How to Fit Cryptocurrency Into Your Estate Plan

Cryptocurrency has turned tens of thousands of people across the United States into millionaires. Bitcoin and its competitors—like LiteCoin, Ripple, and even the meme-inspired Dogecoin—have steadily accumulated value over the course of the past several years, and many Americans have begun taking notice. People are mining, purchasing, and exchanging digital currencies at unprecedented rates. Since cryptocurrencies are both a valuable asset and, in many ways, an investment, estate planning attorneys are increasingly being asked how they can help integrate virtual funds into real-world plans.

Understanding Cryptocurrency

Cryptocurrency, like any form of money, can be exchanged for goods and services. While most cryptocurrency exchanges occur online, more and more brick-and-mortar establishments are beginning to accept payment from less volatile brands like Bitcoin.

While cryptocurrency can be purchased with dollars, each crypto-company has its own policy to control supply, demand, and inflation. Bitcoin, for instance, is well-known for its ability to be “mined.” Technology-savvy people can set up their computers to verify Bitcoin transactions in the hope of being awarded a Bitcoin themselves. However, there are only 21 million Bitcoins in existence: once they have all been awarded or “mined,” there will be none left to discover. Other companies offer cloud mining or simply permit consumers to purchase currency using a credit card. 

Even though cryptocurrency has yet to go fully mainstream, it has wide-ranging applications and is likely to become more prevalent with time.

Why Crypto-Investors Need to Plan for Estate Succession

Estate planning laws in Arkansas and across the country are still evolving to account for virtual estates. Perhaps the single biggest consideration for people who possess valuable cryptocurrency is ensuring access for their estate executor or successor trustee. Since cryptocurrency accounts, or “wallets,” can only be accessed using highly individualized keys and access codes, many crypto-investors keep this information a closely guarded secret. 

However, crypto-investors need to ensure that their estate executors—be they an attorney, relative, or close friend—have access to their keys and access codes after they have died. After all, the executor will not be able to take control of or disburse cryptocurrency without this information. Furthermore, cryptocurrency transfers can have major tax implications.

Putting Cryptocurrency Into an Estate Plan

Since the law has yet to properly accommodate cryptocurrency, it can be difficult to draft a comprehensive estate plan that includes large sums of any given currency. Investors must first understand that the Internal Revenue Service does recognize cryptocurrency as a viable, taxable asset. However, the IRS treats cryptocurrency as property rather than currency--and taxes it as such, too.

Consequently, an estate plan incorporating cryptocurrency must include mechanisms that facilitate the transfer of digital funds to prospective beneficiaries while minimizing the potential tax burden. However, crypto-investors and miners can still take advantage of several time-trusted estate planning strategies; such as:

• Gifting. Someone who holds virtual currency may be able to gift Bitcoin or other currencies to a loved one; they may also be able to make charitable donations to receive tax advantages while still alive.
• Living trusts. There is currently no state- or federal-level statute prohibiting trusts from being funded with Bitcoin or any other cryptocurrency. However, many cryptocurrency exchanges have built-in features which make it difficult or next to impossible to trace transfers. This, coupled with the volatility of cryptocurrency rates, can make it hard for casually established trusts to manage digital assets. As such, it is important to consult an estate planning attorney who has investment- and wealth-management experience. They may be able to help devise strategies to ensure that trustees can manage and invest cryptocurrencies without being given unfiltered account access.
• Grantor Retained Annuity Trusts, or GRATs. A GRAT is a type of trust which allows the trustor or trustee to transfer annuities from rapidly appreciating assets to a beneficiary or beneficiaries with minimal gift or estate taxes, provided they do not die before the GRAT’s trust period ends. If properly coordinated, a GRAT funded with Bitcoin or another rapidly appreciating cryptocurrency can pay massive dividends to prospective heirs with minimal tax penalties.

Contact Us Today

Cryptocurrency mining and investments have changed many people’s lives for the better—in some instances, an investor’s success can bolster their legacy and provide for generations of family.

However, putting cryptocurrency into an estate plan is not something that should be attempted alone. An experienced estate planning and wealth management attorney can help devise a safe, secure, and legal way to pass on digital wallets to close friends and family members. To find out more, send Quraishi Law a message or call us today to schedule your free consultation.