature on paper.
Blockchain technology could enable a testator to leave instructions for administering their digital assets directly on the blockchain ledger. Any alterations to a “blockchain will” would be visible. Proponents of this type of system argue that it would be even more secure than the legal formalities required by current law. It would also streamline the execution of a will’s instructions regarding digital assets by integrating those instructions into the blockchain.
Intangible property like cryptocurrency can be easily overlooked during estate planning. People tend to think of real estate and personal property when they think about creating a will. A will might leave all of a testator’s tangible property to one or more beneficiaries, and a testator might assume that this does not include their crypto assets. However, certain storage methods can turn cryptocurrency into a tangible asset.
Many companies store cryptocurrency for customers in digital wallets. From consumers’ point of view, their cryptocurrency is in the “cloud,” where they can access it from almost any computer or mobile device. This type of crypto storage is often known as a “hot” wallet. Crypto assets stored in a hot wallet are intangible since they have no physical form other than the wallet company’s servers.
Another option for storing virtual currency is to leave it with an online cryptocurrency exchange. Many hot wallets allow consumers to transfer cryptocurrency to an exchange fairly quickly, much like online brokerage accounts. Crypto assets stored with an exchange are also intangible assets.
A “cold” wallet stores crypto assets offline on an external storage device like a USB drive. The drive itself is an item of personal property that the testator owns. If their will disposes of all of their tangible property at once, that will likely include the USB drive and all of its contents. The cryptocurrency could therefore be part of the testator’s tangible property.
The IRS treats cryptocurrency like property, not currency, for income tax purposes. Crypto assets are, therefore, similar to stocks and other investments. If you buy a cryptocurrency and then sell it once it increases in value, you must pay capital gains tax. If you sell it at a loss, you may be able to claim a capital loss on your taxes. Gifting cryptocurrency may result in gift tax liability if its value at the time of the gift exceeds your annual gift tax exemption amount.
You can put cryptocurrency and other digital assets into a trust, but you should consider several issues before you do so. A trustee with fiduciary duties is responsible for managing trust assets. They will need full access to the trust’s crypto assets, including all personal keys. You probably should not include that information in the trust document itself, but you must give it to the trustee as soon as possible.
Cryptocurrency’s volatility can create problems for a trustee. As fiduciaries, trustees must follow the “prudent investor rule,” which generally requires them to avoid overly risky investments that could lead to sharp drops in value. Virginia has enacted the Uniform Prudent Investor Act, which outlines the “reasonable care, skill, and caution” that a trustee must use. Crypto assets may directly conflict with that obligation. Many financial institutions may decline to accept any trusts with crypto assets.
Virginia law allows a trust agreement to “restrict, eliminate, or otherwise alter” the prudent investor rule. This would allow a trustee to manage crypto assets with a much higher tolerance for risk. However, as mentioned above, institutional trustees might avoid this type of trust.
The volatility of cryptocurrencies provides several opportunities for tax savings. Timing is crucial since it requires making a gift when crypto values are low or a charitable donation when values are high. You can use these techniques to transfer crypto assets out of your estate ahead of time, reducing your eventual estate or gift tax bill.
The IRS charges gift tax to taxpayers who give away significant amounts of property. Unlike income tax, the person making the gift is responsible for the tax, not the recipient. Gifts up to a particular value are exempt from the gift tax. The IRS provides for an annual gift tax exemption each tax year, as well as a combined lifetime gift and estate tax exemption. The exemption amounts for 2023 are as follows:
Different exemptions apply for gifts between spouses, depending on the citizenship status of the recipient spouse:
When determining whether a taxpayer has exceeded the gift tax exemption, either for a particular year or throughout their lifetime, the IRS looks at the value of the gift at the time the taxpayer made the gift. Gifting cryptocurrency when its value is low can help the gift giver avoid gift tax liability.
Taxpayers can deduct donations to 501(c)(3) charitable organizations from their income for tax purposes. The IRS limits charitable deductions to a percentage of annual income for most taxpayers, with some exceptions. Deductible donations may include both cash and property. Donations of cryptocurrency to charitable organizations can therefore produce tax benefits.
This strategy aims to make a donation when the crypto asset’s value is high. The donor receives a tax deduction. The charitable organization can sell the asset tax-free and use the money to support its mission.
Including your digital assets in your estate plan helps to ensure that the beneficiaries of your estate will be able to access and take full advantage of those assets. Without a detailed description of your crypto assets, instructions on how to access those assets, and a complete set of personal keys or passwords, you could lose those assets forever.
This is not just speculation. Crypto asset owners have lost everything because of unknown passwords. An example occurred in late 2018 when the 30-year-old founder and CEO of a Canadian cryptocurrency exchange reportedly died while on his honeymoon in India. His company had about US$190 million worth of crypto holdings for more than 100,000 customers. He had the only password to access these assets, and no one ever found the password after his death rendering the value of the accounts worthless. You do not want anything like this to happen to your heirs.
When you speak to an estate planning attorney, you should provide them with all the necessary information for identifying and accessing your crypto assets. Your attorney will provide detail in the estate plan on locating your crypto assets. They will leave sensitive information like personal keys out of your actual Last Will and Testament, but they will make that information readily available to your executor. You can be assured that your crypto assets plan will take effect how you want.
To ensure that your estate plan property and completely accounts for your digital assets, you need a diligent and thoughtful Virginia Beach estate planning attorney. Contact Midgett Preti Olansen today at 757-687-8888 or through our online contact form to schedule a confidential consultation.