Cryptocurrency is almost mainstream, despite its complexity, says Insurance News Net in the article “Westchester County Elder Law Attorney… Sheds Light on Cryptocurrency in Estate Planning.” The IRS has made it clear that as far as federal taxation is concerned, Bitcoin and other cryptocurrencies are to be treated as property. However, since cryptocurrency is not tangible property, how is it incorporated into an estate plan?
For starters, recordkeeping is extremely important for any cryptocurrency owner. Records need to be kept that are current and income taxes need to be paid on the transactions every single year. When the owner dies, the beneficiaries will receive the cryptocurrency at its current fair market value. The cost basis is stepped up to the date of death value and it is includable in the decedent’s taxable estate.
Here’s where it gets tricky. The name of the Bitcoin or cryptocurrency owner is not publicly recorded. Instead, ownership is tied to a specific Bitcoin address that can only be accessed by the person who holds two “digital keys.” These are not physical keys, but codes. One “key” is public, and the other key is private. The private key is the secret number that allows the spending of the cryptocurrency.
Both of these digital keys are stored in a “digital wallet,” which, just like the keys, is not an actual wallet but a system used to secure payment information and passwords.
One of the dangers of cryptocurrency is that unlike other financial assets, if that private key is somehow lost, there is no way that anyone can access the digital currency.
It should also be noted that cryptocurrency can be included as an asset in a last will and testament as well as a revocable or irrevocable trust. However, cryptocurrency is highly volatile, and its value may swing wildly.
The executor or trustee of an estate or trust must take steps to ensure that the estate or the trust is in compliance with the Prudent Investor Act. The holdings in the trust or the estate will need to be diversified with other types of investments. If this is not followed, even ownership of a small amount of cryptocurrency may lead to many issues with how the estate or trust was being managed.
Digital currency and digital assets are two relatively new areas for estate planning, although both have been in common usage for many years. As more boomers are dying, planning for these intangible assets has become more commonplace. Failing to have a plan or providing incorrect directions for how to handle digital assets, is becoming problematic for many individuals.
Speak with an estate planning attorney who has experience in digital and non-traditional assets to learn how to protect your heirs and your estate from losses associated with these new types of assets.
Reference: Insurance News Net (Feb. 25, 2019) “Westchester County Elder Law Attorney… Sheds Light on Cryptocurrency in Estate Planning”
Suggested Key Terms: Digital Assets, Estate Planning, Elder Law Attorney, Cryptocurrency, Digital Keys