Cryptocurrency is making its name known in estate planning, which means it is important to choose an attorney who understands crypto as an asset to incorporate into your estate plan. Crypto can be used to fund a trust or purchase an IRA (known as a Crypto IRA™ or Cryptocurrency IRA™), and should also be referenced in your estate planning documents. When incorporating your crypto into your estate planning, it is important to consider your choice of a fiduciary, their authority and access, and how your crypto may impact your taxes.
Individuals who hold crypto should indicate in their estate planning documents the names of individuals or organizations who are permitted to access and manage their crypto upon their death to avoid distribution issues. This language should include granting permission to access the decedent’s electronic devices that have information relating to their crypto. Failure to include such language could result in the person who is trying to access your crypto (a Personal Representative, Trustee or fiduciary) violating federal or state laws. It is also important that whoever is designated to take control of the decedent’s crypto knows the decedent’s private key. It is virtually impossible to uncover an individual’s private key!
It is crucial for you to list your crypto interest in your estate plan. The anonymous nature of crypto makes it difficult to uncover your crypto if your beneficiary does not know to look for it. If your beneficiary does know about your ownership of crypto, they need to know your private key in order to access or manage it. But even then, without expressly giving someone the power in your will to access the electronic devices upon your death, your executor or personal representative could end up violating state or federal privacy laws trying to access what is now supposed to be their property. There is also no way to receive a court order to access an individual’s unknown private key. You must have this information accessible to your executor or personal representative—but be sure you trust this person, since there is no way to trace fraudulent or illegal transfers using your private key.
You may wish to leave the value of your crypto rather than the crypto. This avoids your beneficiaries needing to access your accounts, however, your personal representative or executor will still need to access your accounts and exchange your balance for cash. Crypto is currently viewed by the IRS as personal property, so it is not taxed as usual income is, but rather like real estate or stocks. You should note, there are specific reporting requirements surrounding crypto that you need to be aware of and discuss with your CPA.
If you fund a trust with crypto, it is important that you indemnify the trustee and release said trustee from their fiduciary duty to diversify these funds. This language should not be overly broad, as it could release the trustee from liability from neglect. It is also important that whomever you choose to be your trustee is someone who you trust. The anonymity of crypto comes with a downside—there is no oversight of transactions. While you may be able to trace the fraudulent transaction, there is practically no way to recover the crypto. On the other hand, if the crypto you fund your trust with increases in value, your beneficiaries may avoid estate gift taxes.
Murphy & Berglund can help you take all of the important factors into consideration while drafting your estate planning documents to ensure that your crypto is seamlessly incorporated into your asset protection.
If you are looking for a secured way to house your crypto, with insurance that will pay out dollar for dollar if your crypto is hacked, talk with us about Crypto Custody™ solutions.
MURPHY & BERGLUND, PLLC AND ANY REPRESENTATIVE THEREOF, IS NOT A FIDUCIARY UNDER ERISA AND DO NOT OFFER TAX ADVICE, DO NOT PROVIDE INVESTMENT ADVICE, DO NOT SELL INVESTMENTS, DO NOT EVALUATE, RECOMMEND, OR ENDORSE ANY ADVISORY FIRM OR INVESTMENTS. INVESTMENTS ARE NOT FDIC INSURED AND ARE SUBJECT TO RISK, INCLUDING THE LOSS OF PRINCIPAL. CLIENTS ARE ADVISED TO PERFORM OR FACILITATE THEIR OWN DUE DILIGENCE WHEN INVESTING. THE INFORMATION CONTAINED HEREIN DOES NOT CONSTITUTE FINANCIAL PLANNING OR TAX ADVICE AND SHOULD NOT BE CONSTRUED TO APPLY TO ANY INDIVIDUAL PERSON OR SITUATION. EACH PERSON SHOULD CONSULT WITH HIS OR HER OWN PERSONAL TAX ADVISOR, FINANCIAL PLANNER, ATTORNEY OR ACCOUNTANT WITH RESPECT TO SUCH INDIVIDUAL’S SPECIFIC SITUATION AND SHOULD NOT RELY UPON THIS INFORMATION WITHOUT SUCH CONSULTATION.