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Estate Planning with Cryptocurrencies

BitcoinThe fluctuating prices of cryptocurrencies is a frequent topic of discussion, but how they figure into estate planning is often ignored. Digital currencies are anonymous, meaning that they do not have a listed beneficiary like most asset management accounts do. There is also no central “Bitcoin Bank” for executors or trustees to contact for further information, meaning that the information provided to heirs is literally all they will have to work with when attempting to claim their inheritance. 

The first thing to remember is that estate planning is absolutely essential when considering cryptocurrency. If the owner of a Bitcoin account dies without sharing their private key with anyone, their holdings become completely inaccessible. This means that the funds within it have effectively died with their original owner. Anybody interested in including crypto assets as part of their estate for their heirs needs to be proactive about making arrangements according to their wishes.

This does not mean sharing a private key with the world. Instead, the holder of cryptocurrencies should write it down and place it somewhere secure, such as a safe or digital archive site. This arrangement makes the private key public only when necessary, giving the cryptocurrency trader privacy in the meantime.

Estate planners should also consider the tax implications of digital holdings. The IRS currently considers Bitcoin and other virtual currencies as property, just like a car or house. As such, the estate may be subject to capital gains taxes if it's crypto holdings increase in value. The initial purchase price is irrelevant in these circumstances, as only the current market price and the currency’s value on the original holder’s date of death are included in the calculation.

Some states have a “Prudent Investor Act” requiring trustees and executors to diversify any significant investment, language that may be taken to include cryptocurrency holdings. If the owner of a cryptocurrency legacy wishes to pass it on in its current form, it is necessary to specifically absolve whoever is managing the estate of any liability should the “investment” go sideways.

There are additional steps that may be taken to ensure the successful transfer of digital assets. For example, all cryptocurrency holders should make a complete inventory of where their digital holdings are hosted as part of their estate planning. Some coins are stored on the exchanges or used to purchase them, such as Coinbase or Bitstamp. Any exchanges used should be written out on paper so that relevant heirs know where to look.

Alternatively, tokens may be stored within an online “wallet”. Heirs need to know the name of any wallets that may have coins and where the backups for those wallets are located to have any realistic chance of claiming their inheritance.

Finally, any devices (laptops, smartphones, etc.) used to access cryptocurrencies may have private keys saved on them. Anybody with access to these devices could take the crypto without authorization, so heirs need to protect them until the estate has been settled.

Cryptocurrencies have added a new dimension to estate planning that must be considered in all relevant circumstances.