The Digital Estate Plan: Because Your Bitcoin Won’t Bury Itself
In the not-so-distant future, digital assets such as cryptocurrency will be an integral part of many people’s financial portfolios. As the use of cryptocurrencies like Bitcoin and Ethereum continues to grow, it is imperative to consider how these assets will be managed and passed on after one’s death. Imagine a future where your digital wealth is seamlessly transferred to your loved ones, ensuring their financial stability and peace of mind. However, this vision can only be realized with a well-thought-out digital estate plan.
The story of Gerry Cotton, the CEO of QuadrigaCX, serves as a stark reminder of the consequences of neglecting this aspect. Cotton’s unexpected death left 100,000 cryptocurrency holders locked out of their accounts, worth nearly $200 million, because he was the sole holder of the cryptographic keys[1]. This scenario highlights the urgency of including cryptocurrency in estate planning to avoid such catastrophic outcomes.
KEY POINTS
- Digital Assets: Cryptocurrencies are considered property for tax purposes and must be accounted for in estate planning documents to ensure proper transfer to beneficiaries[3].
- Cryptocurrency: Specific provisions in estate plans are necessary to identify and access cryptocurrency wallets and exchange accounts[1].
- Online Accounts: Fiduciaries need detailed information, including account passwords and private keys, to manage and distribute digital assets[2].
- Estate Planning: A comprehensive estate plan must include a succession plan for cryptocurrency, ensuring secure access and transfer of these assets[4].
Understanding Cryptocurrency in Estate Planning
What is Cryptocurrency?
Cryptocurrency is a digital currency used primarily for online payments, investment, or as a store of value. Unlike traditional currencies, it exists only in digital form and is recorded on an anonymous public ledger known as the blockchain. This unique nature of cryptocurrency necessitates special considerations in estate planning[1].
The Need for Specific Provisions
Estate planning attorneys must adapt their strategies to include cryptocurrency-specific provisions. This involves identifying the types and locations of cryptocurrency wallets, as well as creating a memorandum that contains account information, passwords, and a step-by-step guide on how to access the cryptocurrency. Without these provisions, cryptocurrency can fall into the residue of the estate and become inaccessible to beneficiaries[1].
Managing Cryptocurrency Keys and Access
Storing Private Keys
Private keys are the lifeline to accessing and managing cryptocurrency. There are several ways to store these keys, including using hardware wallets, software wallets, or even physical items like metal plates or secure USB drives. It is crucial to ensure that these keys are stored securely and that the locations are known to the fiduciaries or beneficiaries[2].
Secure Transfer of Assets
Creating a secure plan to transfer private keys is vital. This can be achieved by using a third-party custodian or by transferring the cryptocurrency into a corporate entity. Both methods help minimize the risk of losing digital wealth through theft or mismanagement. The plan should clearly outline where the private keys are stored, how to access them, and who will manage them after the owner’s passing[2].
Tax Implications and Record Keeping
Cryptocurrency as Property
For tax purposes, cryptocurrencies are treated as property. This means that the acquisition date, method of acquisition, and fair market value at the time of acquisition must be recorded. These records are essential for the executor to properly account for the adjusted basis and report and pay any taxes due from the estate[3].
Maintaining Records
Maintaining detailed records of cryptocurrency transactions is critical. The Internal Revenue Service requires taxpayers to record their transactions, and starting in 2026, brokers will report these transactions using Form 1099-DA. Ensuring that these records are accurate and accessible will help in managing the tax implications effectively[3].
Ensuring Fiduciary Access and Management
Choosing the Right Fiduciary
Selecting a fiduciary who is knowledgeable about cryptocurrency is essential. This person will be responsible for managing the volatile nature of these assets and ensuring that the value is preserved. The fiduciary must understand how to access the digital wallets, initiate transfers, and securely store the private keys[2].
Authorizing Access
Estate planning documents should include language that authorizes the fiduciary to access the accounts and retain account information, passwords, and private keys. This ensures that the fiduciary can manage the cryptocurrency without legal hurdles, especially under laws such as the Stored Communications Act[1].
Conclusion
In conclusion, planning for the digital estate is no longer a luxury but a necessity. By including specific provisions for cryptocurrency in estate planning documents, individuals can ensure that their digital assets are passed on to their beneficiaries without becoming lost or inaccessible. The key is to create a detailed plan that outlines where private keys are stored, how to access them, and who will manage them after one’s passing. This not only protects the digital wealth but also provides peace of mind for the future.
Frequently Asked Questions
What happens if I don’t include my cryptocurrency in my estate plan?
If cryptocurrency is not specifically included in the will, it will fall into the residue of the estate and may become inaccessible to beneficiaries. This is because there is no paper trail for cryptocurrency ownership, and without the necessary information, the assets cannot be transferred[1].
How should I store my private keys?
Private keys can be stored using hardware wallets, software wallets, or physical items like metal plates or secure USB drives. It is crucial to ensure these keys are stored securely and that their locations are known to the fiduciaries or beneficiaries[2].
What tax implications do I need to consider for my cryptocurrency?
Cryptocurrencies are treated as property for tax purposes. You need to record the acquisition date, method of acquisition, and fair market value at the time of acquisition. These records will help the executor to properly account for the adjusted basis and report and pay any taxes due from the estate[3].
Who should manage my cryptocurrency after my death?
It is advisable to choose a fiduciary who is knowledgeable about cryptocurrency. This person should understand how to access digital wallets, initiate transfers, and securely store private keys to manage the assets effectively[2].
Citations:
1 https://www.naepcjournal.org/wp-content/uploads/issue40f.pdf
2 https://www.texastrustlaw.com/creating-a-comprehensive-estate-plan-for-cryptocurrency-is-essential/
3 https://www.investopedia.com/tech/how-cryptocurrencies-impact-estate-planning/
4 https://www.actec.org/resource-center/video/understanding-cryptocurrency-in-estate-planning/
5 https://info.wealthcounsel.com/blog/estate-planning-with-crypto-assets