The definition of an asset has changed due to cryptocurrency, and this has an impact on estate planning, which is the process of distributing your assets to your heirs after your death. According
to experts, while the fundamentals of estate planning haven’t changed—you still want to distribute your assets as you see fit, after all—it has made the pre-planning process more difficult.
According to Corey Roun, senior director of trading and derivative strategies at Lyons Wealth Management, “the big challenge is there is nobody to call to recover passwords, keys, and
locations of digital assets, making pre-planning more critical than ever before in estate planning.”
Here are five advice for cryptocurrency owners on estate planning and what to avoid.
5 suggestions for using cryptocurrency in estate planning
1. Be aware of where the cryptocurrency is kept.
Custody with an Institution: When cryptocurrency is held with conventional brokers or on cryptocurrency exchanges, it can be managed just like other investment assets like stocks, with a
beneficiary designated on the accounts or in other ways in a will or trust document. Despite an owner’s best efforts, a hidden account can still be found.
Self-custody: Self-custodied crypto assets, such as those kept in an off-chain wallet, may encounter serious problems if the owner has not informed family members of their existence. Self-
custodied cryptocurrency can be hidden, which is one of the things that draws many crypto enthusiasts to it. However, this means that the owner must let family members know about it and give them access to the stored cryptocurrency.
According to Sean Foote, founder and CEO of Legacy Suite, an estate planning company for traditional and digital assets, “these assets are not discoverable via a title or probate search.”
“Passwords, private keys, and seed phrases are frequently used to protect access to these assets, but they are easily lost and typically not shared.”
If you’re preparing an estate, you must inform your family members of your cryptocurrency holdings and the location of those holdings.
2. Recognize that your cryptocurrency may be permanently lost.
If your estate pre-planning is not thorough, any cryptocurrency you are self-custodizing on an encrypted hard drive could end up lost forever.
According to Joseph Fresard, an attorney with Simasko Law in the Detroit area, “the main thing to keep in mind is that it’s possible the crypto could be completely lost when not enough planning
has been done beforehand.” “It’s possible that your heirs will never reap the rewards of your investment if the crypto is stored on a hard drive that disappears, is destroyed, or stolen, or if the key is lost.”
According to Foote, if these assets are not properly managed, they could be practically inaccessible to the owner’s heirs after his or her passing.
3. Allow access to cryptocurrency accounts
It’s crucial that you give your heirs the information and means to access your assets after your death, whether they are traditional brokerage accounts or cryptocurrency stored on an encrypted
hard drive. Naturally, experts advise that you strike a balance between that and preserving the security of your account.
Professionals advise anyone with digital assets, whether they are crypto or not, to set up access to their accounts for the estate executors.
In order to centrally locate your digital assets in the safest locations possible, such as a safety deposit box, Roun advises setting up a centralised location to secure all known seed phrases, keys,
and pass phrases. “The fiduciary in charge of the estate should be the only person with access to this.”
And don’t undervalue how challenging it might be for users who are not familiar with the procedure to access crypto accounts.
“If you were to inherit cryptocurrency, what knowledge would you need to allocate the funds wisely? Make sure to include all relevant details about the cryptocurrency, advises Fresard.
4. But exercise caution when granting account access.\
According to experts, it’s critical to follow best practises during this process and to keep your accounts secure. And it’s crucial for digital assets in particular because, if cryptocurrency is sent to
someone else, it can be virtually impossible to recover, which is bad for the owner and potential heirs.
Since wills are public documents, Foote warns that including this private information in them could accidentally make it public. A more responsible course of action might be to rely on trustworthy
third-party services experienced in digital estate planning or to use secure digital vaults.
According to Roun, it’s imperative to deny access to any family members who intend to profit from any access they may have before the estate is settled. Another reason the digital succession plan is
crucial for proper execution is that it must be set up and accessible well in advance and kept up to date with the owner each year before passing, according to the expert.
5. Taxes on cryptocurrencies
It’s also crucial to keep in mind any tax concerns that might arise when working with cryptocurrencies. Any capital gain that has been realised is taxable, and the same goes for purchases made with cryptocurrencies when the cost of the goods exceeds the cost of the
cryptocurrency. In addition, even if the cryptocurrency is hidden, the estate may still be subject to estate taxes if it exceeds certain thresholds.
According to Foote, tax implications—which include monitoring the cost basis and gain and loss metrics—are crucial, especially during the asset transition phase. “These tax nuances will become
more important in estate planning as the regulatory environment for digital assets matures.”
Taking care to fully declare the estate’s taxable gains (and losses) and making sure the estate is taking care of all its financial obligations are essential if you’re an executor dealing with hidden cryptocurrency.
To sum up
Owning cryptocurrency or other digital assets can make estate planning more complicated due to their decentralised nature. The biggest risks of leaving crypto assets unclaimed in an account or
greedy family members trying to steal your assets before they reach your intended heirs can be reduced with careful planning in advance.