Introduction to Cryptocurrency Estate Planning

What is Cryptocurrency?

Cryptocurrency, often referred to as “crypto”, is a digital form of currency. It utilizes blockchain technology as a transaction ledger, creating a decentralised, immutable, public digital record. Its decentralised nature means that no central authority, like a bank, is needed to verify transactions, instead, a network of independent computers does this work. Available strictly in digital form, access to cryptocurrencies requires a computer or smartphone, facilitating the earning, purchasing, and selling of these digital coins aka crypto currency.

Please refer to Cryptocurrency and blockchain on Wikipedia for a detailed overview of these two topics.

Understanding the Importance of Crypto Estate Planning

Estate planning for cryptocurrency has risen in importance due to the growing adoption of digital assets as a part of investment portfolios worldwide. Unlike traditional assets such as real estate, stocks, or cash, cryptocurrencies cannot be managed or transferred upon death without the deceased’s private keys, essentially complex digital passwords that prove ownership. Moreover, because popular cryptocurrencies such as Bitcoin and Ethereum are stored in digital wallets that are usually secured by these highly confidential keys, it’s imperative to include a detailed strategy for conveying these keys to the designated heirs as part of an estate plan.

An adequate crypto estate plan also addresses problems of identifying the existence of these digital assets, taxing of the transferred crypto currency, and detailing a transparent process for asset distribution. Ignoring this aspect may lead to the loss of valuable digital assets, causing financial harm to the beneficiaries.

In the absence of centralised bodies like banks that traditionally help manage the assets of the deceased, having a estate plan for cryptocurrency ensures the protection and smooth transition of their digital assets pre/post-death, ensuring peace of mind for the crypto holder and their beneficiaries.

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Identifying and documenting your Cryptocurrency Assets

how-to-document-crypto-currency

Identifying your crypto assets is the first step in comprehensive estate planning. This involves creating an exhaustive list of your digital holdings. Here is a short guide:

  1. Record all currencies: Include every kind of cryptocurrency you own – Bitcoin, Ethereum, Litecoin, and so forth. Remember to include assets from Initial Coin Offerings (ICOs) or staking in the cryptocurrency pools.
  2. Mention their locations: Detail where each cryptocurrency is stored. They might be in hardware wallets, software wallets, or exchanges. If you’ve made transactions using certain cryptocurrencies, be sure to include these details.
  3. Quantify holdings: State the precise number of units held in each cryptocurrency. This is crucial to accurately evaluate the worth of your digital assets.
  4. Verify with Cold Storage Devices: Physically check hardware wallets or other cold storage devices to ensure the stored cryptocurrency matches your records.
  5. Cross-Reference Transactions: Cross-reference transaction histories across various wallets and exchanges to reconcile and confirm the accuracy of your crypto asset list.
  6. Utilize Portfolio Tracking Tools: Leverage cryptocurrency portfolio tracking tools or apps to automate and streamline the identification process, providing real-time insights into your holdings.

How to include your crypto in your estate plan

  1. Create a Will or Trust: Draft a clear and comprehensive will or establish a trust to outline how you want your crypto assets to be distributed upon your passing. This legal document ensures your wishes are followed and helps avoid potential conflicts among heirs.
  2. Name a Beneficiary: Designate a specific beneficiary for your crypto assets. This can be done by updating the account settings on the respective cryptocurrency platforms. Naming a beneficiary ensures a smoother and quicker transfer of assets, bypassing probate.
  3. Consider a Digital Executor or Trustee: Appoint a digital executor or trustee who is well-versed in cryptocurrency matters to manage and distribute your digital assets. This person should have the technical knowledge to handle your crypto portfolio according to your instructions.
  4. List Your Crypto Assets: Maintain an up-to-date inventory of all your crypto holdings, including information on the platforms or wallets where they are stored. This list should be easily accessible by your executor or trustee, aiding in the efficient administration of your estate.
  5. Record and Secure Crypto Keys: Document and safeguard your private keys or seed phrases. Store this information in a secure location, such as a safe or a safety deposit box, and ensure your executor or trustee knows how to access it. This step is crucial for preserving the integrity of your crypto holdings.
  6. Regularly Update Your Estate Plan: Cryptocurrency markets and regulations evolve, so it’s essential to revisit and update your estate plan regularly. Changes in your financial situation, family dynamics, or the crypto landscape may necessitate adjustments to ensure your plan remains current and effective.
  7. Creating a Comprehensive Digital Inventory: A comprehensive digital inventory is a significant piece of your crypto estate planning. This includes not just cryptocurrencies, but all your digital assets.
    • List all digital assets: In addition to cryptocurrencies, compile an exhaustive list of digital assets that includes online bank accounts, PayPal, email accounts, social media profiles, digital photos and videos, blogs, domains, digital music, eBooks, and more.
    • Include necessary access information: For each asset, list all crucial information necessary to access them, such as usernames, passwords, PINs, and secret answers. Regarding cryptocurrencies, give specific instructions on accessing each wallet or account, which would include wallet addresses and private keys.
    • Assign value to each asset: Provide a current estimate of the dollar value for each digital asset. This is crucial for tax purposes and distribution among heirs.
    • Update the inventory: Digital assets are likely to be far more dynamic in nature compared to traditional ones. Ensure your inventory is regularly updated and safely stored, ideally both digitally in a safe, encrypted format and physically in a secure location.

Always remember to keep this inventory extremely secure, ideally encrypted, and store it in multiple secure locations to protect against loss, theft, or damage. A credible attorney or trusted individual should know how to safely access this information in the event of your death.

The Process of Asset Valuation for Crypto Estate Planning

Asset valuation plays a crucial role in estate planning, including for digital assets like cryptocurrencies. Given the inherent price volatility of cryptocurrencies, this can be a complex task.

Here are some guidelines for cryptocurrency asset valuation:

1. Fair Market Value: Several tax authorities uses the Fair Market Value (FMV) at the time of the owner’s death for estate valuation purposes. Therefore, real-time pricing of each cryptocurrency at the time of death should be documented, and public pricing indexes for cryptocurrencies can be used to determine this. Please note that tax laws differ from country to country and it’s always best to do your research.

2. Converted to a Fiat Currency: The valuation should be converted into a commonly accepted fiat currency like the USD, GBP, or EUR. This is typically done by multiplying the number of units of each cryptocurrency you own by the FMV at the time of the owner’s death.

3. Regular Updating: Given the high price volatility of cryptocurrencies, the value of your digital assets can significantly change over time. This highlights the importance of regularly updating your digital inventory and estate plan. We recommend you update the valuation of crypto currency every 1 month.

4. Professional Assistance: Valuation for gift or estate tax purposes, and how to substantiate valuations to tax authorities, can be complex given the absence of clear guidelines by regulatory authorities. It’s advisable to seek advice from tax professionals and specialist advisors knowledgeable in cryptocurrency transactions to properly navigate these complexities.

Gifting Cryptocurrency and Transfer Tax Implications

Cryptocurrency gifts, much like other types of gifts, can have significant implications for transfer tax. When gifting crypto, you need to consider:

Are crypto currency gifts taxed?

1. Volatility and Timing: Given crypto’s highly volatile nature, you can optimise your tax position by gifting during lows, i.e., ‘crypto winters.’ Once the gift is made and the asset appreciates, the increased value is no longer part of your taxable estate.

2. Annual Exclusion for Gifts: As with any gift, there is an annual exclusion amount in almost every country. For example, in the USA has a limit of $17,000 for 2023 where as in the UK (HMRC website) it is £3,000. This means you can gift up to this amount to an individual each year without incurring a gift tax. It is always advisable to do your research and speak with a processional who can guide you accordingly.

3. Charitable Gifts: Gifting cryptocurrency to charities is increasingly popular and tax-efficient and also offers a strategic approach to managing your overall estate’s tax liabilities. By leveraging the tax benefits associated with gifting crypto currency to charities, individuals can make a positive impact on their communities as well.

To utilize this estate reduction method effectively while ensuring complete tax compliance, it is wise to engage a tax advisor or attorney experienced in cryptocurrency transactions.

How to Secure Access to your Crypto Assets Posthumously?

Securing access to your crypto assets posthumously involves meticulous planning. Create a detailed document listing your cryptocurrency holdings, platforms, and access information. Safeguard this information in a secure location, and consider designating a trusted individual as a digital executor who can navigate the complexities of accessing and distributing your crypto assets according to your wishes. Regularly update this documentation to reflect any changes and ensure a smooth transition of your digital wealth.

Recording and Securing Crypto Keys

The “keys” in cryptocurrency are akin to the password to your digital wallet. They are a string of randomly generated numbers and letters, and there are two types:

  1. A public key, also known as a “wallet address,” for sending and receiving crypto transactions.
  2. A private key, which overrides access to your crypto wallet, much like a password to a bank account.

Given their immense value and policy-making power in your crypto holdings, keys need to be exceptionally well-documented and securely stored. Here’s how:

  1. Record Keys: First, record your public and private keys meticulously. It is recommended to do this offline and on a physical medium to minimize hacking risks.
  2. Store Keys Securely: Protect your keys from physical damage, loss, or theft. Consider strongbox storage methods like a safe deposit box, with a trusted family member, or with an attorney. You may even want to use a failsafe method like engraving your recovery phrase on a metal plate which is more durable than paper.
  3. Backup Keys: Always have a backup of your keys in case the originals are lost or destroyed. These backups should be securely stored in a different location from the original keys.
  4. Allow Future Access: Ensure your loved ones or a designated individual can access these keys upon your death. A commonly used method is to divide the key information between multiple trusted persons, including executors, lawyers, and trusted heirs, making sure no one person has the full key until it’s necessary.
  5. Revisit Keys Regularly: Given the ever-evolving nature of technology, it’s essential to regularly revisit your stored keys and storage method to ensure they stay adequately secure and accessible.

The loss or theft of these keys could result in permanent losses. Hence, it’s extremely important to take key storage seriously during estate planning.

How to deal with Cryptocurrency held on Exchanges after Death

Should a cryptocurrency owner pass away with their assets held on an exchange, the process for accessing these funds can be complex. Here are the steps to follow:

  1. Contact the Cryptocurrency Exchange: The executor of the will should contact the cryptocurrency exchange directly, explaining the situation and enquiring about the necessary processes or policies to retrieve the deceased’s assets.
  2. Provide Documented Proof: Reputed cryptocurrency exchanges will typically request multiple documents. This includes a copy of the Grant of Probate (issued after the will has been validated), a copy of the death certificate, a copy of the will, and a form of valid identification. It’s also likely that the executor will need to undergo the exchange’s Anti-Money Laundering (AML) and Know Your Customer (KYC) identity verification process.
  3. Follow Up Regularly: Exchanges usually consider these cases manually, meaning response times can vary. Maintaining regular communication with the exchange can help expedite the process.

However, regulatory policies, exchange protocols, and legal requirements vary greatly among different countries and exchanges. It’s advisable to consult a legal expert or professional specialising in digital asset estate planning in the relevant jurisdiction. Because these processes can be complex and time-consuming, estate owners should ideally leave detailed instructions for managing their exchange accounts as part of their estate plan to simplify the process.

Use of Trusts for Cryptocurrency

Use of Trusts for Cryptocurrency

Trusts can be a highly effective estate planning tool for cryptocurrency assets, potentially providing an additional layer of protection and control in comparison to wills alone.

  1. Setting up a Cryptocurrency-Specific Trust: One might consider establishing a trust designed specifically for digital assets. In such a situation, a knowledgeable trustee is appointed to oversee the process of managing and distributing digital assets. This individual or entity should ideally have a thorough understanding of cryptocurrencies, including the related risks, regulations, and technicalities.
  2. Limiting Probate Procedures: The assets placed in the trust are typically not subject to probate – the process by which a will is reviewed and approved by the court. This can allow for a faster, less burdensome distribution of the assets upon death.
  3. Maintaining Privacy: Given that a will becomes a public document after the owner’s death, a trust can be a beneficial tool for maintaining the privacy of the owner and the beneficiaries.
  4. Implementing Control: A trust can provide specific instructions for managing and distributing assets based on pre-set conditions. For instance, one might utilize smart contracts (self-executing contracts with the terms of the agreement written into a code) to automate the distribution process.
  5. Introducing Multi-Signature Wallets: To increase security, multi-signature wallets can be employed, requiring more than one key to authorize a Bitcoin transaction. This approach can mitigate the risk of fraud, hacking, or mismanagement by any single party.

However, incorporating crypto into trusts presents its challenges – a key one being the need for trustees to manage these assets prudently. Trustees may not be adequately equipped to handle cryptocurrencies due to their inherent volatility and complex nature. Therefore, it’s imperative to identify either a reliable third-party custodian for holding and managing the crypto assets or a trustee with adequate knowledge and experience handling cryptocurrencies.

What is the difference between cryptocurrency tokens and cryptocurrency?

The difference between cryptocurrency tokens and cryptocurrency lies in their nature and purpose:

Cryptocurrency:

Cryptocurrency refers to digital or virtual currencies that use cryptography for security and operate on decentralized networks, typically based on blockchain technology. Examples of cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC).

Cryptocurrency Tokens:

Cryptocurrency tokens are a subset of cryptocurrencies, representing a specific asset or utility on a blockchain platform. Tokens are created through smart contracts on existing blockchain networks, such as Ethereum or Binance Smart Chain, and their value can be tied to various assets, rights, or functionalities.

Frequently Asked Questions (FAQ)

crypto currency estate planning FAQs

Can you inherit crypto currency?

Yes, cryptocurrencies can be inherited. When someone passes away, their digital assets, including cryptocurrencies, can be passed on to heirs through proper estate planning. This involves designating beneficiaries, securing access keys, and addressing the legal aspects of inheritance to ensure a smooth transfer of cryptocurrency holdings to the intended recipients.

Can I put my crypto in a trust?

Yes, you can place your cryptocurrency in a trust. Establishing a trust has potential tax benefits and smoother inheritance.

Can a trust own cryptocurrency?

Yes. A trust can own cryptocurrency. By incorporating digital assets like cryptocurrency into a trust, individuals can ensure efficient management, succession planning, and potential tax advantages.

What are the unique challenges in cryptocurrency and estate planning?

Challenges like securing and transferring private keys, navigating legal uncertainties surrounding digital assets, and adapting to the rapidly changing regulatory environment as some of the unique challenges when dealing with crypto currency in estate planning. The volatility of cryptocurrency values required frequent updates to estate plans along with addressing tax implications.

Should I consult a lawyer for cryptocurrency and estate planning?

Consulting a lawyer for cryptocurrency and estate planning is highly recommended. Legal professionals with expertise in both areas can provide invaluable guidance on navigating the complex regulatory landscape, drafting secure and comprehensive documents, and ensuring that your digital assets are seamlessly integrated into your estate plan. Their insights can help you address potential challenges and optimize your plan for the unique considerations associated with cryptocurrency.

What happens if you lose the private key to your cryptocurrency?

The private key is essential for accessing and managing your cryptocurrency. Losing it can lead to permanent loss access to your cryptocurrency assets, as there’s no central authority to recover or reset the key.

In specific circumstances, if you lose the private key to your cryptocurrency and it becomes irretrievable, you may be able to claim a “negligible value claim.” This process is treated as if you’ve disposed of the cryptocurrency for zero value, which crystallizes a capital loss equal to the price you initially paid for the cryptocurrency. The resulting loss should potentially offset chargeable capital gains on other assets, reducing your overall tax liability.

However, the negligible value claim must usually be made to Revenue in the assessment year when the private key was lost or deemed irrecoverable, but a grace period is generally permitted. Legislation and tax treatment differ, so it’s vital to consult with a tax advisor who is aware of cryptocurrency regulations. To avoid the chances of losing a private key, it’s imperative to adopt robust security practices, including maintaining multiple secure backups.

Is it a good idea to name a digital executor or trustee?

Naming a digital executor or trustee for cryptocurrency assets is good practice and could be incredibly beneficial. Due to the complex nature of handling digital assets after death, it may be prudent to appoint someone who has the necessary technical acumen to execute your crypto estate plan properly.

A digital executor or trustee, along with the standard executor would take on the responsibility to:

  1. Secure your digital assets by transferring them to a secure location preventing theft.
  2. Identify and approach the necessary cryptocurrency exchanges or digital wallets for retrieval of assets.
  3. Be responsible for distributing the assets as per your will or trust.
  4. Ensure that all relevant taxes are paid, and legal obligations are met during the administration of digital assets.

If choosing a digital executor seems difficult, some people opt to use a digital death service or hire a professional with knowledge in cryptocurrencies to help guide the executor through the process.

Remember, legal regulations regarding digital assets vary across jurisdictions, hence it’s a good idea to consult with a legal professional that understands digital assets.

How to safely and securely record Crypto Keys?

Consider using hardware wallets or encrypted USB drives to store private keys, and keep physical copies in a secure location, such as a safe or safety deposit box. Implementing strong, unique passwords and considering additional layers of security, like biometric authentication, adds an extra layer of protection to your crypto keys, safeguarding them against unauthorized access. Regularly review and update your security measures to stay ahead of potential risks.

What happens to your cryptocurrency held on an exchange if you pass away?

Some exchanges have specific procedures for handling deceased account holders, while others may require legal documentation from your heirs. It’s crucial to outline your wishes in your estate plan, including providing access instructions and details about your cryptocurrency holdings, to ensure a smoother transition and prevent potential complications for your heirs.