We’re witnessing a time where digital assets are gaining prominence. As cryptocurrency becomes more widely recognized, its implications for estate planning are significant and multifaceted. This blog aims to educate estate planning attorneys about the unique considerations, challenges, and best practices for planning for cryptocurrency assets. If you want to understand how to include crypto assets into your client’s estate plans, then read on.

A recent survey found that 89% of cryptocurrency owners are concerned their families may struggle to identify and access these assets after their death. As estate planning attorneys, it’s important to understand how to effectively incorporate digital assets into your clients’ estate plans.

Through insights from Brittney Shearin, ESQ., Head of Product & Legal Technical Attorney for LWP, we will explore essential topics that can help attorneys confidently work this emerging area and better serve their clients who might want to include crypto assets in their wills or trust.

Here’s what you need to know about helping clients secure their financial legacies when it comes to cryptocurrency.

Definition of Crypto Assets

Crypto assets, commonly referred to as cryptocurrencies, are digital currencies that use cryptography for secure financial transactions. Unlike traditional currencies, cryptocurrencies operate on decentralized networks, often referred to as blockchain technology, which enables peer-to-peer transactions without the need for intermediaries such as banks. While Bitcoin remains the most recognized cryptocurrency, thousands of other digital currencies exist, each with unique features and purposes.

Growing Importance in Estate Planning

As the digital economy expands, so does the relevance of cryptocurrencies in estate planning. According to digital currency solution business, Triple-A, over 560 million people now own cryptocurrency worldwide, reflecting significant growth from the mere 4 million people who owned crypto just 7 years ago. As a result, estate planning attorneys must be prepared to address the unique characteristics and challenges that crypto assets present.

Unique Challenges of Crypto Assets in Estate Planning

Decentralization and Access Issues

One of the primary challenges with crypto assets is their decentralized nature. Unlike traditional assets that can be easily transferred or bequeathed, cryptocurrency often exists in online wallets secured by private keys. If the security key is lost or inaccessible at the time of the holder’s death, the assets become irretrievable. Brittney Shearin emphasizes, “The decentralized nature of crypto poses a risk; without access to private keys, the wealth can vanish.”

Valuation Volatility

Cryptocurrency is notoriously volatile, with significant fluctuations in value occurring over short periods. For instance, Bitcoin’s price swung from nearly $65,000 in April 2021 to about $30,000 in June 2021. This volatility can complicate estate planning, making it challenging to structure an estate plan that accurately reflects the value of these assets at any given time. Forbes reported that volatility can impact the overall estate value, affecting distribution among beneficiaries.

Understanding the Legal Landscape of Crypto Assets

Regulatory Considerations

The legal treatment of cryptocurrency varies significantly across jurisdictions. Some jurisdictions classify crypto as property, while others view it as currency, impacting tax liabilities and the overall administration of the estate. The Internal Revenue Service (IRS) treats cryptocurrencies as property for tax purposes, meaning holders must recognize gains or losses when they sell. This classification creates a web of regulatory considerations that estate planning attorneys must navigate.

Jurisdictional Variability

The lack of uniform regulations complicates the estate planning process. Different states have varying approaches to the legal status and taxation of digital currencies. This inconsistency can lead to potential conflicts regarding the treatment of assets upon death, creating increased litigation risks if there is disagreement among executors, beneficiaries, or fiduciaries. Brittney notes, “This lack of uniformity may lead to complexities that can escalate into disputes during the estate settlement process.”

Common Misconceptions About Crypto Assets

Misunderstanding the Nature of Crypto Assets

One prevalent misconception is that clients believe crypto assets are treated the same way as cash or traditional investments. While they may share similarities in terms of transactions and inheritance, access to these assets is fundamentally different. Many clients overlook that accessing cryptocurrency requires specific private keys and passwords.

Another misconception is that digital assets are automatically included in estate plans. This misunderstanding can lead to complications during probate, resulting in potentially expensive and time-consuming processes. Moreover, clients may wrongly assume that taxation rules do not apply to crypto assets, whereas the IRS mandates reporting crypto transactions.

Addressing Misconceptions Around Crypto Assets For Estate Planning

To combat these misconceptions, attorneys can proactively educate clients on cryptocurrency and digital assets. Hosting tailored workshops, webinars, or providing educational resources through newsletters and social media can raise awareness. Sharing real-life stories of individuals unable to access their crypto assets after a loved one’s passing can also illustrate the importance of proper planning.

Unique Considerations for Estate Planning with Cryptocurrency

Cryptocurrency is treated by the IRS as personal property, similar to artwork. This classification brings specific financial implications that necessitate meticulous planning to ensure clients’ assets are transferred according to their wishes. Here are key factors to consider when advising clients on including cryptocurrency in their estate plans:

Appraisals: Just like rare artwork, appraisals are required for any taxable transfer of cryptocurrency, especially for assets like NFTs that may not have a stable market value. Encourage clients to obtain appraisals from certified experts and maintain records for these assessments.
Tax Laws: Cryptocurrencies are subject to unique tax laws. Ignoring these regulations can lead to significant capital gains taxes for heirs, income or estate tax penalties, or depreciation in the asset’s market value.
Complex Distribution: While many estate plans detail the division of traditional financial assets, they often overlook more complex assets like cryptocurrency, which can hold significant financial value. And when the value of crypo assets vary wildly, distribution of such assets may cause rifts or unequal distribution of assets among beneficiaries.

Identifying and Valuing Crypto Assets

Steps for Identifying Crypto Assets

Estate planning attorneys should implement a thorough intake process that includes identifying all digital assets a client possesses. This process involves creating a digital asset inventory that outlines the types of crypto assets, wallet addresses, exchange accounts, and access details.

Valuing Volatile Assets

Valuing cryptocurrency is inherently challenging due to its volatility. Attorneys can utilize current market prices from exchanges where the assets are traded, but they must be mindful of potential fluctuations in value. This is especially critical when clients are approaching Medicaid threshold limits or estate tax exemption limits. It’s also important to ensure equality of distribution among beneficiaries, if that’s the client’s goal. Collaborating with financial professionals experienced in crypto assets can provide valuable insights into accurate valuation.

Safeguarding Access and Security

Ensuring Access for Executors and Beneficiaries

To ensure executors and beneficiaries can access crypto assets after a client’s death, it is crucial to establish clear, written instructions. This documentation should detail how to log into accounts, recover wallets, and cash in assets. Regularly updating these access instructions is equally important to reflect any changes in the client’s accounts.

Creating a Secure Plan for Access Information

Beyond written instructions, clients should implement robust security measures to safeguard private keys, passwords, and access information. Utilizing reputable password managers and two-factor authentication adds layers of security. Brittney recommends discussing various storage options, such as online wallets for convenience and offline wallets for enhanced security. Physical keys should be stored in safe locations, such as home safes or safe deposit boxes, to prevent unauthorized access.

Essential Tips for Handling Cryptocurrency in Estate Plans

To ensure a comprehensive and effective estate plan, encourage your clients to consider the following:

Create Both a Will and Trust: It’s important for clients to include their digital assets explicitly in both documents. A Will and a Trust outline how assets will be distributed, ensuring that cryptocurrency is managed according to their wishes.
Name a Beneficiary: Advise clients to designate their Trust as the beneficiary of their cryptocurrency assets, when possible. This strategy can facilitate the transfer of assets without going through probate, minimizing delays and costs.
Designate a Digital Executor or Trustee: A digital executor or trustee can oversee the management and distribution of cryptocurrency assets after death. This ensures that assets are handled properly, respecting the client’s wishes. This also allows clients to name more crypto-savvy friends, family, or professionals to handle their crypto assets, separate from their traditional assets.
Maintain an Inventory: Encourage clients to keep a detailed record of their cryptocurrency holdings, including the types of cryptocurrencies, quantities, value at the time of purchase, and storage locations. This documentation will be invaluable for Trustees or Executor, as well as for beneficiaries.
Consider a Cryptocurrency Custodian: For clients with significant cryptocurrency holdings or security concerns, utilizing a cryptocurrency custodian can provide additional management and security for these assets.

Integrating Crypto into an Estate Plan

Provisions for Crypto Assets

An estate plan should include a comprehensive list of all cryptocurrency holdings, detailing the type of crypto, wallet locations, and necessary accounts for access. If specific bequests are intended, these should be clearly stated in the estate plan, along with contingent beneficiaries. Furthermore, references to digital assets should clarify the authority of the Trustee or Executor over crypto holdings. It is also important for attorneys to check state statutes regarding digital assets, to determine whether the statute contemplates fiduciary rights over these types of assets.

Trust Structures for Crypto Assets

Attorneys should work with clients to determine the most suitable trust structures for managing crypto assets. Both revocable and irrevocable trusts can be effective tools. Revocable trusts offer flexibility and ongoing access to assets but lack asset protection. In contrast, irrevocable trusts provide greater protection but come with more limitations.

Specialized digital asset trusts are also an option, providing tailored management of crypto assets. While not necessary for all clients, some may find value in separating complex digital assets into their own trust for specialized management.

Tax Implications and Reporting

Key Tax Considerations

When planning for crypto assets, attorneys should educate clients about capital gains tax implications, as the IRS treats cryptocurrencies as property. Gains from sales or exchanges are subject to capital gains tax, with different rates applicable for short-term versus long-term holdings. Additionally, gift tax and estate tax considerations mirror those for traditional assets.

Reporting Crypto Holdings

Accurate reporting of crypto assets is essential for estate tax purposes. Clients must keep detailed records of all transactions, including purchases, sales, and exchanges, along with dates and fair market values. Crypto assets should be reported on IRS Form 706 if the estate exceeds the federal estate tax exemption. Proper recordkeeping ensures that clients are prepared for any potential tax liabilities.

Administration of Cryptocurrency in Estates

Administering cryptocurrency within an estate or trust poses unique challenges that require specialized knowledge:

Private Key Security: Cryptocurrency is stored in digital wallets secured by private keys. Losing or having these keys stolen could result in the irretrievable loss of assets.
Beneficiary Identification: Ensuring that beneficiaries can be identified and located after the owner’s death is vital. This can be complicated if the assets are in a wallet only accessible by the original owner.
Legal and Regulatory Ambiguity: Cryptocurrency is a relatively new asset class, and there remains a lack of regulatory clarity concerning its treatment in estate planning. This uncertainty can complicate the fiduciary responsibilities of executors and trustees.

Educating and Engaging Clients

Staying Informed on Cryptocurrency in Estate Planning

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