Cryptocurrency – Safeguarding Your Bitcoin Within Your Estate Plan
by Dan A. Baron, Baron Law LLC
Many of us have dabbled in the crypto market and most have at least heard of the various kinds of these digital exchanges. To name a few: Bitcoin, Ethereum, Tether, Polkadot and my all-time favorite Dogecoin (or “Doggy Coin” as I like to call it) have become popular investment strategies for many Americans. Recently I spoke with a client who in 2008 exchanged 1,000 Bitcoin for a used bicycle – today that Bitcoin would be worth over $36 million dollars. If you are invested in Bitcoin or another cryptocurrency, then you should pay careful attention to how you’re leaving your precious coin to your family. For those who understand how the cryptocurrency platform works, also understand how easily your fortune could be lost.
What is Cryptocurrency?
The U.S. dollar, Euro, Swiss Franc are all examples of currencies. They are also mediums of exchange. Before currency, we would exchange goods and services such as spices, rum, or shoemaking. Money, whether it’s represented by a metal coin, a shell or a piece of paper, doesn’t always have value. Its value depends on the importance that people place on it—as a medium of exchange, a unit of measurement, and a storehouse for wealth. When I think of cryptocurrencies, I think of my baseball card collection compared to diamond necklace. My Minnie Miñoso baseball card is worth more to me than a diamond necklace because I don’t wear jewelry. Similarly, cryptocurrencies have become more in demand because our society finds value in what it represents, albeit, simply an arbitrary value.
Managing Crypto While we are Alive
What makes Cryptocurrency unique is that it is a digital payment system that doesn’t rely on banks to verify transactions. Crypto are coins that are stored in a “wallet.” There are two types of wallets, hot and cold. A cold wallet is tangible and non-digital – accessible on a hard drive, USB drive, or simply written on a piece of paper. A hot wallet is intangible and digital – accessible through an online exchange with a username and password. Since cold wallets are not digitally stored, they become easily lost. The New Yorker reports that in 2021 over a half a billion dollars of Bitcoin can be found in landfills across the world. This mistake occurs most often when someone accidentally throws away their USB drive or hard drive that contains the crypto key.
Hot wallets are much harder to misplace. As mentioned, there are multiple platforms allowing users to login through a username and password opposed to a USB drive tucked underneath your pillow. The bigger issue with hot wallets is protecting against hackers. Just this year January of 2022, one of the world’s largest crypto platforms, Crypto.com, reported over $30 million stolen by hackers.
Managing Crypto if you are Disabled
If you become disabled and need someone to manage your assets on your behalf, then it is imperative that you specifically authorize access to these assets. The IRS views crypto as ‘property’. As such, your financial power of attorney should define cryptocurrency as property within the document. Since crypto is unregulated, it is also possible for your trusted agent to gain access to hot wallet accounts via a username and password as an unauthorized user.
Passing Crypto to Our Loved Ones
Passing on your precious coin to loved ones can be a bit of a challenge. The biggest problem with cryptocurrencies is its ghostlike existence. Those owning cold wallets go through great efforts to hide their flash drives and other tangible tokens. Thus, regardless of what assets you have, it’s imperative that you are organized and have a collaboration with family, attorneys, and financial planners so that everyone knows the crypto exists. We recommend storing the private key in a secure fireproof box. Remember, a safety deposit box at a bank will require the probate court’s involvement if the account is not jointly owned. Within the safe we recommend a summary of crypto outlining the details of the investment. Most importantly, make sure your executor and interested parties are aware that the asset exists, or else, your investment may end up in the garbage as mistaken junk.
Avoiding Probate and the IRS
If you have a simple will, then you’re crypto will pass through a lengthy and expensive probate court process. Some platforms allow you to name a beneficiary and/or maintain joint ownership. In this case, you will be able to avoid probate; however, you still have to face the IRS. The best way to avoid probate and have a favorable IRS outcome would be to link the cryptocurrency to a revocable trust.
The IRS views cryptocurrency as property and the gains incur a capital gain tax. Further, unlike a stock listed on the Nasdaq, cryptocurrency can have different values on various exchanges, so valuation converting the coin to U.S. dollars can be tricky. Because of capital gains, it may be desirable to bequeath your crypto to a charitable organization through a trust. Doing so will reduce the capital gains to the estate and will avoid probate.
Estate Planning Professionals
In an effort to ensure due diligence we have amended our intake questionnaires to request information regarding a client’s cryptocurrency ownership and how and where it’s located. Advisors who provide clients with a digital asset inventory should complete all of their accounts’ usernames and passwords within their estate planning portfolio. Careful and thoughtful planning for cryptocurrency may help you and your loved one’s sleep (a little) better at night. For more information or to discuss your estate planning goals, contact Baron Law at 216-573-3723, or email@example.com.
Baron Law LLC
Crowne Centre, Suite #600
5005 Rockside Road
Independence, Ohio 44131
Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.