Cryptocurrency has gained popularity in recent years, going from a concept that few people understood to a separate form of currency with trillions of dollars in value. Despite this more widespread use, the law has lagged behind in how this asset is treated. If you are curious about cryptocurrency in your estate plan, consider reaching out to an estate planning lawyer.
What Is Cryptocurrency?
Cryptocurrency is digital money that owners can use to make purchases of goods and services. Blockchain technology protects cryptocurrency, which is a decentralized system that stores data regarding financial transactions in a way that protects it from being hacked, changed, or otherwise defrauded.
Unlike other types of currency, cryptocurrency is not backed by the U.S. government. While cryptocurrency has the word “currency” in it, the Internal Revenue Service says that cryptocurrency is considered personal property, not currency, for tax purposes. This means that cryptocurrency is treated more like a car or piece of furniture for estate planning purposes.
Cryptocurrency is intangible and can only be used in digital space. It can only be accessed by someone who has the private key, which is often stored in a digital wallet.
Examples of Cryptocurrency
There are currently thousands of types of cryptocurrency. Some of the most popular versions of cryptocurrency include:
Special Considerations for Cryptocurrency and Your Estate Plan
Cryptocurrencies raise some unique legal challenges, including:
Anonymity: Cryptocurrency is anonymous by nature and involve more valuable and diverse assets. Blockchain transactions are anonymous. Therefore, dealing with this type of asset is much different than dealing with other types of financial assets, such as a checking account. For example, if you have a checking account, you can generally notify the bank that you want someone else to be able to access it and such safeguards are built into the law. Cryptocurrency is different. Your beneficiaries will need to have detailed about cryptocurrency and how to access it. You will also need to provide them with an access key.
Value Volatility: Cryptocurrency also has much more volatility in its value than other assets. Cryptocurrency can quickly appreciate or depreciate in value. This can also translate to greater capital gains taxes for beneficiaries.
Prudent Investor Standard: Executors or trustees are required to handle investments as a prudent investor. Since cryptocurrency is still relatively new, many people are not familiar with it and how to safeguard it. This may mean that they need additional assistance from someone with more expertise in this area. Additionally, handling cryptocurrency properly may mean the person assigned to protect it be technologically adept.
How to Handle Cryptocurrency in Your Estate Plan
Guidance from the American Bar Association on cryptocurrency in estate plans suggests:
Include Inclusive Language in the Estate Plan: The estate plan should include specific language about how to obtain information about the cryptocurrency and that allows the fiduciary to access, retain, and manage the cryptocurrency.
Provide Access Keys: Even if the fiduciary is able to access the cryptocurrency, if this access occurs after death without a proper access key, the fiduciary could be in violation of privacy laws, data protection laws, or terms of service agreements. Therefore, it is important that you provide proper access keys to the people who will need to access your cryptocurrency.
Many people use a cold wallet, which requires a PIN to access and keeps information secure but accessible.
Make a Detailed Plan: Carefully consider how you want cryptocurrency to be handled and leave detailed notes in a will or trust. Since a will becomes public, you might want to create a separate memorandum about your cryptocurrency to accompany your will but not be publicized. Creating a detailed step-by-step guide in which you explain how your fiduciary can access your cryptocurrency can go a long way to ensuring these assets can be accessed and not serve as an undue burden on your beneficiaries.