Cryptocurrency has changed the nature of what can be considered an asset, which has also affected estate planning, the process of distributing your assets to your heirs upon your death. Experts say that while crypto hasn’t changed the principles of estate planning – after all, you still want to distribute your assets however you want – it has increased the complexity of the pre-planning process.
“The big hurdle is that there is no one to call to recover passwords, keys and locations of digital assets, making pre-planning more important than ever before in wealth planning,” said Corey Roun, senior director of trading and derivatives strategies, Lyons Wealth Beheer .
Here are five tips for cryptocurrency owners when planning their estate and what to look for.
5 tips for estate planning with cryptocurrency
1. Know where the crypto is kept
The location of cryptocurrency can influence the pre-planning process in important ways:
- Storage at an institution: Cryptocurrencies held with traditional brokers or crypto exchanges can be treated in exactly the same way as other investment assets such as stocks, with a beneficiary named on the accounts or otherwise specified in a will or trust documents. Although an owner may try to keep an account hidden, it may eventually be discovered.
- Self-preservation: For example, crypto assets that are themselves held in an off-chain wallet could encounter significant problems if the owner has not informed family members of its existence. Self-stored cryptocurrency can be hidden – part of the appeal for many crypto fans – meaning the owner must notify the family of its existence and provide a way to access the stored cryptocurrency.
“These assets cannot be found through a title or estate search,” says Sean Foote, founder and CEO of Legacy Suite, a wealth planning firm for traditional and digital assets. “Access to these assets is often protected by passwords, private keys and seed phrases, which can be easily lost and are usually not shared.”
If you are preparing an estate, you should let family members know that you have crypto assets and where they are located.
2. Understand that your crypto could be lost forever
If you store crypto on an encrypted hard drive – and control it yourself – it could be forever misplaced if your advance planning isn’t thorough.
“The most important thing to keep in mind is that it is possible for the crypto to be completely lost if not enough planning is done in advance,” said Joseph Fresard, an attorney at Simasko Law in the Detroit area. “If the crypto is stored on a hard drive that is lost, destroyed or stolen, or if the key is lost, your heirs may never receive the benefit of your investment.”
“If these assets are not properly managed, they can become virtually inaccessible to heirs after the owner’s death,” Foote says.
3. Provide access to crypto accounts
Whether it’s traditional brokerage accounts or cryptocurrency held on an encrypted hard drive, it’s essential that you provide heirs with the tools and information to access your assets when you pass away. Of course, you’ll have to balance that with maintaining the security of your account, experts say.
Professionals recommend that anyone with digital assets – both crypto and non-crypto – prepare access to their accounts for executors of their estate.
“There are many ways to set up a centralized location to secure all known initials, keys and passphrases for your digital assets, and then centrally locate them in the most secure places available, such as a safe deposit box,” says Roun . “The only access to this should be the fiduciary responsible for the estate.”
And don’t underestimate how difficult it can be to access crypto accounts for those unfamiliar with the process.
“Put yourself in the shoes of someone inheriting crypto, what would you need to know to allocate that money appropriately? Make sure you include all relevant information about the crypto,” says Fresard.
4. But be careful how you grant access to accounts
Experts say it’s critical to keep your accounts secure during this process, and it’s important to follow best practices. And it is especially important for digital assets, because if cryptocurrency is sent to someone else, it is essentially unrecoverable, harming the owner and potential heirs.
“Since wills are public documents, recording this sensitive information in them could inadvertently reveal confidential data,” Foote says. “A wiser approach might be to use secure digital vaults or rely on third-party services skilled in digital estate planning.”
Roun says it is critical to eliminate access for family members who want to take advantage of the access they have and grab money before the estate is settled. “That’s another reason why the digital succession plan is so crucial for proper implementation… to set it up and open it well in advance, and maintain it annually with the owner before it transitions,” he says.
5. Cryptocurrency Taxes
It is also important not to lose sight of any tax issues that arise when dealing with cryptocurrency. Any realized capital gain is taxable, as are purchases using cryptocurrency when the value of the goods is worth more than the purchase price of the cryptocurrency. And of course, if the estate exceeds certain thresholds, estate taxes may be due even if the cryptocurrency is hidden.
“Tax implications, including tracking cost basis and profit and loss metrics, are critical, especially during the asset transition phase,” says Foote. “As the regulatory landscape for digital assets matures, these tax nuances will become increasingly important in estate planning.”
If you are an executor dealing with hidden cryptocurrency, you should proceed with caution and ensure that you take precautions to fully report the estate’s taxable gains (and losses) and that the estate meets all its financial obligations.
In short
Properly planning an estate when you own cryptocurrency or other digital assets may require more advance planning due to the decentralized nature of the assets. Smart advance planning can help mitigate the biggest dangers if crypto assets are left in an account or if greedy relatives want to siphon off your assets before they reach the intended heirs.
